Bank regulators, the Basel Committee, FSB, and other, insist on putting systemic risk on ever-larger doses of steroids

What was the biggest systemic risk we used to refer ages ago? That which Mark Twain described with “The bankers are those who want to lend you an umbrella when the sun shines and take it away as soon as it looks like it is going to rain”. In other words that bankers could be too risk adverse, and therefore not be allocating credit efficiently to the real economy. 

But what did regulators do with their risk weighted capital requirements for banks? They told banks to lend out even more the umbrella when the sun shines. 

I have written on bank regulations for a long time, not as a regulator, but as a consultant that has walked up and down on Main Street helping corporations of all types to access that bank credit that seems so impossible or so expensive when one is perceived as risky. 

And as an Executive Director of the World Bank 2002-2004 I also raised my voice on many related issues. You can read some of my public opinions here. 

Today I was made aware of a paper from the International Institute for Applied Systems Analysis, IIASA, authored by Sebastian Poledna, Olaf Bochmann, Stefan Thurner and that is said to suggest: “smart transaction taxes based on the level of systemic risk” 

Holy Moly, when will they ever learn? All intrusions that tilt regulations in favor of something or someone become, immediately, a new source of systemic risk? 

And the more and the better you are in guarding against some identified systemic risk, the higher you are climbing up the very dangerous mountain. 

In April 2003, when commenting on the World Bank's Strategic Framework 04-06 I held: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind." 

Everywhere I look I see more and more sources of systemic risks in our banking system. Like which? 

Continuing to rely on too few human fallible and capturable credit rating agencies. 

Continuing to use risk weighted capital requirements that distort for no good reason at all. 

Liquidity requirements that can only increase the distortions. 

Forcing the use of standardized risk weights, which imposes a single set of criteria on too many. 

Regulators now wanting to assure that banks all apply similar approved risk models. 

The stress tests of the stresses that are a la mode. 

Living wills. 

And of course that pure ideological interference that have statist regulators assigning a 0% risk weight to sovereign and a 100% to citizens. 

All in all, in terms of creating dangerous systemic risks, hubris filled bank regulators are the undisputable champions. 

The main cause for all this is that our bank regulators seem to find it more glamorous to concern themselves with trying to be better bankers, than with being better regulators. 

Regulators, let the banks be banks, perceive the risks and manage the risks. The faster a bank fails if its bankers cannot be good bankers, the better for all. Your responsibility is solely related to what to do when banks fail to be good banks. Please?

And regulators always remember these two rules of thumb: 

1. The safer something is perceived to be, the more dangerous to the system it gets; and the riskier it is perceived, the less dangerous for the system it becomes. 

2. All good risk management must begin by clearly identifying what risk can we not afford not to take. In banking the risk banks take when allocating credit to the real economy is precisely that kind of risks we cannot afford them not to take. 

So when can we get bank regulators humble enough to understand their role is to regulate banks against risks they themselves cannot understand? Please?