Thursday, September 30, 2010
Wednesday, September 29, 2010
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?
Tuesday, September 28, 2010
Friday, September 24, 2010
Sunday, September 19, 2010
One of the primary purposes of banks is tending to the financial needs of those small businesses and entrepreneurs who might be the source for the future generation of decent jobs, but are yet too small for the capital markets. If so why are you making it less attractive for banks to do just that by, in relative terms, placing much higher capital requirements on whom naturally must be perceived as riskier? Is not being perceived as riskier a heavy weight by itself? Do these clients not have to pay higher interest rates anyhow?
A banker’s most important mission is to learn to analyze a client and find ways of how to safely satisfy his credit needs. If so why are you implicitly ordering all bankers just to follow the opinions of some few credit rating agencies?
An absolute perfect credit rating, guarantees an exact pricing, and therefore provides no special profits to any side of the operation. Special profits, for one side or another, do only arise from incorrect perceptions of risk. If so, why are you creating risk information oligopolies which, when captured, can only leverage incorrect risk perceptions into a systemic risk?
Current financial regulations requires a bank to hold 100% of the standard Basel II or Basel III capital requirement when lending to a small business or entrepreneur, but allows it to hold zero percent of that same standard Basel II or Basel III capital requirement when lending to a triple-A rated sovereign like that of the USA. If so could not a visitor from outer space, looking solely at the financial regulations, simply conclude that planet earth is communistic?
In order to regulate banks, one would naturally assume the need of establishing a purpose for the banks. The Basel Committee does no such thing!
Titling the comment as I do, am I to harsh with the Basel Committee? I don’t think so!
In 1999 I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse”; and as an Executive Director at the World Bank I did all I could to warn about what I was certain was doomed to happen. But I was blithely ignored by this small group of regulators who were just too cozy in their little mutual admiration club.
Well the AAA-bomb finally exploded and the Basel Committee does still not take any questions from outside their own circle, which now includes the Financial Stability Board. And now they are only giving us their “Razzle Dazzle 'em, Bazzle III 'em” treatment. That is inacceptable for a world that is and will be going through much suffering, precisely because of the Basel Committee.
Thursday, September 16, 2010
It was built with lousy materials, like arbitrary risk-weights and humanly fallible credit rating opinions.
And it was built on the absolutely wrong frontier, for two reasons:
First, it was build where the risk are perceived high, and where therefore no bank or financial crisis has ever occurred, because all those who make a living there, precisely because they are risky, can never grow into a systemic risk. Is being perceived as risky not more than a sufficient risk-weight?
Second it was built where it fends of precisely those clients whose financial needs we most expect our banks to attend, namely those of small businesses and entrepreneurs, those who could provide us our next generation of decent jobs and who have no alternative access to capital markets.
Now with their Basel III the Basel Committee insists on rebuilding with the same faulty materials on the same wrong place and it would seem that we are allowing them to do so.
I am trying to stop them… are you going to help me or do you prefer to swim in the tranquil waters of automatic solidarity with those who are supposed to know better?
The implicit stupidity of the current Basel regulations could, seeing the damage these are provoking, represent an economic crime against humanity!
Monday, September 13, 2010
Give 'em the old Razzle Dazzle, Razzle Bazzle 'em,
Friday, September 10, 2010
When I talk about an authorized leverage of "64.5 to 1" the real figure is "62.5 to 1". Since there could be some debate on whether I was trying to see if you were following me, catch you sleeping, or because I did not use a calculator I made a mistake... be my guest and pick any explanation you choose, it won´t matter anyhow for the conclusions… and I will not repeat the class just because of that.
Wednesday, September 1, 2010
3.- What is the rationale of a regulatory system where if the bank lends to an unrated small business or entrepreneur it needs to have 8 percent in capital but, if it instead lends to the government of an AAA rated sovereign, like the USA, so that government bureaucrats lend or give stimulus to the unrated small businesses and entrepreneurs, the banks need to hold zero capital? Is this not plain pro too-obese-to-succeed government regulation? What do the interest rates on public debt really signal with this type of regulations interfering?
The questions at the IMF blog