Tuesday, May 26, 2015
For the purpose of establishing how much capital (equity) banks need to hold against loans, the Basel Accord (Basel I), Basel II and Basel III defined the following credit-risk weights: Governments 0%; SMEs and entrepreneurs 100%.
I believe that to be absolutely crazy… but regulators won’t listen to me.
But those credit risk weights also de facto translates into that the Basel Committee deems the risk that bank credits are not used productively to be: Government bureaucrats = 0%; SMEs and entrepreneurs = 100%.
And that is of course even crazier… but regulators will still not listen to me.
Now when we reading about so many concerns with the lack of productivity in many economies… will anyone help me to explain to the Basel Committee the connection that exists between their credit-risk-weights and the falling productivity of economies?
Is it not time to think a little bit about productivity weights too?