Regulation distortions, sure makes finance information on banks extra hard to grasp.

Simon Samuels writes about bank financial reports of 600 pages, “Too much information makes finance hard to grasp” April 25.

Sir, since the 2007-08 crisis, I have read at least 50 editorials, articles or research papers, written by first class newspapers, experts or renowned academicians, that have compared the capital to assets ratios of banks of before the 90s, with the capital to risk weighted assets of the Basel I, II and III… in order to show how bank capitalization has evolved.

In fact even prominent regulators have fallen in their own trap.

For instance in this letter I pointed out the mistakes of Alan Greenspan.

Besides, what’s the use of risk weighted capital to asset ratios if no one understands what the risk weights are and how these came into being, like for instance the zero percent for sovereigns?

Sir this is the prime example of how regulation has distorted information and makes the finance information on banks hard to grasp.

PS. Do you want me to review my blog and count the times FT and its people got it wrong but ignored my letters on it?

PS. By the way in my letters I have found that Simon Samuels, related to the Financial Stability Board, seemingly has not much against the concept that regulators should act as risk managers for the world. Boy it does takes a lot of hubris for that! 

@PerKurowski ©

Besides setting the target for bank capital, we need to think about how to get there.

Sir, Anat Admati and Martin Hellwig write that “capital ratios in Basel III rely on a complex, distortive and manipulable system of risk-weights”, “Banks are not a special case on debt-equity ratio” May 21.

They are absolutely correct, on all three counts, and that is applicable to Basel II too. But what I would like to mention is the curious fact that the “distortive” element, and which to me is the most serious flaw of Basel regulations, as it affects not only the banks but the whole market too, has received the least of attention.

There is no doubt that we need to go down the route of substantially increasing the capital requirements of banks, whether to the 8-12 percent level I favor, or the 25-30 percent level Admati and Hellwig favor. But, when considering the fact that bank capital is going to be extremely scarce while travelling on the route to the final bank capital that is needed, we should not forget that the distortive effects of the risk-weights will be more important than ever.

In this respect I opine that regulators, more than thinking about how to force bank capital increases, need to think in terms of how to help these increases to happen as fast and as smooth as possible. There might be many other ways, but personally I favor either large public sector capital injections in the banks accompanied by clear rules as to how current shareholders could repurchase that capital in order not to be diluted, or some strong tax incentives awarded to any bank that achieves a capital increase which in the short term meets the final long term target.