Thursday, June 27, 2013

The Basel Committee seems to be drowning in in-house surrealism. Put it out of its misery

Risk weighted capital requirements are insane, since the perceived risks they are based on, are already been cleared for in interest rates, amounts of exposure and other terms. 

And not only am I saying it. Anat Admati and Martin Hellwig recently wrote “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

And now the Basel III reformers are introducing a simple, transparent, non-risk based leverage ratio of 3 percent to act as a credible supplementary measure to the risk-based capital requirements.

And they argue they do that to “reinforce the risk-based requirements with a simple, non-risk-based "backstop" measure.” “reinforce”? They’ve got to be joking. "Supplementary" as they say,  perhaps somewhat, though the fact remains that capital requirements will still be based on perceived risk and therefore still favor “The Infallible” those already favored by banks and markets, and discriminate against “The Risky” those already discriminated against by banks and markets.

And read this! “Implementation of the leverage ratio requirement has begun with bank-level reporting to supervisors of the leverage ratio and its components from 1 January 2013, and will proceed with public disclosure starting 1 January 2015.” And which means that before January 1st 2013 we the public, will not have the right to know how really leveraged our banks are.

The Basel Committee seems to be drowning in in-house surrealism, and some ministers or central bankers should show some mercy and put it out of its misery

Why can´t a sequestration begin cutting where it could be most productive?