Friday, August 16, 2013
Members of the Basel Committee for Banking Supervision
In July 2013 you issued, for comments before October 11, 2014, a discussion paper titled “The Regulatory framework: balancing risk sensitivity, simplicity and comparability”
In reference to it let me declare that I totally reject, and protest, your whole perceived risk based capital requirement framework. It is based on the absolutely false premise that the perceived risks are not cleared for by banks in terms of interest rates, size of exposure and other contract terms.
Your perceived risk based framework, which re-clears for the same perceived risks in the capital (equity), only guarantees that banks will overdose on perceived risk, and makes it completely impossible for banks to help the society in allocating effectively bank credit in the real economy.
Your perceived risk based framework has also been the prime cause for the current crisis, as it, by allowing banks to make higher expected risk-adjusted returns on exposures to what is perceived as absolutely safe than on exposures to what is perceived as risky, has driven the banks to create excessive exposures to what is perceived as absolutely safe, which is precisely the kind of exposures that have caused all major bank crises in history, when the ex-ante perceptions, turn out ex-post to be wrong; in this case much aggravated by the fact that the capital of the banks will also be extremely small when such unfortunate thing occurs.
Your perceived risk framework has also, in my words, castrated the banks and introduced a risk-adverseness that is making of the developed countries, submerging countries.
As a private citizen I do not have the time or the resources to repeat all my arguments over and over again and so I refer you to my blog:
And in which, for a starter, you might find especially illustrating the following post
And to follow up, you might want to read what was recently published in the Journal of Risk North Asia, Volume V, Issue II, Summer 2013
And please, before you regulate our banks one iota more, tell us what you think the purpose of our banks should be, to see if we agree.
Respectfully yours, sort of.
A former Executive of the World Bank (2002-2004)
PS. If I sound a bit disrespectful, forgive me, but I have been trying, for more than a decade now, to make you see the light. I do not ever shout in capital letters on the blogs, I am a grandfather, with a serious cv., but there has to be a way by which an ordinary citizen can get some answer, even from a Basel Committee.
PS. If I feel I have to add to these comments I will do it here…the link to this post.