Mervyn King: Regulators can't rely on bank models
WASHINGTON (MarketWatch) -- Global bank regulators cannot rely on models financial institutions use for themselves to identify if there is too much risk in the system, said Mervyn King, governor of the Bank of England, on Monday. "It is the case that conventional calculations of risks and how much capital banks need turn out to be irrelevant from one day to the next," he said. King added that regulators must identify two or three major developments that are creating risks and "then have the courage to go in and tackle them."
No, regulators must have the courage to go in and build firewalls, or better yet break the big banks into separate corporate entities, so that most banking is of a conventional sort where conventional calculations of risks and how much capital banks need turn out to be relevant from one day to the next and to put the rest of financial activity into separate realms for speculators who can put few at risk besides themselves. Mr. King's advice is really nothing but to trust once again to essentially the same regulatory framework and financial structure that has already failed us. It would inevitably once again allow the nest eggs of pension funds and insurance companies to be misused by financial "innovators" who are mainly expert in finding creative ways to make highly leveraged bets seem much less risky than they really are.