Thursday, April 10, 2008

Why we cannot leave bank regulators to regulate on their own!

Nout Wellink the Chairman of the Basel Committee on Banking Supervision declared in the Financial Time on April 10 2008 that “Basel II is sophisticated and sorely needed”; and it is a splendid confirmation of why we cannot leave the traditional bank regulators regulating banks on their own. The just are digging ourselves deeper in the hole we are in!

Of course there is nothing wrong with sophistication as long as it does not take away from our understanding of what is going on, which it will be the end result, which makes further mockery of market transparency; and as long as it does not create new artificial market advantages, which it will by favoring the big banks and the continuation of our craze of putting ever more eggs into fewer basket; and as long as it does not create new systemic risks, which it will as long as “to err is human” applies, just like it applied in the case of the credit rating agencies.

But, what I most object to is that “there will be greater differentiation in the capital requirements for high risk and low risk exposure”. Who on earth told the bank regulators that the only role of banks was to avoid failing and that for that purpose you had to create an additional regulatory bias against risks, more than the natural bias against risk that already exists in the market? No, we do not need the banks to increasingly finance only securitized consumers and public sectors around the world just because that could be construed as having a lower risk of default. To do so could lead the world to default. If we are going to use default risk as a basis, then we better design the minimum capital requirements in terms of units of risk per decent job created.