Wednesday, February 29, 2012

Again, the two basic questions the bank regulatory establishment does not dare, want or know how to answer.

If banks already look at the credit information provided by credit ratings when setting interest rates, amount to lend and other terms, do you think it is intelligent for the regulators to also look at the same credit ratings, or similar risk perceptions, in order to define the capital requirements for banks? Is that not overdoing the nanny part a bit too much? Could that not lead to a dangerous overexposure to whatever is officially deemed as absolutely not risky? Like to triple-A rated securities and infallible sovereigns? 

And is not the whole idea of lower capital requirement for banks when the perceived risks are low just a dumb idea from the very start, knowing, as we do, that big systemic bank crises never ever occur because of excessive exposures to what is believed to be risky, but that they always occur because of excessive exposures to what was wrongfully believed as absolutely not-risky?