June 18, 2014

The capital requirements for banks based on perceived risk, distort the correct risk pricing that the market might have done.

Sir, Simon Johnson writes about the risk of “Concentrating risk with the laudable goal of reducing opaqueness”… “Chaos is brewing behind the clearing house doors” June 18.

Absolutely, that was precisely what happened when regulators decided to concentrate in the hands of very few human fallible rating agencies, so much of the risk perceptions in the banking system… and look at what happened.

But, when Johnson begins lining up AIG, Fannie Mae and Freddie Mac as causing big distortions in the pricing of risk, I do not agree. The most fundamental distortions in the pricing of risks are the result of the regulators, with their capital requirements for banks based on perceived risk, distorting the correct risk pricing that the market might have done.