Tuesday, February 23, 2016

Shame on you bank regulators… you even dared lie to your own Queen, to her face!

November 2008, Her Majesty, Queen Elizabeth asked: why did nobody notice the “awful" financial crisis earlier?

But now I see that in December 2012, four years later the “Queen finally finds out why no one saw the financial crisis coming”. Interested I went to read about it and, not really unsurprisingly, they are shamelessly lying to their own Queen, in her face.

It states: “As she toured the Bank of England's gold vault, Sujit Kapadia, an economist and one of the Bank's top financial policy experts, stopped the Queen to say he would like to answer the question she had posed. And Kapadia went on to explain that as the global economy boomed in the pre-crisis years, the City had got "complacent" and many thought regulation wasn't necessary.

Kapadia told Her Majesty that financial crises were a bit like earthquakes and flu pandemics in being rare and difficult to predict, and reassured her that the staff at the Bank were there to help prevent another one. "Is there another one coming?" the Duke of Edinburgh joked, before warning them: "Don't do it again."

When the Queen was leaving the governor of the Bank, Sir Mervyn King, said: "The people you met today are really the unsung heroes, the people that kept not just the banking system but the economy as a whole functioning in the most challenging of circumstances.”

Holy moly what bullshit! If it was my Queen, I would never have lied to her that way,I would have asked her instead for her pardon.

Of course financial crisis are difficult to predict but, in this case it was a crises fabricated by bad bank regulations.

Kapadia explained: “the City had got "complacent" and many thought regulation wasn't necessary”. 

Absolutely not! The regulators intervened perhaps more than ever and in doing so completely distorted the allocation of bank credit to the real economy.

With their risk adjusted capital requirements they allowed banks to leverage immensely more on assets ex ante perceived or deemed as "safe", like AAA rated securities or loans to Greece, than with assets perceived as "risky", like small loans wit high risk premiums to SMEs and entrepreneurs. 

And that meant they allowed bankers fulfill their wet dreams of earning the highest expected risk adjusted profits on what’s safe. And if, as a regulator, you do a thing like that, something is doomed , sooner or later, to go very bad.

In January 2003 I had already warned in a letter to the Financial Times: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough.”

And worst of all is that basically the same regulators keep on regulating basically the same way, Basel I, II and III.

And all for nothing, since never ever have major bank crises resulted from excessive exposures to what was ex ante perceived as risky; these always resulted from excessive exposures to something ex ante perceived as risky, but that ex post turned out to be very risky.

The absolute truth is that had the regulators not regulated at all, banks would never have been leverage as much as they did.