January 17, 2009

How we now wish the regulators had let things be!

Sir no one would contradict Chris Giles’s opinion that “Regulation is small price for protection from another crunch” January 17, the question is though… what kind of protection? … could we not make it worse?

In this respect, to all those who believe that the more intrusive these regulations are the better, let me remind them that not long ago our financial regulators made a choice between the following options:

a. To leave things as they were, with the same capital requirements for banks on all credits, which if 8% meant a maximum 12.5:1 leverage; allowing the banks to keep taking their own credit decisions without having to look over their shoulder at what the credit rating agencies opined or,

b. To impose on the banks a formula of minimum capital requirements based on “risk”, as the regulators understood risk to be, and which for instance for corporations with a AAA ratings required only 1.6% of capital which allowed for these credits a 62.5:1 leverage; and forcing the banks to heed the opinions of the credit rating agencies sending out the message of “if these official risk-surveyors are good enough for the bank regulators then they are good enough for the banks”.

The regulators, sadly, unwisely, chose option b…how we now wish they had not changed a thing!