January 14, 2015

Stop bank regulators from pre-acting on ex ante perceived credit risks, and make them think more of all ex post dangers.

Sir, John Kay refers to a chapter in an upcoming book of his titled “The bias to action”; and to that “the bias to immediacy and action is as pervasive in politics as in finance” in order to remind Warren Buffett holds that “The trick is, when there’s nothing to do, do nothing”, “Wisdom for politicians from the Sage of Omaha” January 14.

Well, since John Kay’s book is about finance, I do hope that it includes some reflection on the dangers of even faster trigger action, let’s call it preemptive action bias, and which affected the minds of bank regulators to such an extent, they confused ex ante perceived risks with ex post occurred dangers.

I would say it is impossible to think of assets that banks perceived as “risky” when placed on their balance sheets, which have caused a major bank crisis. But nonetheless, regulators found it prudent to require banks to hold more equity against what is ex ante perceived as risky that against what is ex ante perceived as safe.

Could we please get us some regulators who understand that we need banks to allocate credit correctly to the real economy much more than we need them to avoid taking ex ante perceived credit risks… and could we please get us some regulators who try to focus on what could be all the important ex post risks, and not react solely to the ex ante perceptions of risks.