Current bank regulations present two absolute inexplicable lunacies, which can only be justified if you are a communist

Starting 1988, with the G10 Basel Accord of which the US is a signatory, bank regulators, in Basel I, for the purposes of establishing how much capital (equity) banks need to hold against assets, declared the following credit-risk-weights: Government Zero percent; citizens, or their SMEs, 100 percent.

Knowing that only the citizens are the real back up of any government, and that governments can be very creative dishonoring their debt, for instance by means of inflation… that is an absolute inexplicable lunacy... unless you’re a communist of course.

Worse yet. Those risk weights cause banks to lend more and at lower relative rates to the government than to the citizens and to their SMEs. And that would imply that government bureaucrats are more productive using bank credit than the citizens, or their SMEs.

In other words, the credit-risk-weights de facto simultaneously translates into bank-credit-productivity-weights of 100% for government bureaucrats and zero percent for citizens, or for their SMEs. 

And so the question lingers is the Basel Committee a tool for communists to infiltrate the financial system of the free world? It would certainly seem so.

Here: The confessions of an ideologue.

PS. Here my letter to the Financial Stability Board

Financial regulations, if wrong, could destroy the economy of a nation, and is therefore an issue of utmost importance for national security.

Suppose military regulations which implicitly stated that those who avoided taking direct risks when fighting the enemy, for instance by using drones, had much better possibilities to advance in the ranks than those who dared to risk hand to hand combat. Would this not impact negatively, at least in the long term, the strength of the Home of the Brave?

And should bank regulators not have to consider the dangers of introducing distortions in credit allocation, which might weaken the economy and thereby weaken the defense of the nation?

In 1988, the G10, a group which includes United States, decided to introduce risk-weighted capital requirements for banks; where “risk” means credit risk, and “capital” means bank equity. As a consequence, those bank assets with a low risk-weight require banks to hold less equity than those assets with a high risk-weight.

The initial big risk-weight differentiation, in 1992 with Basel I, was that loans to the central governments of the OECD nations had a cero risk-weight, while loans to the private sector carried a 100 percent risk-weight. In 2004, with Basel II, many more risk buckets were added and in the private sector the risk-weights were set from 20 to 150 percent.

And it all sounds like prudent bank regulations… more-risk-more-equity - less-risk-less-equity. But, unfortunately, bank regulators, I pray unwittingly, did not notice that by doing that, they were introducing an extremely dangerous distortion of how bank credit was allocated to the real economy.

It signified that the equity of a bank, to which we have to add the value of the support a society and taxpayers lend the banks, could be leveraged many times more for assets with a low risk weight, than with assets with a high risk-weight. 

And that meant banks could earn much higher risk adjusted returns on equity on assets that carry a low risk-weight than on assets with a high risk-weight.

Just for a starter it meant that regulators effectively instructed banks to allocate more credit to the central government than to the private sector… implying thereby of course that a government bureaucrat has more capacity to allocate financial resources efficiently to the real economy than a private agent, like a SME or an entrepreneur

And anyone who thinks this regulatory risk aversion will not affect the strength of the USA’s economy, has no idea about how the USA got to be strong

And to top it up, it is all for nothing, since all major bank crises have always resulted from too big exposures to something that was perceived as “safe” that turned out risky, and never ever from excessive bank exposures to something perceived as risky.

Really; are the risk weighted bank capital requirements with decreed weights: 0% Federal Government, 100% We the People, in accordance to the US Constitution?

 

@PerKurowski

A message sometime ago to Homeland Security

A letter on the issue of defense in the Washington Post

On June 26, 2004 our banks in Europe and America got castrated, and our real economies became doomed... to stall and fall

On the 26th of June 2004 the G10 approved Basel II. With that they declared as a regulatory principle that if banks lent to a corporation rated AAA to AA- “The Infallible”, it needed to hold only 1.6 percent in capital, signifying an authorized leverage of bank equity of 62.5 to 1, but, if it lent to someone rated BBB+ to BB-, or without a rating, “The Risky” then it had to hold 8 percent in capital, and thereby being authorized to only leverage 12.5 times to 1. 

That meant of course that from that day on banks would earn much higher risk-adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky” and that meant, of course, that from that day on banks would only lend to “The Infallible”, that is unless “The Risky” were willing to pay the banks much higher interest rates than those higher interest rates they were already paying to the banks, because they were perceived as more risky. 

And that meant that the risk-taking that had helped Europe and America become what they were was halted in its track… and no longer did it help that in church hymns praying “God make us daring” were sung, from that day on Europe, and America, or at least their banks, had been castrated and sang in falsetto. 

And it only took some few years for Europe and America to start stalling and falling, with their banks drowning in excessive exposures to “The Infallible”, such as triple-A rated securities backed with lousily awarded mortgages to the subprime sector in the US, or loans to sovereigns like Greece. 

And from that day, day by day, less bank financing was awarded, on reasonable terms, to “The Risky”, those small and medium companies, and entrepreneurs, best in position to deliver to our youth the next generation of jobs.

Damn Basel II and all those responsible for it, and damn all those helping to silence what the regulators did, on their own, with absolutely no authorization.

Has the US Congress delegated to the Basel Committee the settings of capital requirements for banks?

Can anyone explain why the Basel Committee is not mentioned even once in the 1336 pages long reform bill presented to the US Senate or in the 1776 pages long H.R. 4173 financial regulatory Act approved by the House of Representatives?

Has the US Congress delegated into the Basel Committee the settings of capital requirements for banks? If so is the US citizen aware of it?

For instance is Congress unaware of that the SEC when it on April 28, 2004 allowed the US investment banks to substantially increase their leverage, it did so explicitly stating that “the consolidated computations of allowable capital and risk allowances [be] prepared in a form that is consistent with the Basel Standards”.

Don’t they know that if there is anything that has guided the evolution of the current financial regulations, those that I have for so long sustained doomed the world to exactly the type of crisis we now have, that is the Basel Committee. Basel’s AAA-bomb was ignited on June 26 2004, when the G10 countries, which includes the US endorsed the revised capital framework for banks known as the Basel II standards.

G10 signs up on Basel II

Central bank governors and the heads of bank supervisory authorities in the Group of Ten (G10) countries met today and endorsed the publication of the International Convergence of Capital Measurement and Capital Standards: a Revised Framework, the new capital adequacy framework commonly known as Basel II. The meeting took place at the Bank for International Settlements in Basel, Switzerland, one day after the Basel Committee on Banking Supervision, the author of the text, approved its submission to the governors and supervisors for review.

The Basel II Framework sets out the details for adopting more risk-sensitive minimum capital requirements for banking organisations. The new framework reinforces these risk-sensitive requirements by laying out principles for banks to assess the adequacy of their capital and for supervisors to review such assessments to ensure banks have adequate capital to support their risks.

PS. It is lunacy!