What pay rules can we impose on regulators who insist on distorting the allocation of credit to the real economy?

Sir, you write “US federal regulators this week proposed new pay rules intended to limit excessive risk-taking” “Investment banks can endure tougher times” April 23.

Time again to understand what “excessive risk-taking” is being referred to.

One thing is the risk of dangerously large exposures to what is perceived, decreed or concocted as safe, and which allow for very small capital requirements. Those were the risks that caused the 2007-08 crisis, AAA rated securities, residential housing finance and sovereigns like Greece.

Another thing is the risk of the risky, like SMEs and entrepreneurs. These risks, because they generate higher capital requirements, are risks not sufficiently taken, and the economy suffers from that.

Do regulators really know what “excessive risk-taking they want to limit? I seriously doubt it. The “more-risk less-pay” and the “less-risk more-pay” is just the typical kind of intervention that brings on unexpected consequences.

More-risk more-capital less-pay. Less-risk less-capital more-pay. We will all end up suffocating in some over-populated safe haven!

It is obvious, at least to me, that the greatest current source of risk to the banking system, and to the economy, are the risk weighted capital requirements for banks, which so distorts the allocation of credit. Are there some pay rules on regulators we could apply?

@PerKurowski ©