Monday, October 5, 2015

All economic research that has not controlled for the distortions produced by bank regulations could be worthless.

In 1988 with the Basel Accord the concept of risk-weighted capital requirements for banks was introduced. The first decision: Zero percent risk weight for sovereigns and 100 percent for private sector.

In June 2004 Basel II introduced risk weights for the private sector of 20 percent for the AAA-AA rated, 50 percent for the A+ to A rated, 150 percent risk weight for those rated below BB-, and 100 percent for all others.

That meant that the risk-adjusted returns on banks equity would not only depend on the risks of the assets, but also on the regulatory capital requirements for those assets.

Therefore, all economic research that should but that has not controlled for the serious distortions in the allocation of bank credit to the real economy these regulations produce, could be worthless.