Saturday, March 19, 2011

What Lord Turner hasn´t the foggiest about!

Since the 8 per cent capital requirement of Basel II and applied with a risk-weight of 100 per cent proved to be more than sufficient to cover for the risks of bank lending or investing in what was officially perceived as “risky”, it is clear that the problem does not lie with a too low basic capital requirement but with the too low risk-weights applied to all what is officially perceived as “not risky”.

This is what a Mr. Lord Turner, who now says “security can only come with 15 to 20 per cent” capital requirements, hasn´t the foggiest about.

Mr. Lord Turner also says “Financial instability is driven by human myopia and imperfect rationality” Absolutely! But when is he going to realize that the regulator´s myopia, including his own, might be the most systemically dangerous.

Thursday, March 17, 2011

Our banks… a bad road leading from nowhere to nowhere!

A road can be extremely well constructed but lead from nowhere to nowhere. That is why it so extraordinary that we allow the global regulators in the Basel Committee to regulate our banks without defining a purpose for our banks. That said, since the Basel Committee proved that it was not even good at regulating basic road engineering, we now have a bad road coming from nowhere and leading to nowhere.

Let me explain why besides lacking a purpose, the regulations of our banks are so lousy.

The only risk the regulators considered in order to set the capital requirements for the banks in Basel II was the risk of default of their clients, mostly as this was perceived by the credit rating agencies. The higher the perceived risks, the higher were the capital requirements and vice versa.

The above though sounding logical completely ignored that the market already arbitrages for the information provided by the credit rating agencies about risk of defaults, by means of adjusting the risk-premiums it applies. Therefore, the unforeseen but should have been foreseen results of these capital requirements based on risk, was to dramatically increase the risk-adjusted return on bank capital when lending to anything perceived as “not-risky”, while making it, in relative terms, dramatically much less attractive to finance anything officially perceived as “risky” and that for its same adjusted risk premium requires more bank capital.

No wonder that the banks stampeded into the triple-A rated waters where, since real triple-As are and will always be extremely scarce or non-existent, the market had provided some Potemkin triple-A ratings.

The only real Black Swan event that caused this crisis was that amazingly inept regulators got hold of the Basel Committee… and the most amazing thing is that they are still there!

Sunday, March 6, 2011

Is the USA now a submerging country?

"Are America's Best Days Behind Us?" by Fareed Zakaria in Time of March 3, 2011

Risk taking is the soul and essence of a country emerging, growing and moving forward. Risk-aversion is the natural reflection of a country that has had enough.

When the USA, which proudly refers to itself as “the land of the free and the home of the brave”, decided that their banks, their frontline of risk-takers, were going to be allowed to have immensely less capital when dealing with what was perceived as “not risky”, like what’s dressed up in triple-A ratings or lending to the government, than when lending to their small businesses and entrepreneurs, then the USA called it quits, and placed itself on the slippery slope of going down and down… fast or slow… but submerging.

The first thing the banks did was then to obediently go and massively enter the triple-A rated waters, where the sharks of the real economy where waiting for them… If that is not submerging what is?