Basel‘s monstrous regulatory mistake
The regulators notwithstanding that the market and the banks already considered the credit ratings when setting their risk premiums and interest rates, considered exactly the same information when setting their capital requirements for the banks. This double consideration, which would have been wrong even in the case of perfect credit ratings, leveraged incredibly the systems dependence on the human fallible credit ratings.
And now, more than three years into the crisis, the Basel Committee, FSB, FAS, Fed, IMF, World Bank, PhDs and finance experts, specialized journalists, like all those in FT, and most other who have and give opinions on the issue of bank regulations, have yet to say one single word about a mistake that really makes it impossible to construe any worthy bank regulation on top of it.
One really wonders what world we live in, when the regulators is turning our whole banking system sissy... and making it impossible for banks to allocate credit efficiently to the real economy.
PS. The monstrous mistake, which evidences our bank regulators have never walked on main-street, is that they believe what’s perceived as risky, is much more dangerous to our bank systems than what’s perceived as safe: My 2019 letter to the Financial Stability Board
Postscript: Basel Committee, please listen to Violet Crawley, don't be so defeatist, it’s so middle class.
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