Three letters in June 2004

1st letter 

Basel, June 2004 

Dear Bankers 

We are fed up with you getting into so much trouble, and us being blamed for it. Therefore, and as we know that incentives matters, we will allow you, with our Basel II regulations, to hold much less capital when you do lending or investing business with those our expert consultants the credit rating agencies consider as The infallible, than when you do business with The Risky. 

Since that will allow you to obtain immensely higher returns on equity than what is usual in banking, and so be able to pay yourself much higher bonuses, we are sure to count on your full cooperation. 

Yours sincerely, 

The Bank Regulator, of the Basel Committee for Banking Supervision 

2nd letter 

America and Europe, June 2004 

Dear Bank Regulator 

Many thanks for Basel II! 

You can sure count with our fullest cooperation implementing it and in fact we already started to anxiously look around for (and some of use even create) AAA rated business.

Yours sincerely, 

The Bankers; mostly on behalf of the larger soon to be even larger banks 

3rd letter 

Washington, June 2004 

Dear Bank Regulator 

On behalf of my former and future clients, the not-so-good rated and unrated small businesses and entrepreneurs everywhere, “The Risky”, let me express my deepest concern with the Basel II you have just enacted. 

The pillar of those regulations is that banks will be able to hold much less capital when doing banking business with “The Infallible” than when doing so with “The Risky”. That means, of course, that banks will obtain much higher comparative risk adjusted returns on their equity when doing business with “The Infallible” than when doing business with “The Risky”. And that, pardon my sincerity, I find to be both stupid and obnoxious. 

First, my clients, “The Risky”, because bankers always tend to be very careful when doing business with them, have never ever caused a bank crisis. On the contrary, since all major bank crises have always resulted from excessive bank exposure to what was thought to be a member of “The Infallible”, your regulations will only guarantee that the resulting bank crises will be even larger than major. 

Second, the fact that those ex-ante considered as “The Infallible” will be treated so favorably, increases the chances of them becoming, ex post, “The Risky”; and with that that banks will find themselves standing naked with no capital at all in the midst of the next major crisis. 

Third, since credit raters are human, there is an immense danger in giving excessive credence to credit rating agencies, as for them being able to determine with sustainable preciseness who are “The Infallible” and who are “The Risky”. 

Fourth and most importantly, let me remind you that “The Infallible” of today have almost always been “The Risky” of yesterday and so, if you persists in regulations that favor those who built the past and discriminate against those building the future, you must understand that for a more systemic and larger trouble than ordinary bank troubles...  and that no bank can survive standing in the middle of the rubble of huge economic descent.

Yours sincerely, 

Per Kurowski 

An Executive Director of the World Bank (mind you, only one of 24)