Monday, June 23, 2014

Who supervises that FDIC, Fed, OCC, with their risk-weights, do not distort allocation of bank credit to the real economy?

The FDIC writes: “The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (Board), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies), under the auspices of the Federal Financial Institutions Examination Council (FFIEC), are requesting comment on proposed revisions to the risk-weighted assets [used to determine the regulatory capital banks should hold].”

And in a reference material titled “New Capital Rule: Community Bank Guide” we read:

“This guide summarizes significant changes from the current general risk-based capital rule for exposures commonly held by community banking organizations, and it provides relevant information regarding the treatment of more complex exposures such as securitization exposures, equity exposures, and exposures to a foreign government or bank. Community banking organizations become subject to the new rule on January 1, 2015. 

The new rule takes important steps toward improving the quality and increasing the quantity of capital for all banking organizations as well as setting higher standards for large, internationally active banking organizations. The agencies believe that the new rule will result in capital requirements that better reflect banking organizations’ risk profiles, thereby improving the overall resilience of the banking system. The agencies have carefully considered the potential impacts on all banking organizations, including community banking organizations, and sought to minimize the potential burden of these changes where consistent with applicable law and the agencies’ goals of establishing a robust and comprehensive capital framework.”

All of which leads us to ask again, for the umpteenth time… who is in charge to supervise that the risk- weighing of bank assets does not distort the allocation of bank credit to the real economy?

How can anyone think of "a robust and comprehensive capital framework" that does not even consider the consequences of distortions which could be much more dangerous for the overall safety of the economy than the presence of unsafe banks?

Do these risk weights really consider any unexpected events and losses banks could suffer or are they based on the same risk perceptions used by the banks to clear for expected risks?