August 29, 2015

We urgently need “Flop Pickers” or “Harbingers of Failure” to test those who are being picked as bank regulators.

Sir, I refer to Tim Harford’s “Meet the Flop Pickers” August 29. Boy could some good “Harbingers of Failure” have come in handy to stop the disastrous bank regulations flop.

What did the members of the Basel Committee for Banking Supervision do?

They based their capital requirements for banks on perceived credit risks, blithely ignoring that those risks, by means of interest rates and size of exposure, were about the only risks already being cleared for by the banks.

They assigned much of the role in determining credit risk to some very few human fallible credit rating agencies.

They based their capital requirements for banks, those that are primarily to cover for unexpected losses, on the credit risk perceptions about expected losses, blithely ignoring that the safer something is perceived, the larger its potential of delivering unexpected losses.

They regulated banks not caring one iota about the purpose of banks, and so they blithely ignored the vital function of banks of allocating bank credit efficiently to the real economy.

And so, by allowing those perceived as absolutely safe to have even more and cheaper access to bank credit than normal, while those perceived as “risky”, like unrated SMEs and entrepreneurs to have even less and more expensive bank credit than normal, they have made a great mess of banks, one of the most important components of our financial system.

And, to top it up, they decided governments were much safer than the private sector and that therefore bank needed to hold minimum capital when lending to governments, something that de facto meant that regulators believe government bureaucrats can use bank credit more efficiently than the private sector.

So you tell me… would it not be extremely important to have access to “Flop Pickers” or “Harbingers of Failure” to test those who are to be picked as bank regulators?

Could you please ask Eric Anderson, Song Lin, Duncan Simester and Catherine Tucker to see if they could find us some adequate Herbs to tests bank regulation products?

Urgently... since the same failed regulators keep on regulating without even acknowledging, and much less correcting their mistakes!

PS. They have blamed credit rating agencies though... without understanding that their regulations would cause dangerous distortions even if the credit ratings were perfect.