Monday, September 13, 2010

We are all being subject to a “Razzle Dazzle 'em, Bazzle III 'em” scheme

In Basel III, as in Basel II, the capital requirements are set “in relation to risk-weighted assets (RWAs)” even though it was the risk weights which proved to be most wrong.

It was a low risk weight of only 20% which generated a capital requirement of only 1.6 percent (.08 x .2) allowing banks to leverage 62.5 times to 1, which drove the banks to stampede after the triple-A rated securities collateralized with lousily awarded mortgages to the subprime sector.

Also if a bank lends to a small business then it needs 8 percent in capital but if it instead lends that money to the government of a sovereign rated AAA to AA then the bank needs no capital for the risk-weighted assets since the weight is 0%... lunacy!

Since the risk weights have not been modified at all in Basel III, let me assure you that the Basel Committee still has no idea about what they are doing. Frightening!

Basel III does mention that “These capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures described” but since that supplement seemingly will be small and what really counts are the marginal capital requirements for different assets Basel III does not provide a solution.

No financial or bank crisis has ever occurred from something ex-ante perceived as risky they have all resulted, no exceptions, from excessive lending or investment in something perceived as not risky.

Basel III still constitutes an arbitrary and regressive discrimination of small businesses and entrepreneurs whose needs we in fact most want our banks to attend. With the same risk-weight discriminations, the higher the capital requirements are, the higher the real effective discrimination.

Banks were authorized by the Basel Committee to lend to Greece leveraging 62.5 to 1! Now even after being sunk, we are still in the hands of exactly the same banks with exactly the same regulators following exactly the same fundamentally faulty regulatory paradigm… Help!

Give 'em the old Razzle Dazzle, Razzle Bazzle 'em,

Show 'em the first rate sorceror you are

Long as you keep 'em way off balance

How can they spot you've got no talent

Razzle Dazzle 'em, Bazzle III 'em,

And they'll make you a star!