July 04, 2017

Since the risks regulated for are not the right risks, meeting risk weighted bank capital requirements means little

Sir, Philip Stafford reports “Reforms put in place by the Group of 20 leading nations have successfully tackled the most pressing issues that contributed to the crisis, according to the annual report from the Financial Stability Board, an international group of policymakers and regulators.” “Financial reforms: Shadow banking tamed, argues global watchdog” July 4.

Nonsense! If all evidences are duly reviewed, what most caused the crisis was the risk weighted capital requirements for banks. These allowed banks to leverage immensely, and thereby earn very high expected risk adjusted returns on their equity, with what was perceived, decreed or concocted as safe, like financing houses, sovereigns like Greece or the AAA rated securities backed with mortgages to the subprime sector.

The regulators regulated as if they were bankers. As regulators they should look at the risk that the risks are not adequately perceived or managed, and at the possibility of unexpected events. 

And that stupid risk weighting has not been eliminated because of the introduction of a non-risk based leverage ratio; on the contrary as that LR pushes up the capital floor, it might squeeze even more those affected by the roof set by the risk-weighted portion.

And regulators have also introduced additional sources of distortions like the liquidity requirements, which also are based on simplifications about what is liquid and what not. 

Their test of the stresses a la mode, or the elaboration of wills that might affect the living, could also signify new sources of systemic risks.

No the regulators have done a lousy job, primarily because they all circled their wagons around the mistakes they committed.

And if they go on doing what their mutual admiration club’s groupthink tells them to do, let’s hope the shadow banking sector goes underground, so that regulators don’t get their dirty nannying fingers around it too.

PS. No wonder FSB's "safer", "simpler" and "fairer" financial system video, has the comments disabled.

PS. I need a co-author that writes well and knows something about banks and finance, to help me write a book based on more than 2.500 letters ignored by FT