November 21, 2016

Math teacher Lucy Kellaway, before leaving FT, please explain to bank regulators the difference between a sum and an average

Sir, Lucy Kellaway stuns us announcing she will be leaving FT in order to teach some inner London students math. “It is almost goodbye from me and I want you to join me”, November 21.

Though I am not sure why she can’t write articles and teach math at the same time, her readers will sure miss her and her students most certainly welcome her.

That said, and given she must obviously know math and have some pedagogical proficiency explaining it, I sure wish that, before leaving, she would have a go at explaining to current bank regulators, the difference between a sum and an average.

In banking, the amount of credit and the interest rate charged on any credit is basically the result of the average bankers risk aversion to any average perception of risk. Were bankers to add up their risk aversion, then just the safest of the safest might get some tiny piece of credit and all slightly riskier would be totally left without.

Which is why, when bank regulators, to the bankers’ risk aversion to perceived risk, added by means of the risk weighted capital requirements for banks their own risk aversion to basically the same risk perception, they distorted all common sense out of the allocation of bank credit to the real economy.

For more than a decade I have tried to explain this to regulators, with no luck. Perhaps Lucy Kellaway would be able to find better words. We sure need our bank regulators to understand the simple fact that any risk, even if perfectly perceived, causes the wrong responses, if excessively considered.