Are bank regulators violating the human rights of the next generations?

The current capital requirements for banks in Basel II, which are based on perceived risks already previously cleared for, are immensely lower for exposures to “The Infallible”, like to some favored sovereigns and the AAA rated, than for exposures to “The Risky”, like to small and medium businesses and entrepreneurs. And therefore, banks earn immensely more expected risk-adjusted returns on equity when lending to “The Infallible”, than when lending to “The Risky”. 

And that in essence means that banks are following lending and investment objectives much more suitable to retiring baby-boomers, those who adore safety and cash liquid values, than those of the many young, who need much more daring long-term risk-taking... in order to stand a chance to find a job...during their lifetime. 

And nobody even wants to discuss that distortion, not even the World Bank, the world´s premier development bank. 

And as a result, the gap between the haves, the old, the history, the developed, “The Infallible” and the have-nots, the young, the future, the not developed, “The Risky”, is also increasing. 

Damn those aprės nous le déluge regulators. They castrated our banks and made these abandon our young ones. With what authority do they think they can do a thing like that? 

And, forgive me for asking, but is not a discrimination against the needs of the next generations, in all essence some sort of violation of human rights? And of course one thing is for the regulators to do so unwittingly... but persisting in it even after someone has explained it to them?

Should we not haul the Basel Committee and Financial Stability Board in front of the International Criminal Court in Hague, so as to at least demand the immediate suspension of this odious regulatory policy?

Another letter in Washington Post: An American approach to banking

An American approach to banking

Regarding the April 29 editorial “A diet for the big banks”: 

It suffices to remember the saying about “a banker being that chap who lends you the umbrella when the sun shines but wants it back as soon as it looks like it is going to rain” to know that those assets perceived as safe are already much favored over those perceived as risky. The risk weights applied by the Basel III regulations and based on exactly those same perceived risks only increase the gap between “The Infallible” and “The Risky.” 

And that is why I very much salute the bill by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) that looks to “require more capital and better capital but also limit the ‘risk-weighting’ of assets.” More capital is a perfectly legitimate requirement, but the imposition of risk weights is fundamentally incompatible with “a land of the brave.” The United States did not become what it is by avoiding risks. 

That the bill puts the United States at odds with Basel III regulations does not matter, as those regulations have been proven harmful enough. On the contrary, Europe would also do better with a Brown-Vitter proposal. 

Per Kurowski, Rockville 

The writer was an executive director of the World Bank from 2002 to 2004.

Washington Post

Here other of my letters in the Washington Post on this issue:
September 6, 2007: Factors in the Financial Storm
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation

January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe 

July 11, 2018: There is another tariff war that is being dangerously ignored. 

December 30, 2018: Affordable homes or investment assets?

REVISED “The Bankers´ New Clothes”, by Anat Admati and Martin Hellwig, is a very good, and therefore [not] a dangerous book

Anat Admati and Martin Hellwig in their “The Bankers´ New Clothes” write the following about risk-weighted assets: 

“The risk-weighting approach gives the impression of being scientific”. 

“The risk-weighting approach is extremely complex and has many unintended consequences that harm the financial system. It allows banks to reduce their equity by concentrating on investments that the regulations treats as safe.” 

“The official approach to the regulation of bank equity, enshrined in the different Basel agreements is unsatisfactory… the complex attempts in this regulation to fine tune-equity requirements – for example, by relying on risk measurements and weights- are deeply flawed and create many distortions, among them a bias against traditional business lending.” 

And yet the authors when then writing “Whatever the merits of stating equity requirements relative risk-weighted assets may be in theory”, evidence they cannot or dare not free themselves entirely from believing there is something valuable in risk-weighting.

But no! There are no merits to risk-weighting, even in theory. It is just a big dumb regulatory mistake! Clearing in the capital requirements for perceived risks already cleared for on the assets side with risk premiums, amounts of exposure and other terms, just dooms banks to overdose on perceived risks, like those expressed in credit ratings, and at the same time effectively hinders the banks from performing an effective resource allocation which is so important for the society. 

The authors write “The idea behind risk-weighting is that if the assets banks hold are less risky, less equity may be needed for a bank to absorb potential losses”. What regulatory lunacy is that? If banks believe they hold less risky assets they will hold these at much lower risk-premiums, for much larger amounts, and on much more generous terms. Come on, does that sound like something which could merit banks holding less capital?

And because of their lingering doubts, what Anat Admati and Martin Hellwig propose in their book, is not so much the need of eliminating the distortion of the risk-weights, but the need for more capital. And that is why, especially as I considered it a very good book, and it includes so much of what I have argued over the last decade, I must also call it a very dangerous book.

Let me explain: If the capital requirements for a bank were zero, then risk-weights would not discriminate nor distort. It is the higher the capital requirements are, than the larger will the discrimination and the distortion the risk-weights produce. 

The authors argue: “Requiring that bank’s equity be at least on the order of 20-30 percent of their total assets would make the financial system substantially safer and healthier” Can you imagine what distortions that would cause if something like the current risk-weights are kept? 

No! and especially since I look at the banks not as separate entities in Mars, but a part of the real economy on Earth, I bet that a Basel II, 8 percent capital requirement that came with absolutely no risk-weighting, would make the financial system and the real economy substantially safer and healthier, and sturdier, than a 20-30 percent capital where regulators remain thinking of themselves as risk-managers of the world. 

And here is a previous comment on the same book

DISCLAIMER: I have just exchanged opinions with Anat Admati and she holds that contrary to what I interpreted the book makes clear that they completely oppose the pillar of Basel bank regulations, namely risk-weighted capital requirements based on perceived risk. Great! I wonder where this now leaves the Basel Committee and the Financial Stability Board, as risk-weighting is their Pillar, pride and joy.

Clearly this is a big support for the bank bill being introduced by Senators Sherrod Brown, Democrat of Ohio, and David Vitter, Republican of Louisiana. Go Brown-Vitter! Screw Basel! Enough is enough!

Two facts on Basel I, II and III

The first fact is that since banks are allowed to hold less capital, and therefore to leverage the risk-adjusted margins more on their capital, and therefore to obtain much higher expected returns on equity when lending to what is perceived as “safe” than when lending to what is perceived as “risky”, current regulations are completely distorting our financial system. 

That has caused banks to create excessive exposures to what was erroneously perceived as risky, like in AAA rated securities, Greece, real estate, and to refrain from lending to those in the real economy perceived as “risky”, like small businesses and entrepreneurs. 

The second fact is that the first fact is not even mentioned, much less discussed. 

CFA, revoke any certification given to anyone in the Basel Committee or the Financial Stability Board.

If a certified financial advisor was offering the same advice to a wealthy retiree and to a poor young professional, he would have his CFA certification immediately revoked. 

Yet that is exactly what all in the Basel Committee and the Financial Stability Board are doing when regulating our banks and serving some baby-boomers’ Après moi le déluge philosophy. They require all our banks to act in the same way, concentrating on lending to what is perceived as “absolutely safe” and avoiding what is perceived as “risky”, like the lending to small and medium businesses and entrepreneurs.

Weighing the risk of a bank’s clients is not the same as weighing the risks of the bank.

If bank regulators are concerned, like for instance now with uncleared derivatives, it is one thing for them to order the bank to increase the capital it holds against all not risk weighted assets, let us say from 6 to 6.2 percent, and quite another, to target specific assets with a higher capital requirements. The first adjusts the capital to the overall risk level of that banks activity, the second just distorts and discriminates against what the regulator perceives is risky. 

“An nescis, mi fili, quantilla prudentia mundus regatur?” Axel Oxenstierna, 1583 – 1654

The Basel II Roulette Manipulation

Because of what they perceive as reckless speculative risk-taking by banks, many refer to banking as a casino. And so let us think of the alternative loans and investments a bank can make, as the alternative bets on a roulette table.

On it there were for instance “Safe Bets”, black or red, with a payout of 1 plus the bet; “Intermediate bets”, columns, with a payout of 2 plus the bet; and “Risky Bets”, any single number, with a payout of 35 plus the bet. All bets had of course a similar expected value of return, the same risk-adjusted return, though in the case of the roulette, a somewhat negative one, because the House always wins when the zero or double zero comes up, the House Edge. In banking, good credit and investment analysis, is expected to provide positive yields, even for the "zero" and "double zero".

But imagine then that a Basel Committee for Roulette Supervision suddenly got too concerned with that some players were making too many risky plays, and losing all their money, very fast, and that this was something for which they felt that, as a regulatory authority, they could be blamed for, and so decided to do something about it.

And so they decreed their Basel Roulette II Regulations and by which, in order to keep the players playing longer and not losing it all so fast, they allowed the payout for “Safe Bets” to be five times higher, 5 plus the bet, the payout for “Intermediate Bets” double the current, 4 plus the bet, while the payout for “Risky Bets” would remain the same, 35 plus the bet. 

And so what do you think would happen? Just what had to happen! Every player ran to make “Safe Bets”, and now and again, just for kicks, perhaps an “Intermediate Bet”, but they all stayed away from “Risky Bets”, since these just did not make sense any longer.

And the players got so excited with their profits, and bet more than ever, and so when suddenly the zero or double zero appeared, as had to happen, sooner or later, they lost fortunes, and really got wiped out, more than ever, and to such an extent that the casino even had to pay for their taxi ride home. 

Before current Basel bank regulations, all bank lending or investment alternatives produced basically the same expected risk and cost of transaction adjusted returns on equity; because that is what a free competitive market and banking mostly produces. But this was precisely what The Basel Committee for Banking Supervision changed when, with their Basel II, they imposed different risk-weights to determine the capital requirements for banks for different assets.

For instance, when lending to “The Infallible”, like “solid sovereigns” and what is triple-A rated, the banks had to hold only 1.6 percent in capital, and so were allowed to leverage their equity 62.5 times to 1. And that is FIVE times as much allowed leverage than when lending to “The Risky”, like small businesses and entrepreneurs, and where banks had to hold 8 percent in capital and therefore could only leverage their bank equity 12.5 to 1. And for “The Intermediate”, in a similar fashion, a doubling of the pay-out ratio, to 25 to 1 was authorized. 

This absolutely loony manipulation of the odds of banking; and which obviously not only guaranteed that when disaster struck the banks would be standing there naked without any capital; also made it impossible for the banks to perform with any sort of efficiency their vital role of allocating economic resources. 

And the most crazy thing is that soon five years after the disaster occurred, this manipulation of the odds of banking is not even being discussed, and the regulators with Basel III are even adding on liquidity requirements based on perceived risk, which can only have a similar effect of improving the expected risk-adjusted returns from lending to “The Infallible” instead of lending to “The Risky” 

And instead of discussing this monstrous and odious odd manipulation that favors those already favored, "The Infallible", and discriminate against those already discriminated against “The Risky” the world, and the specialized press, like Financial Times, keep themselves busy with the clearly illegal, but immensely less relevant “Libor Affair”.

Poor us! These banking regulations are castrating our banks, making them sing is falsetto by accumulating more and more on their balance sheets exposure to the safe-havens perceived as not yet too dangerously overpopulated; while avoiding like the plague exposure to the more risky but probably more productive bays where our young could find the next generation of jobs they so urgently need.

PS. And it would be so comic, if not so tragic, that absolutely most experts, including Nobel Prize winners, keep on referring to the crisis as a result of excessive risk-taking by banks, and which is of little assistance when trying to explain that what all banks were doing, was betting excessively on boring safe bets, red or black, and this only because of bad regulations… rien ne va plus.

Damn you the Basel Committee for Banking Supervision, and you the Financial Stability Board.

In the name of all those perceived as risky small businesses and entrepreneurs who always had to pay higher interest rates and manage with smaller loans, damn you bank regulators! Thanks to you allowing banks to leverage more their equity when lending to “The Infallible” than when lending to us, “The Risky”, we now have to pay even higher interest rates and need to manage with even smaller loans, if we can even get them. 

In the name of all those who are unemployed because there are not enough small businesses and entrepreneurs creating new jobs thank to your stupid kind of risk-adverseness, damn you bank regulators. 

In the name of all citizens of nations with too high public indebtedness only because you, statist bank regulators, allowed banks to lend to sovereigns holding much less capital than when lending to citizens, damn you bank regulators! 

In the name of all us taxpayers who will now be saddled with much higher tax payments for having to bail out so many banks, damn you bank regulators, for regulating without knowing what you are doing. Not only did you not define a purpose for our banks before regulating these, but you also failed to know that in banking, major crisis never ever occur, because of excessive bank exposure to “The Risky” but always because of excessive exposures to "The Infallible” 

Damn you bank regulators for not having the cojones to admit you were so wrong and for now, with Basel III, even doubling down on your huge mistakes of Basel II. Not only are you knighting the too-big-to fail banks as Systemic Important Financial Institutions, leaving all other banks as unimportant, but, on top of your nefarious capital requirements based on perceived risks, you also layer on liquidity requirements based on perceived risks. 

In the name of America and Europe, damn you, you “Great Castrators” who are taking our economies down and making our banks sing in falsetto. 

In our churches we prayed “God make us daring” and that is why we became great… and then you had to come along and spoil it all. Damn you! Don’t you know there can be no “The Infallible” without “The Risky” daring risking it all, and all of us risk adverse citizens being grateful to them for that?

Asking about Propositum Bancos could help the Basel Committee break the Confundus spell.

Surely the Basel Committee must know by now that no matter how poorly defined their basic capital requirement for banks of 8% of the assets was in Basel II, this was not what caused many banks to hold insufficient capital. That was entirely the consequence of those so faulty risk-weights applied, those which for instance when investing in triple-A rated securities such as those collateralized with lousily awarded mortgages to the subprime sector, or lending to countries like Greece and Ireland, allowed banks to hold only 20% of the 8%, 1.6%, and therefore being able to leverage their capital 62.5 times to 1.

The basic mistake that caused Basel II to be so shamefully inappropriate was that the Basel Committee explicitly ignored the fact that perceived risk of default is already cleared for in the market by means of the risk premiums charged and so making a difference for it in the capital requirements accounts twice for the same risk. And that leads to making access for those perceived as less risky even easier and cheaper, creating the perfect storm conditions as bank crisis only occur because of excessive investments or lending to what is ex-ante perceived as not risky; and causes that those who already have difficulties accessing bank credit at a reasonable rate, like the small business and entrepreneurs, will find it even harder and more onerous to do so.

But the Basel Committee, instead of tackling the fundamental weakness of Basel II, the risk-weights, is in Basel III working on important but yet marginal issues. Clearly the lower but much stricter and cleared defined basic capital requirement of 7 percent announced is an improvement, but, its final effectiveness depends 100% on correcting the issue of the risk-weights... and which basically means throwing them out completely.

And that is why we get so nervous when according to re-“Calibrating regulatory minimum capital requirements and capital buffers: a top-down approach” October 2010 we read of how the Basel Committee tries to capture empirical knowledge by analyzing the “Return on Risk-Weighted Assets” completely ignoring that risk-weighted assets when weighted with their risk weights have no real meaning at all.

Clearly the Basel Committee has fallen under that spell identified by J.K. Rowling as “Confundus” (causes the victim to become confused, befuddled) and the first order of day must be to break it. How can it be achieved? First, we need to get rid of those regulators in the Basel Committee who are way beyond any salvage; and then we must awake the rest by asking the magical question “Propositum Bancos”… what is the purpose of the banks?

Of course too many banks should not fail by not being able to maintain sufficient capital to survive throughout a significant sector-wide downturn, but that is more of a minimum requirement, a restriction, and not at all a purpose. If we, after their huge failure, are to allow the Basel Committee on Banking Supervision to keep on regulating globally the banks, the least they should tell us is what they think the purpose of the banks is, and we should be able to agree on that.

What do I, Per Kurowski, want with respect to the current bank regulations?

I want the current capital requirements for banks based on perceived risk of default concocted by the Basel Committee to be thrown out forever.

Why do I want that?

1st because these capital requirements ignore that the risk of default, as perceived, among other by the credit rating agencies, is already taken care of by the risk premiums charged by the markets and the banks, and so we end double counting for the same perceived default risk; which causes those who already are benefitted by lower interest rates, because they are perceived as having a low risk of return, to be additionally benefitted by having to provide a return on less capital; and punishes additionally those who already have to pay higher interest rates because they are perceived as “risky”, by means of having to provide a satisfactory return on more bank capital.

2nd because the more we strengthen the basic capital requirements like for instance going from a very wishy-washy 8 percent in Basel II to a more solid composed 7 percent in Basel III the more damage will the discrimination produced by the risk-weights cause.

3rd because the risk of default compared to many other risks we face, like climate change or a world with billions of young people with no jobs, is really a minor and almost innocent risk that is an integral part of an operating market, something which becomes even more apparent if we think about the possibilities of markets without defaults and which, of course, could only end up with the mother of the mother of all the too-big-to-fail banks.

4th because it is always dangerous to identify and empower a risk-assessment oligopoly of credit rating agencies, which will leverage whatever mistakes they make on their own or because they are captured.

5th because in order to go forward and not stagnate and fade away humanity always needs a hefty dose of risk-taking, and you can therefore not allow that the banks turn solely into mattresses, where to stash away your savings. To accept sending your children away to war where they could die but at the same time arbitrarily make it harder for young entrepreneurs to access the capital he feels he needs to take himself, and us, forward, does not seem like a reasonably balances proposition.

Why would they want to give it to me?

1st since the regulators have recently been reminded of the fact that all monstrous financial and bank crisis always occur because of excessive investments in what is perceived as not risky, the triple-A rated of each time, and never because of excessive investments or lending to like what is considered as not risky, that should get them thinking. Don’t you think so?

2nd because it is obvious that we need to give small businesses and entrepreneurs, of any age, more fair access to bank credit if they are going to have a chance to make something useful out of all that cash thrown on the economy by fiscal spending and quantitative easing. For your information, right now, the banks when lending to small businesses or entrepreneurs, because their Basel decreed risk-weight is 100 percent, need to have 5 TIMES as much capital than when lending to a triple-A rated client whose Basel decreed risk-weight are merely 20 percent.

And would that be all?

Absolutely not! If we are going to have global regulators, which we will need, it absolutely behooves us to make sure those regulators are chosen from an extremely diversified pool of talents, since the least we need is to allow for creation of incestuous mutual admiration clubs… like the Basel Committee is. Think of it, if the challenge of global climate change is placed into the hands of something like the current Basel Committee, we are all toast.

Are these extravagant wishes?

I don’t think so. Do you?

What are we to do with the Financial Stability Board?

The Financial Stability Board (FSB) reported from their meeting in Seoul on October 20 ahead of the G20 Summit in Seoul and endorsed principles for reducing reliance on credit rating agency (CRA) ratings as follows:

“The goal of the principles is to reduce the cliff effects from CRA ratings that can amplify procyclicality and cause systemic disruption. The principles call on authorities to do this through:

Removing or replacing references to CRA ratings in laws and regulations, wherever possible, with suitable alternative standards of creditworthiness assessment;

Expecting that banks, market participants and institutional investors make their own credit assessments, and not rely solely or mechanistically on CRA ratings.”

Since FSB does not even mention the risk-weights we can only assume FSB feels that all what went wrong was the excessive reliance on the credit ratings. They have no clue. What went really wrong was the way the regulators arbitrarily assigned to the different credit ratings the different risk-weights which determined the capital requirements for banks… like the 20% risk-weight for any lending to private entities rated triple-A or 0% risk weight on any lending to sovereigns rated triple-A.

In other words the FSB is unable or unwilling to understand that the credit rating agencies could have been totally wrong and yet they would never have produces the damage they did with their faulty ratings, had they not been so incredible endorsed by the bank regulators.

And neither does FSB understand that their regulatory favors to what is perceived as having a low risk of default, amounts only to an odious discrimination of what is perceived as having a higher risk of default, and all for no real purpose at all, since we all know that what is perceived as risky does never carry the potential to turn into a systemic danger.

And so friends what are we to do with the thick-as-a-brick Financial Stability Board?

With their “Risk-Weights” it is the regulator who is taking the load off the books of the banks

With reference to all being written about that “distasteful” behavior of banks of putting much of their exposure off the books, you should perhaps consider the following:

When the regulators used (and use) a risk-weight of only 20% to reflect the risk-weighted value on the books of banks, of for instance lousily awarded mortgages to the subprime sector that manage to hustle up a triple-A rating, it was (is) the regulator who is taking 80% off the balance sheet(books)of the banks.

When the regulators used (and use) a risk-weight of only 0% to reflect the risk-weighted value on the books of banks of loans to a sovereign rated triple-A, like the US or UK, it was (is) the regulator who is taking 100% off the balance sheet(books)of the banks.

Sincerely, I doubt the banks could have managed that kind of disappearance acts on their own.

Did really the Basel Committee dare to ignore the markets completely? 100%?

Since 1997 I have been speaking out against the regulatory paradigm of capital requirements for banks based on ex-ante perceived risks applied by the Basel Committee and I have never really been able to figure out what went on in the minds of the regulators to come up with such an idea that, though sounding so logical, more-risk-more-capital less-risk-less-capital, is so utterly faulty and counterfactual, since bank crisis never ever occur form excessive investments in what ex-ante is perceived as risky- when in fact it is just the opposite.

My main suspicion derived from the fact that I have never seen the Basel Committee define a purpose for the banks, and, not doing that, led of course to the wrong regulations.

But lately I am starting to get an inkling that an even more astonishing possibility lies behind it all.

Could it really be that regulators completely ignored what “the riskier”, when paying higher interest rates than for instance those rated triple-A, contributed to bank equity?

Currently a bank lending to a triple-A rated company needs 1.6 percent of capital which allows for a 62.5 to 1 leverage, but when lending to an unrated small business it needs 8 percent of capital and is therefore limited to a 12.5 to 1 leverage.

Let us assume that the margin before credit losses on a loan to a triple-A rated company is .4% and that of a loan to an unrated entrepreneur, 4%. In that case triple-A rated companies provide the banks of a before credit losses return on equity of 25 percent (.4*62.5) while the loans to an unrated small business would result in before credit losses return on equity of 50 percent.

But what if both types of loans could be made with a 62.5 to 1 leverage? Then the unrated small businesses would provide a before credit losses return on equity of 250 percent (4*62.5) in which case we would ask... why regulators feel they are safer with banks lending to triple-A rated clients for a 25 percent margin before credit losses than lending to small unrated businesses that provide a 250 percent margin before credit losses? Do regulators really believe that the bankers are so bad at analyzing credits to small businesses so they are better of just following the ratings of the credit rating agencies?

If both types of loans were made with a 14.5 to 1 leverage? Then the triple-A rated clients would provide the banks with only 5 percent before credit losses return on equity (.4*12.5) and of course then the banker would have a better incentive to try to do a good job lending to small businesses as they are supposed to do.

Please read from The Basel Committee on Banking Supervision the document “An Explanatory Note on the Basel II IRB Risk-Weight Functions", July 2005.

In it we find “Interest rates, including risk premia, charged on credit exposures may absorb some components of unexpected losses, but the market will not support prices sufficient to cover all unexpected losses.”

That leads us to suspect that the Basel Committee completely ignored all the differences in interest rates that the market charges based on perceived risk… something like saying “the market is absolutely and totally useless and so we need to impose our own risk-weights, independently of what it does". Is this what they understand as de-regulation? What hubris! Help!

Is it really possible that the Basel Committee bank regulators did not think of this?

When a bank client, perceived as more risky, like for instance your average small business or entrepreneur, is requested to pay for instance 5 percent or more on their loans than what a triple-A rated client pays, where do you think that 5 percent or more goes to when it gets repaid? The answer is to bank equity of course. That is what we could call the market´s risk-weights.

And when a regulator decides that a triple-A rated client generates only a 1.4 percent capital requirement for the bank (the Basel III 7 percent, adjusted by the risk-weight of 20 percent), while your average risky small business or entrepreneur generates a capital requirement of 7 percent, where do you think the about 2 percent in additional interest that your average small business or entrepreneur has to pay the bank in order to make up for the bank´s opportunity costs goes? The answer is to bank equity of course. This is what we call the regulator´s risk weights.

And so we have a world where, out of the blue, the Basel Committee decided that all our small businesses and entrepreneurs, those whom we should be most interested that our banks finance, well they have to run with under the weight of two different sets of risk-weights.

What kind of handicap officer is thia Basel Committee, taking off weights from those who have been running nicely and putting weights on those who have not run as good or are debutants? I would say that handicap officer is completely nuts or he has completely misunderstood his role.

The best way to end the markets’ addiction to the credit rating agencies is to end the regulator´s obsession with the credit rating agencies.

The Basel Committee’s lousy Maginot Line

It is impossible not to see now that the financial regulators in the Basel Committee, trying to fend off a bank and a financial crisis, constructed an incredibly faulty Maginot Line.

It was built with lousy materials, like arbitrary risk-weights and humanly fallible credit rating opinions.

And it was built on the absolutely wrong frontier, for two reasons:

First, it was build where the risk are perceived high, and where therefore no bank or financial crisis has ever occurred, because all those who make a living there, precisely because they are risky, can never grow into a systemic risk. Is being perceived as risky not more than a sufficient risk-weight?

Second it was built where it fends of precisely those clients whose financial needs we most expect our banks to attend, namely those of small businesses and entrepreneurs, those who could provide us our next generation of decent jobs and who have no alternative access to capital markets.

Now with their Basel III the Basel Committee insists on rebuilding with the same faulty materials on the same wrong place and it would seem that we are allowing them to do so.

I am trying to stop them… are you going to help me or do you prefer to swim in the tranquil waters of automatic solidarity with those who are supposed to know better?

The implicit stupidity of the current Basel regulations could, seeing the damage these are provoking, represent an economic crime against humanity!