Sunday, June 29, 2014

Jaime Caruana, go home. You and your Basel II colleagues have done enough damage, and should not now block the fixes.

Jaime Caruana was the Chairman of the Basel Committee for Banking Supervision at the time Basel II regulations were approved in June 2004; and since I consider these the most outrageous, dumb and irresponsible bank regulations ever, I of course think that he should have retired a long time ago.

But no, ten years later, now as the General Manager of the Bank of International Settlements he still refuses to accept any responsibility. 

Let me for instance refer to his speech “Stepping out of the shadow of the crisis: three transitions for the world economy” given on the occasion of the BIS’s Annual General Meeting in Basel on 29 June 2014 

There he states: “A reliable financial system requires more than resilience. Resilience is the starting point, but let me mention some other key elements. The first is confidence in banks’ risk management. This goes all the way from the overall risk culture to the risk models themselves. The large reported dispersion in risk-weighted asset calculations suggests that there is still plenty of scope for inconsistency, and perhaps even for gaming the rulebook.” 

Not even a hint of the possibility that in fact it was the regulators’ who with their risk-weighted capital requirements for banks, the pillar of Basel II, gamed the rulebook and upset risk-models.

He also says: “ Stringent regulation can alleviate this problem. Constraints on modelling assumptions can improve comparability and curb arbitrage.”

Yes but who will constrain the regulators from arbitraging against their short term credit risk monsters, ignoring the risk-taking the economy needs? 

He also holds: “If calibrated rigorously, the leverage ratio can create a credible backstop for the risk-weighted ratios.” 

Yes but why was this not there in Basel II, and why is it there now only as a backstop, something which allows the risk-weights to distort more than ever on the margins?

He also says: And, implemented consistently, global minimum regulatory standards can reduce the risk of fragmentation along national borders and increase credibility. 

Indeed, but unfortunately, with wrong regulations, like Basel II, that can also increase the global systemic risk in banking.

And he suggests: “to encourage a prudent risk culture, one that allows for diversity and risk sensitivity, but penalises and prevents attempts to game regulations.”

Obviously Caruana has no idea that a prudent risk culture for regulators starts by defining which the objectives of that which is being regulated are, so as to know what they cannot risk distorting with their regulations. If Caruana and his colleagues had known that, then they would have understood that the last thing they could do was to distort the allocation of bank credit to the real economy… as they so blithely did and do!

As is those foremost responsible for gaming bank regulations to suit their own beliefs and not having been penalised for it, are the Basel Committee and the Financial Stability Board members.  

Jaime Caruana… by not being willing to admit the mistakes of Basel II, and occupying a crucial post, you are standing in the way of what needs to be corrected… so go home!