Friday, October 25, 2013

About banks, black donkeys and plain donkeys

There was a little town with a road on which some farmers in horse drawn carriages speeding along at 12.5 mph. sometimes suffered severe injuries when crashing into some of the black donkeys who roamed around the area. And the little town now wanted to prepare for the coming of speedy automobiles. 

But, before a town hall meeting could be held on the issue, Franz Basil, a local bully, presented regulations which stated: If a black donkey is seen, then the maximum speed allowed is 12.5 mph, but if there is no black donkey to be seen, 62.5 mph will be allowed. And to be absolutely sure about it, we are going to set up black donkey outlook outposts so as to rate the possibility there is one.

And since the proposal was immediately hailed as brilliant by some of Franz Basil´s comrade bullies, and some did not want to show they did not understand a iota about what he was talking about, and everyone was happy about a plan that offered the possibility of never ever more a black donkey incident, it was acclaimed, and some even discussed asking their king to knight Franz Basil.

For a while it looked as if all was going well, except for the fact that those who were allowed to drive at only 12.5 mph, were slowly driven off the road, “move over you slow stupid farmer”. 

But then, some weeks later, suddenly a real bloodbath resulted when a couple of vehicles driving at 62.5 mph smashed into some black donkeys.

One could hear the small weak voice of an old local farmer saying: “It had to happen, it was too silly to begin with, the crashing into black donkeys never ever occur when you see these, but only when you do not, for whatever reason, blinded by the sun, to dark to see, or just distracted thinking about coming home fast to your sweet wife. And who could think that those looking out for the black donkeys would not suffer of the same”.

But Franz Basil and his accolades, being the bullies they are, shut him up, offering the solution of allowing authorized speed differences to remain but now making certain that, at no point in time, the average speed of those driving on the road could be higher than 33.3 mph. And, again, understanding even less than before, no others said anything, but “Ah!” in awe.

And there the little town lays licking its wounds, just waiting for the next accident to occur and its farmers not being able to drive around.

But you may ask, “what about the plain donkeys?” Well I leave you to figure out who they are.

Data: The Basel Committee´s authorized speeds

Basel II risk weight for when there is perceived risk, “The Risky” is 100%, which on 8% basic capital requirement produces an authorized leverage of 12.5 to 1. 

Basel II risk weight for when there is no perceived risk, the AAAristocracy, is 20%, which on 8% basic capital requirement produces an authorized leverage of 62.5 to 1.

Basel III 3 percent leverage ratio is equivalent to a 33.3 to 1 average