Tuesday, July 23, 2013

On dangerous bulls, friendly cows, and silly current bank regulations

One entrance says “Beware, dangerous bull here” 

The other “Welcome, only friendly cows here”

If the visitors cannot read you could take some further measures to enlighten them about a danger but, if they can, should you do more? 

Should you on top of it all,  fine all those who visit the bull, and pay a premium to those visiting the cows?

At what point should you substitute your own vigilante concerns for those of any possible visitors?

And, if you do so, at what point will no one ever visit the bull and so that it could become even shyer of humans and therefore more dangerous? 

And, if you do so, at what point might so many be visiting the cows so that the visitors, or even the cows, might get trampled to death?

Those questions reflect some of the difficulties which were not considered by regulators with respect to their capital requirements for banks based on ex-ante perceived risk. 

If bankers can read and understand those perceived risks, how much more must a regulator do in order to fulfill his duty?

Cannot it be so that if regulators also layer their concerns on to of those of the bankers, the whole banking system might overdose on perceived risks?

And if it does, could that not mean that the bulls of bankers, the “risky”, the small businesses and entrepreneurs, will never get any bank credit and the real economy starts to crumble?

And if it does, could that not mean that some of the cows of banking, the “safe” sovereigns and AAAristocrats, get too much credit and therefore become dangerous?