Wednesday, September 29, 2010

Are you ok with a 71.4 to 1 leverage for banks?

Basel III now tells us that the basic capital requirement for banks is not any longer going to be the 8 percent of wishy-washy made up capital of Basel II, but a more real and solid 7 percent. Good news!

But unfortunately Basel III completely ignores mentioning the risk-weights, though these were the real source of the problems with Basel II.

And so now with Basel III, since the risk-weight for operations with triple-A rated securities is still 20%, the “more real and solid” equity required is 1.4 percent; the new authorized leverage for banks when investing in exactly the same type of securities that set of the current crisis, is 71.4 to 1.

Are you really ok with this?