Monday, January 11, 2016

Who is willing to rein in the bank regulatory abuses on Basel Committee Street?

The Basel Committee for Banking Supervision introduced credit risk weighted capital (equity) requirements for banks: more risk more capital – less risk less capital.

That allowed banks to leverage their equity much more when lending to that perceived or deemed safe, like to the AAArisktocracy or Infallible Sovereigns, than when lending to those perceived risky, like SMEs and entrepreneurs.

That allowed banks to earn much higher risk-adjusted returns on equity when lending to the safe than when lending to the risky… sort of realizing bankers' wet dreams.

And that means banks build up dangerous excessive financial exposures to what is perceived as safe, against very little capital, precisely the stuff major bank crises are made off.

And that means banks will mostly refinance the safer past than finance the riskier future, negating thereby the young the opportunities their elder benefitted from in the past.

And, in a nutshell, that guarantees growing inequalities and weakening economies.

Damn the Basel Committee, their associates and all other who maintain interested silence on this de facto regulatory crime against humanity, that I sincerely believe was committed unwittingly.

Where did this disaster, which could even be defined as an unwitting economic crime against humanity, originate? There are many factors, and here are some of those I feel are most relevant. 

Regulators never defined the purpose of the banks and, if you regulate without doing that, then anything could happen. 

Regulators though knowing that banks capital is to be there to help cover for unexpected losses, got confused and used the expected credit risks to estimate the unexpected. 

Regulators simply ignored that what is perceived as safe has by definition a greater potential to deliver unexpected losses than what is perceived as risky. 

Regulators concerned themselves with the perceived risks of bank assets, instead of with the risk of how bankers would manage those perceived risks. 

Regulators simply did not do some empirical research on what causes major bank crises and where therefore not able to manage the differences between ex ante perceptions and ex post realities 

Etc. etc. etc.

Shame on the Basel Committee, their associates and all other who keep mum on this.