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Current bank regulations are evidence free rather than evidence based

Saturday, November 16, 2019 11:04

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Tim Harford suggests, “Pick a topic that matters to you”, “How to survive an election with your sanity intact” November 16.

Ok. Bank regulations. And Harford argues, “Politics… is now evidence-free rather than evidence-based”. Indeed but so are current bank regulations.

What has caused all big bank crises was something ex ante perceived very safe that ex post turned out very risky… in other words incorrect risk assessments.

But instead of basing the capital requirements based on this empirical evidence, regulators concocted risk-weighted capital requirements based on credit risks being correctly perceived. And so they assigned a meager 20% risk-weight to dangerous AAA rated, and 150% to the so innocous below BB- rated.

If I were a regulator I would consider my role to guard against the possibility that bankers could perceive risks incorrectly, instead of, like the Basel Committee has done, betting our bank systems on bankers always being correct. Sir, wouldn’t you too?

Harford suggests, “When someone expresses an opinion, whether you agree or disagree, ask them to elaborate. Be curious.”

Unfortunately, when thousand of times I’ve asked the question “Why do you believe that what’s perceived as risky by bankers is more dangerous to our bank systems than what they perceive as safe?” that has not generated much curiosity. What it has generated is a lot of defensive circling of the wagons. “There again goes Kurowski with his obsession”

Harford also reminds us of Alberto Brandolini’s “bullshit asymmetry” principle, “The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it.” With soon 3.000 letters to FT on the topic of “subprime banking regulations”, I can sure attest to that being true.

https://teawithft.blogspot.com/search/label/subprime%20banking%20regulations

@PerKurowski

Source: http://teawithft.blogspot.com/2019/11/current-bank-regulations-are-evidence.html

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