Besides a necessary U-turn, we must also get rid of those currently responsible for bank regulations reform

Sir, by the tone of Elemér Terták, the Principal Advisor to the Director General for Internal Market and Services, in “Bank reform is gathering pace: no U-turn necessary”, February 26, the European Commission seems to be extremely upset by some recent remarks made by Sony Kapoor in “Europe must reset bank rules to restore investor faith”, Insight, February 14. How dare Kapoor criticize for instance “state of the art framework for bank recovery and resolution”?

But I certainly do want a U-turn in bank reform, and which Kapoor did not even refer to:

Right now the fundamental pillar of bank regulations is the capital requirements for banks based on perceived risk. Much more capital for exposures to what is perceived “risky”, than for exposures perceived “safe”.

And that means that banks are able to obtain a much larger expected return on equity leveraging much more the risk-adjusted interest paid by “The Infallible” than what they are allowed to do with the risk-adjusted interest paid by “The Risky”.

And that amounts to favoring those already favored by banks and markets, and thereby discriminating against those already discriminated against by banks and markets.

And that is so dumb because since bank crises only results from excessive exposures to “The Infallible” who were not so infallible after all, and never from excessive exposures to “The Risky”, that only guarantees that when disaster strikes the banks will have too little capital. 

And that is odious, not only since it increases the gap between “The Infallible” and “The Risky”, but also because it creates distortions which make it completely impossible for the banks to allocate resources efficiently and help to create the jobs which are so much needed, especially by our young.

Come to think of it, since that regulation is so bad, and since the current regulators can’t even seem to understand that, not only is a U-turn required, but we must also get rid of them all.

No problem can be solved from the same level of consciousness that created it.

Albert Einstein

Pray for a mea culpa by a bank regulator, or extract a confession from them by force (no waterboarding)

Sir, in “Europe must reset bank rules to restore faith”, February 14, Sony Kapoor writes “Five years into the crisis and it is still not clear where EU financial regulations are heading” and that “EU needs to reset its approach to financial reform” and suggesting “launching a high-powered public inquiry [to] help hold public officials and bankers to account so that public trust can restore”. 

Good luck with that! I have over a number of years, starting even before the crisis, in perhaps a hundred of venues, asked regulators some simple questions they refuse to answer. That they do because doing so would reveal the monstrous regulatory mistake they made when, thinking themselves able to be the risk managers of the world they created, especially in Basel II, their capital requirements for banks based on perceived risks, which is completely against common sense. 

The reform process is indeed paralyzed, especially when they now even begin to understand that their new concoction in Basel III, liquidity requirements also based on perceived risk, can only make things so much worse. 

What to do? Our best chance is finding a daring political leader that can pull out with force an answer from the regulators; the other possibility is that a courageous important regulator or ex-regulator, like for instance Mario Draghi steps forward with a strong mea culpa. Fat chance! 

As just one example of the unanswered question here is a link to a post in the IMF blog from August 2010.