December 28, 2016

Populist bank regulators ‘like them’ commandeered a historical triumph of emotions over facts

Sir, Sebastian Payne writes that Keith Craig “defined 2016 as the year ‘People Like Us’ — those who have been filled with despair and disbelief about populist uprisings — lost control…[to ‘People Like Them’]” Payne then describes PLT as “the folks who act on gut not reason. Emotion, not facts.” “The year People Like Them take control from People Like Us” December 28.

Payne, praising the work of PLU accepts these are also to blame for, among other, the financial crash and its after effects. In this he is wrong.

If Payne’s description of PLT applies, then at least with respect to banking, PLU lost control in 1988, when with the Basel Accord the concept of risk weighted capital requirements for banks was introduced.

This because ‘more risk more capital – less risk less capital’ is a pure guts no reason, just emotions and no facts, concept.

Why? Bank crises always result from unexpected events like devaluations, criminal behavior or excessive exposures to something ex ante perceived as safe but that ex post turned out to be very risky. What is ex ante perceived as risky never generates that kind of exposures that could endanger the banking system.

In 2004, with Basel II, the regulators doubled down on their emotions and their lack of facts. Its risk weight of 20% for what is rated AAA, and 150% for what’s rated below BB-, represents a historical triumph of emotions over fact.

That had the banks crashing with little capital into AAA rated securities and sovereigns like Greece, and that has banks impeding growth by staying away from “risky” SMEs and entrepreneurs.

With regulators ‘like them’ ‘People like us’ are toast, most especially if we, like FT, behave ‘like them’ and keep mum on what the regulators are doing.