February 22, 2017

The 2007-08 crisis and the relative stagnation thereafter would not have happened without current bank regulations

Sir, Ed Crooks writes “Trump has threatened to “do a number” on Frank-Dodd banking regulations aimed at preventing another financial crisis.” “Populists push to roll back rules” February 22.

Well no! Except for the intent of eliminating overreliance on credit rating agencies, something that has yet to happen, the Dodd-Frank Act did not eliminate those populist bank regulations that caused the last financial crisis, or the relative economic stagnation thereafter.

Some real runaway populism, that happened when hubris filled technocrats thought they could, and at no cost, diminish the risks for the banking system with their risk weighted capital requirements for banks.

What did and does that regulation cause?

That the banks create dangerously large exposures to what is perceived, rated, decreed or concocted as safe, e.g. AAA rated securities and Greece. 

That the banks award too little credit to what can supply dynamism to the real economy, e.g. SMEs and entrepreneurs.

Crooks also writes: “In a 2012 OECD expert paper, David Parker of Cranfield University and Colin Kirkpatrick of the University of Manchester reviewed the state of academic knowledge and concluded that there were large gaps in our understanding of the effects of regulation policy”

I have not read that paper, but I am sure the conclusions must be absolutely correct. For instance, when regulators stress test banks, they do not even care to look at what should perhaps have been on their balance sheets, in order to satisfy the credit needs of the real economy.

It is amazing how the Financial Times insists on keeping all this hushed up.

Does that mean FT agrees with the regulatory statism reflected in assigning to the sovereign a risk weight of 0% while hitting us “We the People”, with 100%?

Does that mean FT finds nothing dumb in assigning a 20% risk weight to the so dangerous AAA rated, while hitting the innocuous below BB- rated with 150%?

Sir, here between you and me, what favours do you owe the bank regulators, or why are you so afraid of them?

PS. The Dodd-Frank Act is so surreal that in its 848 pages it does not even mention the Basel Committee

PS. I dare you to read the remarks I gave to bank regulators in 2003 while being an Executive Director of the World Bank.