Much needed bank capital reforms are hindered by bank lobbying, and by regulators unwilling to discuss their mistakes.

Sir, Benoît Lallemand, Secretary-General of Finance Watch writes: “European bank supervisors last year found ‘unjustified underestimations’ of risk in nearly half of the 105 banks they investigated” “Banks should submit to logic of reform on capital allocation”, March 6.

For those regulators who assigned a risk weight of 150% for what is so innocuous for our bank systems as what is rated below BB-, is not assigning a meager 20% for what could really endanger our bank systems, precisely because it is ex ante rated a very safe AAA to AA, a much worse ‘unjustified underestimations’ of risk?

Surprisingly Lallemand opines that “Risk-based capital measures could still serve their original purpose: as an internal instrument to guide banks’ capital allocation processes.

What? Where in all Basel I or II regulations has he seen stated their purpose was of being “an internal instrument to guide banks’ capital allocation processes”?

It is only the complete elimination of risk weighting that could “encourage banks to lend more productively because it would lessen the regulatory skew towards seemingly safe assets, which has done so much to deprive the real economy of capital, inflate housing and land prices, and feed financial instability.”

Because, even with a 5% leverage ratio, something Lallemand favors, keeping risk weighting would keep on distorting the allocation of bank credit on the margin, there where it matters the most.

Lallemand ends arguing, “that such reforms have still not happened is testament to the power of the banking lobby”. No, much more than that, it has been the refusal by bank regulators to admit their mistakes.

Would there have been any type 2008 crisis if European and American investment banks had not been allowed to leverage a mind-blowing 62.5 times with assets rated AAA to AA, or with assets for which an AAA rated entity like AIG had sold a default guarantee? The answer to that is, an absolute definitive, NO!

@PerKurowski