June 03, 2015

Before managing other systemic risks, bank regulators should dare confront their own large systemic distortions.

Sir, David Oakley and Barney Jopson report that the Financial Stability Board, wants to go after big asset managers, “Asset managers’ bonds push prompts scrutiny” June 3.

Its reason is the following: “Since the financial crisis, the amount of bonds asset managers have on their books has grown dramatically, filling a void created by big dealer banks that have cut their exposure to fixed income. This shift has triggered worries among regulators about what will happen if a rise in US interest rates sparks a rush for the exit in bond markets — and that prospect has fuelled debate on tougher regulation.

Since a loss is a loss, no matter who has to bear it, huge asset managers, no matter what they say, can produce systemic economic shockwaves, and so of course everyone should be concerned with their risks.

But that said the first thing bank regulators need to do, is to understand how their own regulations have impacted the whole financial sector… in many shapes or forms.

I dare them to organize a seminar on: “What distortions do the portfolio invariant credit-risk-only-weighted capital (equity) requirements for banks cause?”