MY UNANSWERED QUESTIONS ON BANK REGULATIONS

Here follows several questions I have posed over the years to bank regulators and other experts on the subject of bank regulations, at the IMF, at the World Bank, there even as an Executive Director (2002-2004), and many other places, and which have not received answers… and worse which are not even allowed to become part of the debate: 

1. If we know that a truly large and systemically dangerous bank crisis, like the current one, could only result from an excessive exposure to what was perceived ex-ante as “Not-risky”, what is the rationale behind allowing the banks to hold less capital when lending to the “not-risky” than when lending to the “risky”, which makes it so much easier for banks to create an excessive exposure in precisely the danger zone? 

2. Why are banks allowed to leverage more and so earn more risk-adjusted interests rates on their equity when lending to the “not-risky” than when lending to the “risky” What would bad golfers say, and what would happen to golf, if the expert players were allowed to use more strokes than those like you and me? 

3. Are you aware that your current capital requirements for banks signifies adding a layer of regulatory discrimination against those perceived as “risky” , those who are already discriminated against by the banks, for instance in the interest rate they are being charged? 

4. Who authorized you as a regulator to determine that the risk of default, in the context of bank regulations, is a risk much more important to guard against than the risk that banks, for instance, do not help to create jobs? Is not a healthy economy the number one precondition for a healthy financial system? 

5. Who gave you the right to assume the role of risk manager for the world, setting your arbitrary risk-weights that has so confused the financial system? Is that not a bit too arrogant? How come you insist on that nonsense in Basel III? 

6. If we know that banks look at the credit ratings, why do you as a regulator also use those ratings to set the capital requirements, and not to the obviously much more important aspect of how banks act when they consider these credit ratings? 

7. Is it not better for banks to have capital when they create an exposure than when they suddenly discover an exposure to be risky and the credit ratings wrong? 

8. If you know that your only concern, as a regulator, with respect to credit ratings, is when these are wrong, why do you set up capital requirements for banks that bet all our banks on these ratings being correct? 

9. Does not allowing the banks to lend to their government with zero equity but requiring from them 8 percent when lending to their citizens, small businesses and entrepreneurs, carry a strong smell of communism? 

10. Are you not flying blind when your financial compass is altered by regulatory manipulations? What would the interest rates on sovereign debt be without the huge regulatory bias in favor of public borrowings? 

11. If a bank is deemed to be one of the systemic important financial institutions, SIFIs, instead of being de-facto qualified as a systemic unimportant financial institution, it sort of gains access to a “too-big-to-fail” franchise. How much would a not so well intentioned banker pay for that franchise? 3 percent in extra equity sounds like the mother of all bargains! 

12. It is of course important to have safe banks in which to deposit money, but it is also important that banks help us to generate that money, and so, why do you focus exclusively on “stability”, which by itself really signifies nothing? Why do we have the Financial Stability Board and not the Financial Functionality Board? 

13. Since in all bank regulations that have come out there is not a single word about the purpose of the banks…how on earth can you think about regulating well the banks without defining clearly and explicitly the purpose of the banks?

And what about Systemically Un-Important Financial Institutions?

Anyone thinking about how to reign or prepare for what could happen with Systemically Important Financial Institutions, should put on your hats of bankers of Systemically Un-Important Financial Institutions, and think about what you need in order to be able to compete so as to survive, as an independent and not as a satellite.

For instance Daniel K. Tarullo has not yet done so, and though he is probably not aware of it he is on that dangerous route that leads to awarding some behemoths a “Too-big-to fail” franchise.

Do not even think of selling “Too-big-to-fail” franchises, much less for a meager 3 percent of additional bank equity.

It would seem like some regulators want to sell “Too-big-to-fail” franchises to Systemically Important Financial Institutions (SIFIs/G-SIFIs), and even for a mere 3 percent in additional capital. Do not even think of it! 

Not only will 3 percent of additional bank capital end up being almost meaningless in the case of a systemic explosion or implosion of these huge banks, but it is also probable that precisely those Too-big-to-fail banks that we least should want to be too big to fail, will be those most likely to exploit the franchise for all it is worth, in order to compensate the additional equity required, in the ways we would least like to see these franchises exploited. 

Of course regulators will argue these franchises will be the subject of special supervision. Who are they fooling? Is it not hard enough for them to supervise these behemoths without labeling them as the most likely candidates for special support?