Thursday, March 16, 2017

If bank regulations had been privatized, how much would a Basel Committee Ltd have paid in fines for 2007-08 crisis?

I ask, because in courts it would have been quite easy to demonstrate that the banking sectors excessive exposures, to for instance AAA rated securities backed with mortgages to the subprime sector in the US, or in loans to a sovereign like Greece, those which caused the crisis, were the direct result of the risk weighted capital requirements for banks.

By strangely awarding lower risk weights to what was perceived as safe, which translated into lower capital requirements, the banks could leverage their equity with exposures to the “safe” many times more than with exposures to what was perceived as risky, like loans to SMEs.

As an example the risk weight for the AAAs was 20%, for sovereigns it hovered between 0 and 20% (Greece) and for SMEs 100%. That meant banks could leverage their equity 62.5 times with AAAs, unlimited to 62.5 times with sovereigns, but only 12.5 times with SMEs. That meant banks would earn much higher expected risk adjusted returns on equity on AAAs and sovereigns than on SMEs. 

I mentioned above, “strangely awarding”, because any regulator who knows what he is doing, would have gone back to analyze what causes bank crisis. Doing so he would have discovered that excessive exposures to what were ex ante perceived as risky never ever occur, (ask Mark Twain). All crises result from either unexpected events (devaluations), criminal behavior (loans to affiliates) or excessive exposures to something ex ante perceived very safe but that ex post turned out to be very risky.

So if society had brought this in front of a court, how much would Basel Committee Ltd have been fined? Clearly so much that it would have been out of business; so much more than what happened to Arthur Andersen when it was brought down for failing in its auditing of Enron.

And all that before all those “risky” SMEs, those who as a result of these regulations had their access to bank credit impaired, would have sued Basel Committee Ltd for the loss of their lifetime opportunities. 

But what has happened to the regulators responsible for the Basel Committee for Banking Supervision? Nothing, zilch, zero, nada, in fact many of them have been promoted.

And anyone knows what has happened to those emission controllers that were cheated by Volkswagen? Nothing? Perhaps there is a real case for privatizing regulations and controls, that way we could at least have some accountability.

PS. In the case of the larger more “sophisticated” banks the Basel Committee even went as far as allowing these to use their own models to calculate capital requirements, something like allowing Volkswagen to calculate their own carbon emissions.