May 04, 2015

God help our grandchildren if our insurance sector, like our banks also fall into the hands of a Sissy Brigade.

Sir, You hold that “Global insurers should be supervised at scale”, May 4. One reason for why you think that should be, is “the pivotal role of American International Group in the 2008 financial crisis. AIG… was belatedly found to have an insolvent derivatives trading unit, heavily intertwined with large banks and investment banks.”

That’s correct, but the real cause for that excessive intertwinement was that since AIG was AAA rated, if it assumed the risk of a bank asset, then according to Basel II, banks could leverage their equity with that exposure more than 60 to 1. What a temptation! So in fact it was the regulators’ own dumb risk-aversion that caused AIGs problems.

I find it amazing that the world has allowed itself to fall into hands of a shortsighted bank regulator who thinks that banks can remain safe by avoiding to take the risks needed to adequately take care of the real economies’ financing needs.

With its credit-risk weighted equity requirements, those which allow banks to earn higher risk adjusted returns on equity when financing what is perceived as safe, than when financing what is perceived as risky, the Basel Committee (and the Financial Stability Board) has completely distorted the allocation of bank credit to the real economy.

And now another risk-aversion centered Sissy Brigade, the EU with its Solvency II, is also in pursuit of the insurance sector, which will make sure its investments will be completely distorted too. And FT, tough not explicitly in this editorial, even seems to be egging them on. God help us. God especially help our children and our grandchildren, those most in need of banks taking risks, with reasoned audacity.