I commented on Monday’s FT article as follows.
I believe the regulatory thinking was something like this. In the years immediately following the crisis, there were increased capital controls, more regulatory scrutiny of limits, impairments etc.
Then a gradual shift in thought. We survived the crisis, largely because of the intervention of the regulators, particularly the central banks. We could therefore survive any future crisis, therefore no crisis is really a crisis. It’s just markets reacting in irrational and unpredictable ways, animal spirits, ‘artificial volatility’ and so forth. Crises don’t really exist, ergo capital doesn’t really need to exist. It will all come out right in the end, if we wait patiently.
Hence it is not a problem to invent capital amounts to meet non-existent capital requirements. Sort of makes sense, no?
You could improve on this approach by abolishing the capital regime altogether. Would be far less time consuming and save a lot of money on both sides. Simply issue a guarantee that any losses whatsoever will be paid for by taxpayers, no need to refund bonuses, dividends etc. Much simpler, and would encourage the right sort of behaviour.
My favourite comment was “So you take on more risk (to try and bump up the income) and you need less capital! Mad.” Captures the essential craziness of MA in one sentence.