The “experts” in the independent agencies, those most likely to introduce systemic risks, must be continuously questioned and supervised.
Paul Tucker for more than 30 years a central banker and a regulator at the Bank of England writes in his "Unelected Power" 2018
“Unlike price stability, the authorities cannot ‘produce’ financial stability by their own efforts but must stop or deter private intermediaries from eroding the system’s resilience.
That cannot be delivered by looking at intermediaries one by one because the financial system is just that - a system, with components parts connected within sectors and markets, via interactions with the real economy, and across countries.
As the first chairman of the Basel Supervision Committee, George Blunden said in the mid-1980s: It is part of the [supervisors] job to take a wider systemic view and sometimes to curb practices which even prudent banks might, if left to themselves, regard as safe.”
And yet with Basel I in 1988, Basel II in 2004 and current Basel III the regulators in the Basel Committee, ignoring the system, ignoring the distortions it causes in the allocation of credit to the real economy and ignoring that no major bank crisis have resulted from excessive exposures to what ex ante was perceive as risky, went ahead and introduced that mother of all systemic risk and procyclical regulation, which is the risk weighted capital requirements for banks.
“Curb practices which even prudent banks might, if left to themselves, regard as safe”? No way, it only guarantees especially large exposures, to what is especially perceived as safe, against especially little capital, laying the ground for especially large crisis.
I did note that in the 568 pages of “Unelected Power” I found no explicit reference to the risk weighted capital requirements for banks.
At the end of his book Paul Tucker suggests “The principles for delegating to independent agencies insulated from day to day politics”. I agree with these. Had they been in place Basel I II or III would not have existed. Just for a starter, in all of Basel’s bank regulations there is not one single word about the purpose of the banking system, one that must surely contain the need to allocate credit efficiently to the real economy.
There is one aspect though that is not sufficiently laid out in Tucker’s principles and that is the absolute must for the independent agency to contain sufficient diversity, not only to foster better discussion but also in order to hinder, as much as possible, these turning into closed mutual admiration clubs.
PS. In the 568 pages of “Unelected Power” I found no explicit reference to the risk weighted capital requirements for banks, those which for a start caused the 2008 crisis.
Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.
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