How much do traders care about capital models?

I have written before on the perverse incentive in risk sensitive capital models such as VAR, and on the suboptimal design of the Basel 2 capital accord. Reading a guest post by Avinash Persaud on Willem Buiter's blog, however, I wondered how much this matters. Let me explain. Persaud rightly points out that everyone uses roughly the same sort of market risk capital model and as a result everyone has roughly the same view of the capital against a given portfolio. Moreover this number changes as the models are recalibrated to include more recent data and thus if vols rise, capital does too. But I wonder if Persaud goes too far in what he says next:

Market participants don’t stare helplessly at these results. They move into the favoured markets and out of the unfavoured. Enormous cross-border capital flows are unleashed. But under the weight of the herd, favoured instruments cannot remain undervalued, uncorrelated and low risk. They are transformed into the precise opposite.

In a crisis certainly everyone covers at once, or at least sufficiently many people do in a sufficiently short period of time to cause illiquidity and rapid price falls. Most of the time however most traders do not use VAR to optimise their portfolios. They see VAR as at best an inconvenient limit. So they don't move into markets their firm's capital model favours: they move into markets their gut instinct, their broker or their boss favours. While capital models (and risk limits phrased in the same terms) do create an incentive structure, they are not the only nor even the most important determinant of an institution's risk profile. It would undoubtedly be a good idea to fix these unhelpful incentives. But we should not over-egg the cake by suggesting that capital models actually change bank's behaviour much except at the margin.