Tuesday, July 7, 2015

Do we need capital requirements for banks based on willingness-and ability-to-lie-and-cheat-ratings?

With Basel II of June 2004, the Basel Committee imposed capital requirements for banks based on credit ratings... stupidly ignoring that bankers were already clearing for such ratings by means of risk-premiums and size of exposures… and naively thinking those credit ratings would always capture real risks.

After having seen the mess that has been caused by for instance much too good credit ratings for the AAA rated securities backed with mortgages to the subprime sector, and the loans to the government of Greece, one could suspect that smarter regulators would have based their capital requirements for banks based on willingness-and ability-to-lie-and-cheat-ratings.

Some decades ago somebody asked me… how come this honest Scandinavian country come up as  more honest than this other honest Scandinavian country on the worldwide corruption index? My instinctive reaction was… the first must have paid more.

Frankly, our current bank regulators have been taken for a ride… an extremely costly ride for us since regulators now dangerously distort the allocation of bank credit.