What is the Basel Committee’s Stefan Ingves now saying, “risk-adjusted (regulatory) returns”?

Stefan Ingves, the Chairman of the Basel Committee in “Where to next? Priorities and themes for the Basel”, a speech delivered on March 12, in page 5 of transcripts, says: 

“The major reforms…that have been developed by the Committee…intended to generate a more resilient financial system, in which higher levels of capital and liquidity are held, and in which risk is appropriately managed and priced. This will obviously have consequences for the costs of financial intermediation, although studies undertaken suggest that this cost is both relatively small, and considerably outweighed by the benefits of increased financial stability. 

Nevertheless ... The Committee is mindful of two potential consequences from the programme of reforms. 

While a degree of deleveraging and increased risk premia are intended consequences of the reforms, there is always a danger that some unintended consequences may arise… 

A second potential consequence relates to the incentives that may arise as the banking sector adapts to the reforms by moving into those businesses where risk-adjusted (regulatory) returns are greatest. This reshaping of banking (either within bank balance sheets or outside the regulated banking system) needs to be monitored on an ongoing basis…” 

What Mr Ingves? “risk-adjusted (regulatory) returns”? This is the first time I read the Basel Committee admitting it is (hopefully unwittingly) distorting the markets, and thereby making it impossible for the banks to efficiently allocate economic resources.

It is not about banks arbitraging opportunities between bank balance sheets or outside the regulated banking system, something quite frequently discussed, but about arbitrating “within bank balances”. 

And so it is not about risk-adjusted bank returns, appropriately managed and priced, something perfectly natural, but about “risk-adjusted (regulatory) returns”. 

In other words, it is about the Basel Committee deciding about where banks can obtain higher or lower returns. 

In other words, as I have argued for a decade, it is not about the credits our banks give out being guided by the markets invisible hand, but by the Basel Committees invisible (and unaccountable) hand. 

Who the hell authorized you Basel Committee bureaucrats to do that? 

And then, “... studies undertaken suggest that this cost is both relatively small”. 

Basel Committee, I dare you to show those studies… If you think, like in Basel II, that authorizing banks to leverage 62.5 times to 1 when lending to a AAA rated client but only 12.5 to 1 when it is an unrated “risky” borrower, has only “relative small” effects on the interest rate that the unrated “risky” borrower has to pay in order to make up for the discrimination, you simply have no idea what you are talking about. 

And then “…this cost [is] considerably outweighed by the benefits of increased financial stability” 

Basel Committee, please, don’t mock us, what stability?