Thanks to bank regulators, if in need, there are now way too little defences to deploy in a countercyclical way

Sir, you hold that there are “reasons to be wary [as bank] regulation is, once again, being eased just at the moment when it ought to be tightened” “Easing financial controls is cause for wariness” March 11.

In support: “Many market participants, moreover, think credit and market cycles are at their peak — just the time when counter-cyclical defences might be deployed”

Sir, is it really when markets are at their peak that we should kick off its drop, by tightening regulations? At the peak of the market, what we really should have is our ordinary defences, like bank capital, to be at their highest levels, so that adequate counter-cyclical defences can be deployed if needed. Are these defences now at the highest? Absolutely not!

Why? Among others, the results from an absolute incapacity to comprehend the pro-cyclicality of many regulations, such as those of the risk weighted/ credit ratings capital requirements for banks. These are based on the ex ante perceptions of risk when times are good, and not on the ex post possibilities when times are less good. The result, in terms of deployable counter-cyclical defences, is total unpreparedness.

Sir you write: “A Financial Times series has highlighted the risks of the rapid expansion of credit to lowly rated, more indebted companies.” No that is wrong! It were the “good times”, made possible by low interest rates and huge liquidity injections, which allowed for too many securities to be rated, ex ante, as being of investment grade, which caused a rapid expansion of credit. What, ex post, perceived rougher times cause, is a rapid expansion of those securities becoming rated as junk.

@PerKurowski