Thursday, October 24, 2013

A regulator´s risk is totally different from a banker´s risk... and current bank regulators do not know this. God save us!

A banker has to believe he has appreciated the risks of assets and borrowers correctly, and covered for these adequately, in order to do his banking business. 

A bank regulator´s risk on the other hand, has nothing to do with the intrinsic risks of bank assets or borrowers, and all to do with whether the banker has been correct or not, in his appreciations of the risks, and if he has adjusted adequately his exposures to it.

And that is why it is so extremely silly of bank regulators to risk-weigh the capital requirements for banks based on the ex ante perceived risk of assets and borrowers, instead of setting a sufficient capital requirement to cover reasonably for the bankers committing mistakes.

And, if trying to do so, the regulator would very soon be able to understand that the assets or borrowers that really signify major dangers for the banks, are those assets that, when booked, were considered “absolutely safe”.

In other words, if risk-weighting, not for the bankers´ risks but for the regulators' risk, the capital requirements for what is perceived as “absolutely safe” should be higher than for what is perceived as “risky”.

And so currently bank regulators are with their risk weights not only distorting the allocation of bank credit to the real economy but, on top of it all, they are doing it in the totally wrong direction. God save us!