Always looking on the bright side November 17, 2009 at 6:44 am
See the sun! Ignore the muddy puddle. That’s the regulators’ way, according to a great post at Interfluidity:
In good times, regulators have every incentive to take banks at their optimistic word on asset valuations, and therefore on bank capitalization. It is almost impossible for bank regulators to be “tough” in good times, for the same reason it is almost impossible for mutual fund managers to be bearish through a bubble. A “conservative” bank examiner who lowballs valuation estimates will inevitably face angry pushback from the regulated bank… Valuations can remain irrational much longer than a regulator can remain employed…
When a “systemic” banking crisis occurs, regulators’ incentives are suddenly aligned with bankers: to deny and underplay, to offer forbearance, to allow the troubled banks to try “earn” their way out of the crisis. Regulators, in fact, can go a step further. Bankers can only “gamble for redemption”, but regulators can rig the tables to ensure that banks are likely to win. And they do.
The whole post is definitely worth reading. The key point though – that banking crises make regulators look silly, and thus they have an incentive to underplay the seriousness of the issue and to covertly help the banks earn themselves back into the black – is very well made. Now would be a really good time to be highly suspicious of asset valuations, loan loss provisions, and other counterparty performance evaluations.
