The Basel Committee on Banking Supervision has only a completely wrong and harmful tool in its toolbox.
Capital requirements based on the perceived risk of default as perceived by credit rating agencies or bank’s own internal risk analysis, is the most important tool in the toolbox of the Basel Committee for Banking Supervision.
The higher the perceived risk the higher the capital requirement, and the lower the perceived risk the lower the capital requirements. It all sounds so extremely logical. Unfortunately as all bank and financial crisis have exclusively originated from excessive investments in what has been perceived ex-ante as having a low risk; and none from excessive investments I what has perceived ex-ante as having high risk, this regulatory tool is totally counterfactual; and therefore totally counterproductive, as this crisis in triple-A rated territory clearly evidences.
And it is even worse than that. As that tool discriminates precisely against the type of clients banks are supposed to help the most, the small businesses and entrepreneurs who have little alternative access to finance, it harms the economy and job creation.
Day by day more get to be aware of this problem, and I had the chance to take it to the forefront by making questions in three of the events during the annual meetings of the International Monetary Fund and the World Bank, October 8-11, 2010
The problem though is that seem they do not yet know what to do about it… and so they try to ignore it and whistle in the dark. In one of the final seminars “The financial sector: navigating the road ahead, where there was no Q. & A. opportunity the basic problem with the capital requirements based on risk was not even mentioned, though the additional layers of confusion currently contemplated, such as capital requirements for liquidity risks, for systemic risk and for cyclicality risks were. Can there be something more pro-cyclical than helping the triple-A rated?
It is truly amazing to see how difficult it is for so many to extract themselves from the regulatory paradigm, or almost regulatory voodooism that has entrapped them. The only truly invisible hand at work was… that of the scheming banking regulators messing around with risk-weights under the table.
Below are the three events that I referred to, and where I asked my question.
The Civil Society Town-Hall Meeting
In the video you can find my question in minute 47.28, Dominique Strauss-Kahn’s answer in minute 1.01.08, and Robert Zoellick’s answer in minute 1.16.32
Structural Reforms: Effective Strategies for Growth and Jobs
Here my first and second question can be seen from minute 1.14.25 on.
Accelerating Financial Inclusion–Delivering Innovative Solutions
My question (not the best sound quality, but it is a similar question) can be found in minute 1.04.03 on
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