We need capital requirements for banks based on the risk regulators have no idea about what they do.

“Is the Bank of England right to take climate risks seriously? The answer is: absolutely… the risks do exist… It is the job of regulators to help decision makers become aware of those risks” That is what Martin Wolf argues. “Carney is right to warn insurers of the coming tempest” October 16.

Clearly Martin Wolf and Mark Carney both believe the insurers are so inept so as not have considered the possibility of impending regulations aimed to stave off climate change, and which could have serious implications, for instance for oil. But, to consider others inept, carries its risks too.

For instance, both Martin Wolf and Mark Carney consider bankers so dumb so as to not take into account ex ante perceived credit risks, and so they both agree on having to slap banks with capital requirements based on ex ante perceived risk. The result? An excessive consideration of ex ante perceived credit risks with all distortionary implications. Dangerously much credit to what is perceived as safe and equally dangerous little credit to what is perceived as risky…

Who on earth told banks they could leverage their equity (and the support they received from society) over 60 times to one when investing in AAA rated securities or lending to Greece? The market? Bank-shareholders? No! It was regulators, like Mark Carney the current chair of the Financial Stability Board. And why would they do a crazy think like that? Because they were scared silly banks would not consider credit risks, and would therefore perhaps lend too much to risky SMEs and entrepreneurs. 

Sir, sincerely, I guarantee you that if the current capital requirements for banks had been based on the risk that regulators would scheme, meddle and distort, not knowing what they were doing, and we had slapped Basel’s 8 percent capital on all assets to cover for that, instead of weighing for ex ante perceived credit risk, the world would not be facing its current difficulties.

Again, why did regulators decide to pick on the ex ante perceived credit risk, basically the only risk already cleared for?

How do we stop Bank besserwisser busybody hubristic bank regulators from interfering with the allocation of bank credit to the real economy?

@PerKurowski ©