“Over the next two months, the regulators proposing this rule will no doubt encounter a lobbying buzz saw. Mr. Hoenig (vice chairman of the F.D.I.C.) said he and his colleagues were bracing for that. Bankers, after all, prefer things just the way they are. They can load up on leverage to take risks and reap the rewards. But when losses abound? Well, they’re the taxpayers’ problem.” – Gretchen Morgenson, assistant business and financial editor and a columnist at the New York Times.
Letting banks regulate themselves with what is called ‘risk-weighting’ didn’t work out so well in the past.
“This so-called risk-weighting approach was an abject failure. For example, the assumptions characterized the sovereign debt of Greece as risk-free, requiring that banks set aside no capital against those holdings for possible losses. The risk-weight system also determined, incorrectly, that highly rated mortgage securities fell low on the risk scale.”
Why shouldn’t banks be regulated up to their eye-balls? How can we think bankers can be trusted now?
Either they are horrible at analyzing risk and need lots and lots of oversight or, more likely, they know that in an under-regulated environment they can privatize any gains and socialize all their losses back to us through future federal bailouts.