Are British authorities more aware of risks than those in the US? Martin Wolf, dare find out.
Sir, Martin Wolf writes “The best protection against occasional huge banking crises is frequent smaller ones.” “The UK must learn its own lessons from the banking crisis” FT April 3, 2023.
I could not agree more. During a World Bank workshop on Basel II in 2003, I opined:
“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.
Therefore, a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”
Also, knowing that ‘the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size”
But Wolf begins with “Banks are the Achilles heel of the market economy. The combination of risky long-term assets with liquid liabilities redeemable at par is a standing invitation to illiquidity and insolvency.” On that I would like to point out that in the case of SVB, those “risky long-term assets” were US Treasury bonds, assigned a 0% risk weight by the regulators. Current risk weighted bank capital/equity requirements are the real Achilles heel of the market economy. Had these not existed, and there instead had been one single capital requirement against all assets e.g., 10%, there’s no chance SVB (or other banks) would have so much ignored the interest rate risk, the duration risk, present.
Just think of what must be a modern bank risk manager’s risk dilemma: “What if my risk model shows the risks of the bank’s assets have increased a lot and therefore the bank’s capital/equity requirements will have to increase a lot too? What will the Board say?”
Wolf writes: “As Charles Goodhart of the London School of Economics has noted, managers who fail to manage successfully must share — and know they will share — in the losses”. I ask, should that not apply to regulators too? Should those who with so much hubris have/are betting our bank systems on that they know so much about risks, not at least be paraded down some major avenues wearing cones of shame?
Finally, Wolf hopes that “The British authorities appear to have been much more aware of the risks created by losses on the market value of portfolios caused by higher interest rates than those in the US.” Why does he not investigate if its so? Is he scared he, like most, will have been duped/lulled into a false sense of security believing that risk weighted assets (RWA) is a sufficiently good reflection of bank risks?
Posts
