Questions on bank regulations which experts are not answering... or even discussing

If all bank crisis in history have resulted from excessive exposures to what was perceived as “absolutely safe”, or at least very safe, and none ever, from excessive exposures to what was perceived as "risky"… what is the rationale behind the pillar of current Basel regulations, namely capital requirements for banks which are much lower for what is perceived as "absolutely safe", or at least very safe, than those for what is perceived as “risky”? Does not all empirical evidence suggest instead that the capital requirements should be slightly higher for what is perceived as "absolutely safe" than for what is perceived as "risky"? 

Since perceived risk is already cleared for by banks on the asset side of the balance sheet, by means of interest rates, amount of exposure and other terms, why did the Basel Committee for banking supervision decided banks needed to clear for the same perceived risk, in the liabilities and equity side of their balance sheet, by means of risk-weighted capital requirements? Does this not doom banks to overdose on perceived risk?

Current capital requirements, allow banks to earn a much higher risk-adjusted return on equity when lending to what is “absolutely safe”, “The “Infallible”, and so banks avoid lending to “The Risky”. But since “The Risky” includes for example small businesses and entrepreneurs, and whose access to credit is absolutely indispensable for the real economy to move forward, who is then supposed to finance what is “risky”? Bureaucrats or citizens? Is not taking smart risks on behalf of the society exactly what bankers are supposed to do?

Bank regulations that so much favor “The Infallible”, those already favored by bankers and markets, and so much discriminates against “The Risky”, those already sufficiently disfavored by bankers and markets, can only lead to increase the gap between the haves, the rich, the history, the old, the developed, and the have-nots, the poor, the future, the young, the undeveloped. Is that what you want?

Please, if you are able to extract an answer from the experts that is reasonable, send me a copy of it to

perkurowski@gmail.com

PS. If bank regulators must meddle, why do they not meddle in a more useful way?

IMF’s “Rethinking Macro Policy II was a great conference, though My Question, again, went unanswered.

Very thankful for the invitation I attended IMF’s “Rethinking Macro Policy II” conference, April 16 and 17, and in which there was a special session on financial regulations. 

There were many good presentations and discussions and if I absolutely must pick one as the best that must be the one on financial cycles presented by Claudio Borio who currently is the Research Director and Deputy Head of the Monetary and Economic Department at the Bank for International Settlements (BIS). 

And as I usually have done over the last six years when attending conferences like these, I asked as many experts as possible:

My Question: 

If all bank crisis in history have resulted from excessive exposures to what was perceived as “absolutely safe”, or at least very safe, and none ever from excessive exposures to what was perceived as "risky"… what is the rationale behind the pillar of current Basel regulations, namely capital requirements for banks which are much lower for what is perceived as "absolutely safe", or at least very safe, than those for what is perceived as “risky”? Does not all empirical evidence suggest instead that the capital requirements should be slightly higher for what is perceived as "absolutely safe" than for what is perceived as "risky"?

As to the answers, as usual, some were intrigued, others stuttered, and many replied “Oh I know there is a clear explanation for the current capital requirements, I just can't remember right now what it was”.

And though I try to avoid asking those I know I have asked before, like Martin Wolf and Lord Turner, I found one participant who answered: “Yes, you asked me that 3 years ago and I have not been able to figure it out yet either”. 

By the way, have a look at a letter which asks a related question, and that I am trying to deliver to as many Ministers as possible during these World Bank and IMF Spring Meetings in Washington, April 19-20 

Please, anyone reading this post and possessing an answer to my Question, I would much appreciate sending it to me at perkurowski@gmail.com

PS. In the conference I met someone who like me knows there is no rational answer.

PS. Here is a more extensive list of the horrendous mistakes of the risk weighted capital requirements

Bank regulations also flatter the fiscal accounts... too much

Claudio Boro, in a very useful and interesting presentation at IMF’s “Rethinking Macro Policy II” forum, mentioned the concept of how financial cycles, during their peak, could so dangerously be flattering the fiscal accounts. 

Indeed, but perhaps what flatters the fiscal accounts even more, are bank regulations, like Basel II, which so extremely flattering assigns a 0 to 20 percent risk-weights to "infallible" sovereigns, allowing the banks to lend to these against zero to 1.6 percent in capital which translates into a mindboggling 62.5 to 1 and up to infinity authorized leverage. 

That translates into much lower borrowing rates for the sovereign (mostly paid by higher borrowing rates for the rest) and as a by product produces what I term as subsidized proxies of risk-free rates.