Tuesday, January 29, 2013

You the Basel Committee, and you the Financial Stability Board, are you really as smart as you think you are?

Even though you, as bank regulators, never have problems with bank’s risk models that function and credit ratings that are correct, and only have problems when bank’s risk models malfunction and credit ratings prove incorrect, with your capital requirements based on ex-ante perceived risk, you decided to bet all our banking system on bank’s risk models functioning perfect and the credit ratings being perfectly correct… was that such a smart move guys? 

Even though you, as a bank regulators, must have known that except for when outright fraud is  present, all major bank crisis, no exceptions, have resulted from excessive bank exposures to what was perceived as absolutely safe, and none from excessive exposures created to something ex-ante perceived as risky, you decided that the bank needed to hold much more capital when investing or lending to something risky than when investing or lending to something perceived as absolutely safe… was that such a smart move guys? 

Even though you, as bank regulators, must have known about Mark Twain’s accurate description of a banker as the fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” and that this was often a hinder for those that though perceived as risky are often on the margin the most important players of the real economy decided to give the bankers even further incentives to lend while it is sunny and to withdraw their credit even faster at the slightest indication that it could possibly rain…. was that such a smart move guys? 

What can I say but to quote Axel Oxenstierna: “An nescis, mi fili, quantilla prudentia mundus regatur?”, “Do you not know, my son, with how little wisdom the world is governed?”, “¿No sabes, hijo mio, con que poca sabiduría el mundo esta gobernado?”, “Vet du inte, min son, med hur litet förstånd världen styrs?” 

In March 2003, while being an Executive Director at the World Bank (2002-2004) and when discussing the implications of Basel II bank regulations I stated: “As the financial sector grows ever more sophisticated, making it less and less transparent and more difficult to understand for ordinary human beings, like EDs, it is of extreme importance that the World Bank remains prudently skeptical and vigilant, and not be carried away by the glamour of sophistication. In this particular sense, we truly believe that the World Bank has a role to play that is much more important than providing knowledge per-se and that is the role of looking on how to supply some of the wisdom-of-last-resort.”

Unfortunately, the whole world is, in dumb open-mouthed amazement, suffocating under the weight of too much knowledge that no one finds time to reflect upon. 

Can we please ask for a time out in order to discuss these quite loony and dangerous Basel bank regulations from scratch? I ask this because when now adding your Basel III liquidity requirements, also based on the ex-ante perceived risk, you seem intent on digging us further down in the hole were you have placed our economies.