Tuesday, January 15, 2013

The Basel Committee Lunacy

First answer: What poses the larger risk to create a major bank crisis, those that can only result from major bank exposures? Exposures to what is rated below BB-, non investment grade and speculative, or exposures to what is rated AAA to AA, high grade and better? 

And then consider that Basel II requires banks to hold 12 percent in capital when lending or investing in something rated below BB-, an authorized 8.3 to 1 leverage of bank equity; and only 1.6 percent when lending or investing to what is rated AAA to AA, an authorized leverage of 62.5 to 1. 

Let me offer you a hint: Mark Twain described bankers as those who lend you the umbrella when the sun shines but want it back as soon as it looks it is going to rain. 

As I see, what I qualify as the Basel Lunacy, only guarantees that when a real sizable financial explosion occurs, those which can only result from excessive bank exposures, those excessive banks exposures that can only result to something being perceived as absolutely safe, that then the banks will stand there absolutely naked with no capital to speak of between them and the depositors or the taxpayers. 

In “Notes on Nationalism”, George Orwell wrote “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” Indeed no ordinary man would be such fools as our current bank regulators, those in The Basel Committee for Banking Supervision or those in the Financial Stability Board.