Saturday, September 3, 2016

The Basel Committee injected cowardice into our bank system and doomed us all to doom and gloom.

In 1988 with the Basel Accord, Basel I, and then in 2004, with Basel II, the Basel Committee on Banking Supervision introduced risk-weighted capital requirements for banks. More perceived risk more capital – less risk less capital.

That allowed banks to leverage their equity more with what was perceived, decreed or concocted as safe, than with what was risky. That allowed banks to earn higher expected risk adjusted returns on equity when lending to The Safe, the government, housing and the AAArisktocracy than when lending to The Risky, like SMEs and entrepreneurs.

Just look at these risk weights: Sovereign = 0%, AAArisktocracy = 20% and We the People = 100%

That effectively injected cowardice into the banking system, which prevents it from allocating credit efficiently to the real economy.

There is no chance in hell capitalism can function and deliver anything good with such regulations… the regulators doomed us all to doom and gloom.

And all for nothing! There has never been a major banking crisis that has resulted from excessive financial exposures assets perceived as risky when incorporated to banks’ balance sheets. These always result from unexpected events or from excessive exposures to something erroneously perceived as safe.

And the saddest part is that this regulatory distortion is not even acknowledged, much less discussed.