I accuse the bank regulators... they caused the crisis!

If risk models, credit ratings and market intuitions were perfect, then a bank would really not need any capital at all, since all risk considerations would have been correctly priced, in the interest rates, in the amounts and in the duration of the loans. But, since risk-models, credit ratings and market intuitions are often not perfect, the regulators needs to require the banks to hold some capital, to make sure that there is an adequate cushion provided by the shareholders who are profiting from the bank activity, before creditors and tax payers are called upon to help out. 

Unfortunately the current generation of bank regulators, stupidly, did not base their capital requirements for banks on the possibility of mistakes, but on precisely the same risk models, credit ratings and market intuitions… requiring for instance minimal equity when the perceived risk of default of a borrower seemed minimal.

And it is precisely there, where the perceived risks of default seem minimal, where the risks for a systemic bank crisis resides, as what is ex-ante perceived as “risky” does never grow into a dangerously sized exposure.

And so, instead of helping to cushion for the mistakes of the banks, the regulators, with their distortions, increased the probabilities of the mistakes being made, and their negative financial consequences. 

And that they did by allowing banks to hold only 1.6 percent in capital when investing in triple-A rated securities or lending to sovereigns like Greece, which implied an authorized leverage of 62.5 to 1, while at the same time requiring the banks to hold 8 percent in capital when lending to job creating small businesses and entrepreneurs, an authorized leverage of 12.5 to 1. And that they also did by allowing the banks to lend to the “infallible sovereigns” against no capital at all, where not even the sky was the limit on leverage. 

And that is why we got those monstrous large bank exposures to what was ex-ante officially perceived as not risky, and which have now, ex-post, exploded in the whole Western World. 

And that is why the “risky” small businesses and entrepreneurs find access to bank lending so curtailed and expensive.

The bank regulators need to be held fully accountable for what they did, because if we do not get to the bottom of this sad affair, neither won’t we get out of it.

Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Capital Inadequacies: The Dismal Failure of the Basel Bank Capital Standards

Thank you Mark Calabria for the invitation.

And thank you Kevin Dowd for the paper that inspired the conference.

https://www.cato.org/multimedia/events/capital-inadequacies-dismal-failure-basel-bank-capital-standards

My intervention begins on minute 20:30

The lunacy and the obscenity of current bank regulations

If risk models, credit ratings and market intuitions were perfect, then a bank would really not need any capital at all, since all risk considerations would have been correctly priced, in the interest rates, in the amounts and in the duration of the loans. But, since risk-models, credit ratings and market intuitions are often not perfect, the regulators should require the banks to hold some capital, to make sure that there is an adequate cushion provided by the shareholders who are profiting from the bank activity, before creditors and tax payers are called upon to help out.

Unfortunately the Basel Committee generation of bank regulators, did not base their capital requirements for banks on the possibility of mistakes, but on precisely the same risk models, credit ratings and market intuitions… requiring for instance minimal equity when the perceived risk of default of a borrower seemed minimal. In other words instead of helping to cushion for the mistakes the regulators, with their distortions, increased the probabilities of mistakes being made, and their financial consequences.

Also, the obscene bank bonuses, based on obscene bank profits, are more the product of some obscene low capital requirements, than the product of good banking. If you earn an expected margin of 1 percent lending to Greece, and leveraged that on your capital 62 times, as the banks were explicitly authorized to do, then your expected return on that bank equity would be 62 percent a year… who would not lend to Greece?

The bank regulators, who are the ones most responsible for causing the current financial crisis that is menacing the Western World, need to be paraded down Fifth Avenue and Champs-Élysées wearing cones of shame… and to be barred, for life, from all regulatory activity.

We urgently need regulators who also understand that risk-taking by the banks is like oxygen to our economies, and therefore understand the need for not rewarding any excessive risk-adverseness... so as to also avoid, the so dangerous overcrowding of the ex-ante safe havens.

Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

What Niall Ferguson left out

Niall Ferguson in “Civilization: The West and the Rest” argues that the west's ascendancy, is based on six "killer apps": competition, science, democracy, medicine, consumerism and the work ethic. Those are indeed ingredients, but unfortunately he misses the willingness to take risks... the oxygen of development. 

Perhaps he does not remember psalms calling out “God make us daring”… and that is why he fails to understand how the bank regulators, with their stupid nanny-scared capital requirements, based on doubling up the importance of ex-ante perceived credit risks, are now slowly but surely taking the Western World down. 

Ps. Here’s a link to… Who did the eurozone in? http://bit.ly/t3mQe0 and as you will read, it really was the butlers… and here´s also a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

And here a comment added December 28, 2015 

In 1988, Basel I halted the ascendancy of the Western civilization and, in 2004, Basel II provoked its fast descent.

In the preface of the book Ferguson writes:

"It was about the first decade of the twenty-first century, just as it was drawing to a close, that I really got the point: that we are living through the end of 500 years of Western ascendancy”

Not a bad estimate. The ascendance stopped in 1988, with the Basel Accord, Basel I, when regulators introduced risk weighted capital requirements for banks and decided that the risk weight for sovereigns was zero percent while for the private sector 100 percent; and then a truly fast descent began when in 2004, with Basel II, they split up the private sector with risk weights  that ranged from 20 to 150 percent, depended on the credit ratings.

That allowed banks to leverage more with “safe” assets than with risky assets; which meant they could earn higher risk-adjusted returns on safe assets than on risky; which meant they built up excessive exposures to what is perceived or deemed to be safe, and ignored what is perceived as risky, like lending to SMEs and entrepreneurs.

And anyone who understands that risk taking is required to keep the economy moving forward so as not to stall and fall, can understand the sad results of it all.

And that it affects primarily the western civilization, is explained by the fact that it possesses the largest amount of “safe” assets than banks can leverage up on, while holding on to the illusion that all is fine and dandy.

Who did the eurozone in?

There are of course many suspicious characters to blame for the eurozone’s pains, not the least the fact that it was created without any strong fiscal root system.

In November 1998, in an Op-Ed titled “Burning the bridges in Europe”, which title had to do with the fact there no escape-route from the euro had been considered. I also wrote there: “That the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive.”

But, there is one huge piece of evidence that is ignored by most of those trying to explain the current troubles. That evidence is the “risk-weights”, the smoking-gun which we find in the hands of the butlers in charge of regulating the banks, and who have their quarters in the Basel Committee for Banking Supervision. Yes, it was some butlers who did the eurozone in! 

The bank butlers, naturally concerned about the safety of the banks, imposed a basic bank capital requirement of 8 percent; applicable for instance when banks lent to European small unrated businesses. In this case that limited the leverage of bank equity to a reasonable 12.5 times to one. 

But, when banks lent to a sovereign, with credit ratings such as those Greece-Portugal-Italy-Spain had during the buildup of their huge mountains of debt, the bank butlers, because this lending seemed so safe to them, and perhaps because they also wanted to be extra friendly with the governments who appointed them, they applied a “risk-weight” of only 20 percent. And that translated into an amazingly meager capital requirement of 1.6 percent; and which allowed the banks to leverage their capital when lending to the infallible a mind-blowing 62.5 times. 

The result was that if a bank lent to a small business and made a risk-and-cost-adjusted-margin of 1 percent, it could earn 12.5 percent a year, not much to write home about. But, if instead it earned that same risk-and-cost-adjusted-margin lending to a Greece, it could then earn 62.5 percent on your bank equity… and that, as you can understand, is really the stuff of which huge bank bonuses are made of, and also the hormones that cause banks to grow into too-big-to-fail. 

And, as should have been expected, the banks went bananas lending to “safe” sovereigns. With such incentives, who wouldn’t? Just the same way they went bananas buying those AAA rated securities that were collateralized with lousily awarded mortgages to the subprime sector, and to which the bank-regulating-butlers also applied the risk-weight of 20 percent. And of course the governments also went the way of the banana-republics, and borrowed excessively. What politicians could have resisted such temptations? 

And it was these generous financing conditions, and all the ensuing loans, which helped to hide all the misalignments and disequilibrium within the eurozone… until it was too late. 

Now how could these bank-regulating-butlers do a criminally stupid thing like that? The main reasons were: the bank butlers only concerned themselves trying to make the banks safe, and did not care one iota about who the banks were lending to and for what purpose; they ignored that banks were already discriminating based on perceived risks so what they were doing was to impose an additional layer of risk-perception-discrimination; they completely forgot that no bank crisis in history has ever resulted from an excessive exposure to what was considered as “risky”, but that these have always been the consequence of excessive exposures to what, at the moment when the loans were placed on the banks balance sheet, was considered to be absolutely “not-risky”. 

Also, when the bank-regulating-butlers decided to outsource much of the risk-perception function to some few credit-risk-rating-butlers, two additional mistakes were made. First, they completely forgot that what they needed to concern themselves with was not with the credit ratings being right, but with the possibility of these being wrong; and second, that what they needed most needed to look at was not so much the significance of the credit ratings meant, but how the bankers would act and react to these. 

And the consequences of these regulatory failure in the eurozone, are worsening by the day, or by the nanosecond… because these bank capital requirements have the banks jumping from the last ex-ante-officially-perceived-no-risk-sovereign now turned risky, to the next ex-ante-officially-perceived-no-risk-sovereign about-to-turn risky … all while bank equity is going more and more into the red… and becoming more and more scarce. 

What could be done? One solution could be that of declaring a ten year new capital requirement moratorium on all current bank exposures; allowing the banks to run new lending with whatever new capital they can raise, while imposing an equal 8 percent capital requirement on any bank business, no risk-weighting. If there’s an exception, that should be on lending to small businesses and entrepreneurs, in which case they could require, for instance, only 6 percent of capital, because these borrowers do not pose any systemic risk, and also because of: when the going gets to be risky, all of us risk-adverse need the “risky” risk-takers to get going. 

But that requires of course a complete new set of bank-regulating-butlers… as the current should not even be issued any letters of recommendations. Let’s face it, after such a horrendous flop as Basel II, neither Hollywood nor Bollywood, would ever dream of allowing the same producers and directors to do a Basel III, and much less with only small script changes and the same actors.

The saddest part is that many of those in charge of helping Europe to get out of the current mess that they helped to create, might be busying themselves more with dusting off their own fingerprints.

If there is any place that deserves an occupation... that is Basel!

PS. Years later I learned that all this was just so much worse. EU authorities had assigned all eurozone sovereigns’ debts a 0% risk weight, even Greece’s, even if they were all taking on debt denominated in a currency that was not denominated in their own domestic/printable fiat currency. Unbelievable! And then EU authorities put the whole blame for Greece's troubles on Greece and did not even consider paying for the cost of their own mistake. Is that a way to build a union? No way Jose!

The G20 Cannes Action Plan for Growth and Jobs, is just the continuation of sheer bank regulatory lunacy

Basel I, II, II.5, III are almost exclusively based on stimulating the banks to lend to what is ex-ante perceived as “not-risky”, like triple-A rated securities and "infallible sovereigns", precisely the terrains where all systemic bank crisis like the current one occur; and which therefore creates disincentives for bank lending to what is ex-ante perceived as “risky”, like the small businesses and entrepreneurs… those who can provide us with the next generation of jobs. 

Therefore, to include in a statement titled “Action Plan for Growth and Jobs”, “We commit to the full and timely implementation of the financial sector reform agenda agreed up through Seoul, including: implementing Basel II, II.5 and III along the agreed timelines”, is just the continuation of sheer bank regulatory lunacy

What about capital requirements for banks based on job creation ratings?

Basel II distortion and discrimination based on perceived risks

  The Basel II discrimination and distortion by  

Poor "systemic irrelevant financial institutions"

So now except for 29 banks all the rest have de-facto been qualified as systemic irrelevant financial institutions. Is this going to make the lucky few less too-big-to-fail? Against a requirement of only 1 to 2.5 percent in additional equity, to be paid in comfortable installments? They've got to be kidding! 

Please, someone, save us from these regulators who keep digging us deeper and deeper in the hole where they've placed us.

Greece, a great referendum… one more!

Of course the timing is lousy, but I believe the referendum proposed by Greek Prime Minister George Papandreou to be the absolutely correct thing to do… better late than never. The bail-out deal offered to Greece can only be successful if it can count with the legitimacy of the full approval of the Greeks, otherwise not even a 90 percent haircut could be enough. On the contrary, not doing the referendum would, de-facto, mean giving in to those who are opposing the current bail-out agreement. Should they vote yes or no? That is entirely for them to decide.

By the way, I would also like to see a referendum in Greece, and in the rest of Europe, regarding whether to keep in their posts, or fire without any sort of letter of recommendation, all those bank regulators in the Basel Committee who allowed the European banks to lend to a Greece, Italy, Portugal… against only 1.6 percent in capital, meaning authorizing the banks to leverage their equity over 60 times when lending to the politicians of these sovereigns…

How unfair, bankers just followed orders, and they are now being trashed

The bankers obediently went to where the regulators wanted them to go, where the regulators allowed them to leverage bank equity 60 times and more, like when buying AAA rated securities backed with mortgages to the subprime sector, or lending to for instance Greece, Portugal, Italy and Spain; and, likewise, obediently stayed away from those risky small businesses and entrepreneurs, where the regulators only allowed them to leverage bank equity 12 times. 

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

We golfers can count ourselves lucky golf is not regulated by a Basel Committee

Current bank regulations:

Those perceived as safe, who therefore have easier access to credit, lower bank capital requirements. 

Those perceived as risky, who therefore have less access to credit, higher bank capital requirements. 

"I play with friends, but we don't play friendly games." Ben Hogan 

In reference to the recent published history of the Basel Committee of Banking Supervision (early years 1974-1997) by Charles Goodhart, I must say that we golf players, who enjoy a handicap system that allows us bad players to play against the good ones, should feel very lucky that system did not fall in the hands of something like a Basel Committee of Golf Supervision. 

Had that happened and had that Committee followed the same mentality as the BCBS, we could have ended up with a system that allows good players extra strokes and takes away strokes from the bad, which, in essence is what the current capital requirements for banks based on ex-ante perceived risk do. 

The end result of such a system would be to little by little weed out all bad players until only the best one was left standing, victorious, but with no friend to play with.

Likewise current bank regulations are little by little eliminating the access to bank credit to those perceived as “risky” and concentrating it in lesser and lesser borrowers perceived as not-risky. 

In this respect, having weeded out all “risky” small businesses and entrepreneurs and now doing the same to sovereigns, like falling domino pieces, the US dollar might end up as the last absolute-risk-free-borrower-standing, but what’s the use of that if he then has no friend to play an "unfriendly" game with?

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

'Pour sunlight on lousy bank regulations' says ex World Bank director

http://www.citywire.co.uk/global/pour-sunlight-on-lousy-bank-regulations-says-ex-world-bank-director/a535281

The egos of bank regulators that don’t want to be hurt stand in the way of a solution to Europe, and others.

In the financial sector the truly dangerous systemic risks reside only in the DNA of what is perceived as having a low risk. That is what our bank regulators failed to see, and their hurt egos now stand in the way of finding solutions to the European crisis, as they refuse to cut off the gas that has caused and is stoking the fires.

The capital requirements for banks based on perceived risk, together with the extreme scarcity of bank capital, is forcing the banks out of anything that is becoming perceived as more risky and into what for the time being is still perceived as less risky.

That is making the financing of what is already perceived as risky so much more difficult, while at the same time creating the excessive exposures to the last standing absolutely-not-risky borrower, who will then turn into the mother of all risks.

How can we make them swallow their pride and act before it is too late?

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Current bank regulations cause criminal harm to the economies.

Our banks must currently submit to regulatory capital requirements that are based on the ex-ante perceived risk of borrowers. The higher that perceived risk, the higher the capital, and vice-versa. 

This amounts to an odious and arbitrary regulatory discrimination against those borrowers perceived as “risky” and which serves absolutely no purpose and on the contrary causes serious damages to the world economy. These regulations have both caused the current crisis and are hindering the recovery, and they need to be denounced. 

Those borrowers that are considered as “risky”, like the small businesses and entrepreneurs, already pay the cost for that in the markets, primarily by means of having to pay higher interest rates and less access to bank credit. 

Those borrowers that are considered as “not-risky”, like the triple-A rated and “strong” sovereigns, already receive the benefits from that, primarily by means of having to pay lower interest rates and having more and easier access to bank credit. 

Allowing then the banks to leverage more their capital and thereby earn more risk-adjusted interest rates when lending to those perceived as “not-risky”, imposes on those perceived as “risky” the need to make up the difference in the opportunity for returns on equity to the banks. 

Even those perceived ex-ante as “not-risky” can be hurt, as is the case of Greece, where obviously the fact that banks could lend to it against only 1.6 percent in capital, created artificially favorable conditions for an excessive build up of debt. 

That those capital requirements beside the damage they cause serve absolutely no purpose can easily be ascertain by the fact that never ever has bank lending to those perceived ex-ante as “risky” originated a bank crisis.

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Lord Adair Turner on the Euro

Lord Adair Turner recently said “the thing that has gone wrong is the way we've encouraged Italian banks to hold to Italian debt” 

And so much more with their outright stupid capital requirements for banks based on perceived risks. These drove the banks to excessive exposure to “no-risk-land”, that land which as an example included the AAA rated securities and Greece, precisely the land that they, as regulators, should now is where all the excessive exposures and unpleasant surprises and systemic bank crises occur, while at the same time driving away the banks from helping out those in “risk-land”, where all the small businesses and entrepreneurs live, and in which never ever has a bank crises occurred. 

How much in extra interest rates, or in less access to credit, have the job creating small UK businesses and entrepreneurs have had to pay over the years, just because of Lord Turner and his chums’ regulatory nanny like anti-perceived-risk bias 

And here he is still “not advocating any deviation from the path set by Basel” 

Still I guess we can count ourselves lucky that Lord Turner is not also in charge of the golf handicap system, because if so, he would long ago killed that popular sport by allowing the good players like you more strokes, while taking strokes away from bad players like me.

PS. If you allow here´s a video that explains part of the craziness of our bank regulations http://bit.ly/mQIHoi

If only those of Occupy Wall Street knew

Just think about what those in Wall Street could be saying for if they really knew what they were talking about… Then they could for instance be asking for capital requirements for banks based on job creation ratings, because, if as tax payers we are to be the ultimate pick-uppers of any bank crisis, then we should at least be certain that the purpose of the banks is acceptable to us. 

Right now, the only purpose for the banks that the regulators have de-facto defined, by means of some ridiculous low capital requirements when lending to what is ex-ante perceived as not risky, and which allows for immensely high leverage of bank equity, is for the banks to make huge profits… and that, as purposes come, seems both vulgar and dumb, to say the least.

(Dumb because never ever do systemic bank crises occur as a result of excessive exposures to what is perceived as “risky”, these only result from excessive exposures to what is ex-ante perceived as “not-risky”, which is in fact the only perception that has the ability to generate huge unpleasant surprises.)

(Unfortunately there are many comfortable pseudo-truths about this crisis being pushed by various agendas, and so that the real truth, and that would be so embarrassing for the regulators, is taking a long time to come out.)

If you allow me here is a video explaining current regulatory madness it in an apolitical red and blue! http://bit.ly/mQIHoi

Should not Basel bank regulators have at least a B.A. in regulations?

I am just a humble MBA and which is why even though I more than almost anyone warned publicly about that the current financial crisis was doomed to happen as a result of Basel II, I do not get invited to explain my arguments at all those seminars at the World Bank, IMF and other high places, where so many the Monday morning quarterbacks PhDs get to be invited to speak, year after year,… but that’s ok, c’est la vie… or at least c’est la vie moderne. 

That said I ask though, should not bank regulators, like those in the Basel Committee at least be required to have a B.A. in regulations before going global with their occurrences? Or is there such a thing like a Master or a PhD in regulations? 

I say this because the current bank regulators did not behave like sensible and prudent regulators. Let me give you just but three of the so many examples: 

Should not bank regulators be more concerned about credit ratings being wrong than being correct? Of course they should, but the current bank regulators construed their regulations around capital requirements for banks based on the ex-ante perceived risks being correct. 

Should not bank regulators be more concerned about how bankers react to the ex-ante perceived risks? Of course they should, but the current bank regulators construed their regulations around their own reactions to ex-ante perceived risks. 

Should not bank regulators know that the only bank exposures that can grow so excessively as to generate a systemic crisis, the only ones able to generate huge unpleasant surprises, are the exposures to what is ex-ante perceived as “not-risky”? Of course they should!

In short, we do not need regulators who substitutes for bank and financial experts, we need regulators who complement bank and financial experts.

Here is a video that explains a small portion of the craziness of our current bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Where were the Universities when global bank regulations were designed?

There can be little doubt about that banks are one of the most important actors in the financial system, perhaps even the most important. By means of the Basel Accord of 1988, a proposal in June 1999 for a new capital adequacy framework, and the release of Basel II on 26 June 2004, more and more banks around the world were set to follow the same global regulations… and this is clearly impacting the area of finance, in many ways, more and more each day. 

That said, because of some strange and inexplicable reasons, the issue of bank regulations has been basically ignored by our universities, and most, or perhaps even all of the MBAs, graduate without the faintest idea about the existence of capital requirements for banks that distort immensely the flows of financial resources. 

Why is that? Why do they consider so often in the study material other distortions like tax deductibility for the service of debt but not for equity, and not this regulatory distortion? Had they´ve done so, then perhaps the academicians would have long ago denounced the outright stupidities that, courtesy of the Basel Committee for Banking Supervision, have been introduced in the current bank regulations. Had the Universities taken an interest in this matter we most probably would not be suffering the current crisis, at least not in its current systemic form.

Here is a video that explains a small portion of the craziness of our current bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

The Ph.D. dissertation on Basel II Bank Regulations and their capital requirements for banks that I would like to do.

In November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” And indeed, in 2007-08, one Big Bang occurred… in my opinion as a direct result of Basel II. 

I would now like to do a Ph.D. dissertation on the subject of how the capital requirements for banks of Basel II and which based on the regulators’ fixation with the ex-ante perceived risks of default, introduced serious distortions in the financial markets that caused the current bank and financial crisis. 

Abstract 

Banks lend to clients adjusting the interest rates they charge, the amounts they lend, the duration of the loans, and the scrutiny they give the borrowers, to what they perceived is the risk of non-payment, a perception which obviously includes the information provided by the credit rating agencies. 

But when bank regulators introduced capital requirements for banks that were also based on the ex-ante perceived risk of default, these allowed the banks to hold much less equity when lending to those perceived as “not-risky” than when lending to the “risky”. 

That resulted in that banks were then allowed to leverage their equity much more with the risk-adjusted interest rates when lending to the “not-risky” than what they can do when lending to the “risky”. 

And that in its turn resulted in that banks could earn much higher returns on their equity, ROE, when lending to the “not-risky”, like the “solid” sovereigns and triple-A rated private borrowers, than when lending to the “risky”, like the not-so-solid sovereigns, small businesses and entrepreneurs; and or, that the interest spread between the “not-risky” and the “risky” widened considerably. The “not-risky” are charged lower interest rates than what they would be charged in the market absent these regulations, and, vice-versa, the “risky” are charged higher interest rates than what would otherwise been the case. 

These capital requirements do nothing to reduce the risks of a bank crisis, as these have always occurred because of excessive bank exposure to what had erroneously been perceived ex-ante as not risky; while at the same time they dangerously discriminate against some of the most important and dynamic participants in an economy. 

In this respect these capital requirements stimulated the creation of excessive bank exposures to sovereigns and triple-A rated, that which detonated the crisis; and they are also, by making it harder for small businesses and entrepreneurs to access bank credit at competitive rates, hindering the economy from getting out of the crisis. 

The above thesis could be demonstrated through research analyzing how the interest rate spreads between bank exposures to the “not- risky” and the “risky”, the leverage of the banks and the ROE has responded to the changes in the capital requirements. 

Some capital requirements for banks that discriminated for risk were already in existence as a result of Basel I, but the most extensive use of it came with Basel II, which was approved by the G10 countries in June of 2004. Therefore analyzing and comparing in some detail the two years of banking previous to June 2004 with the two years of banking thereafter should yield quite conclusive evidence as to who are to blame. 

Had the regulators not with a certain degree of hubris assumed the role of risk-managers for the world, arbitrarily toying around with their risk-weights, then quite probably another type of crisis could have ensued, as a result of many existing macro-economic disequilibrium, but none as severe, systemic and destructive as the current one. Just for a starter the demand for AAA rated securities backed by mortgages awarded to the subprime sector, would not have been a fraction of what it ended up to be. Just for a follow up, European banks would never ever have loaded up so much on the sovereign debt of Greece.

Now what I need to find is the university and the professors willing to give my thesis a chance, hopefully close to Washington D.C. where I currently reside, though these days I guess much of it could be done through the web too. 

Is there anyone out there willing to lend me their support?

PS. If you allow me here is a video that explains a small part of the craziness of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

My proposal on capital requirements for banks

The Basel II bank regulations were built upon the pillar of a basic capital requirement of 8 percent, adjusted with risk-weights, based on the ex-ante perceived risk of default. Higher perceived risk, higher capital, and lower perceived risk lower capital. 

I have for years argued that this serves no useful purpose, and that it is outright dangerous because it stimulates the creation of excessive exposure to what is perceived as “not-risky” which is precisely what has caused and will cause all bank crises. Current Basel III proposal does nothing or very little to correct this fundamental fault. Here is what I propose. 

First of all, the capital requirement for all type of bank assets should be the same, for instance 8  to 12 percent, and this because the regulator has no role acting like a supreme risk manager for the world by arbitrarily assigning risk-weights, and which can only bring confusion to the market. 

But also if we want to try to have the banks fulfill their societal purpose, we could contemplate reducing somewhat those capital requirements, for instance with up to 4 percent, when the banks engage in loans that for instance serve the creation of jobs or environmental sustainability. 

The above is because if we taxpayers are going to shoulder some of the risks of a bank failing, as we indeed must, then we should at least make certain that if a bank fails, it does so while trying to do something useful for us.

Of course we need a transition period in order to allow the banks to obtain all that capital they should have held, had it not been for the minuscule risk-weights assigned by the regulator. And, in order not to squeeze those perceived as “risky”, like the small businesses and entrepreneurs, more than they are being squeezed, we should, during this transition period, reduce the basic capital requirement, for instance to 5 to 6 percent, which allows for a leverage of 20 to 1. 

A temporary reduction in the basic capital requirement would clearly create some risk, but so does government stimulus financed with public debt, and I firmly believe it is preferably to have our banks take the lending decisions than government bureaucrats.