I bet you’d all be better bank regulators than those in the scandaliciously dumb Basel Committee!

Of course we would all like and benefit from the credit ratings providing us with more accurate results… but that is not really the issue.

If you were a responsible regulator, what would make you toss and turn at night, that the credit ratings are correct or the possibility they are wrong?

If your answer, as expected, is the second, then try to explain the current capital requirements for banks that allow for extremely little bank equity when the credit ratings determine there is very little or no default risk at all, and which therefore are betting it all on the credit rating always providing correct risk information. Loony eh!

As a result of this regulatory silliness, the current crisis left our banks with no capital, simply because they were not required to have any capital against what was ex-ante rated as “not-risky” but that “ex-post” could turn out to be very risky.

Would you have not been a better regulator asking instead for capital requirements for banks that covered the case of the credit ratings being wrong? I bet you would!

One of the biggest challenges we now face is finding a way to accept and internalize that the “expert” regulators appointed to such vital places as the Basel Committee for Banking Supervision, the global bank regulator, could really come up with so unbelievably unbelievable dumb regulations… Truly scandalicious!

PS. Loony bank regulations explained in an apolitical red and blue!

Did the Basel Committee outsource the drafting of Basel I-II-III to Fidel Castro in Cuba?

Something like that must have happened because regulations that order banks to hold much much more capital when lending to small businesses and entrepreneurs, than when lending to the government, can only be described in terms of a communistic ruled access to bank credit.

SEE THE VIDEO. Loony bank regulations explained in an apolitical red and blue! http://bit.ly/mQIHoi

The vicious communistic styled bank-regulatory circle that nationalized our bank savings

“I, the Government, commit to give the credit rating agencies strong evidences that I will support you, the big banks, so that you, the big banks, can get good ratings and raise funds cheaply. 

And I, the Regulator, commit to set zero or very low risk-weights so that you, the banks, do not need to hold capital when lending to the government… of course for as long as you allow us to keep our jobs. 

And you, the big banks, you just do as the incentives and the disincentives tell you to do. 

And so we, the Government, the big banks and the regulators will live forever happy… until the scheme collapses and citizens and taxpayers find out what we have been up to.”

Who on earth authorized the Basel Committee to do more than regulate or supervise banks?

The Basel Committee for Banking Supervision, whose recommendations the USA has committed to follow, has decided that when a bank lends to the government it requires zero capital but that when it lends to a small businesses or entrepreneur, it needs 8 percent of generously defined bank capital (Basel II), or 7 percent of more strictly defined bank capital (Basel III).

In doing so the Basel Committee is doing much more than regulating and supervising banks, it is de-facto introducing a monstrous, almost communistic, pro-government bias into the world’s financial system, as well as an unexplained risk-adverseness that could easily jeopardize the creation of the next generation of decent jobs. 

Besides it is utterly stupid because never ever has a bank crisis originated because of excessive lending to those who like small businesses or entrepreneurs are perceived as more risky, and therefore already pay higher interest rates, which goes into the capital accounts of the banks.

Who on earth authorized the Basel Committee to do what they do and which, by the way, sounds so un-American?

Crazy bank regulations explained in red and blue

All systemic unimportant and irrelevant financial institutions need to fight back... or they’re toast!

These days some lucky banks, by paying with a little of capital increase spread out over many years, will be denominated by the Basel Committee as Globally Systemic Important Financial Institutions G-SIFIs. 

At that moment all other banks become de-facto Globally Systemic Unimportant Financial Institutions, in other words almost declared as irrelevant. 

If the G-SUFI’s do not fight back or protest they’re toast! Our dear George Bailey would not have stood a chance against a Basel Committee. Did we really authorize the bank regulators to do that?

Crazy bank regulations explained in apolitical red and blue!

A letter from a citizen to Mme Christine Lagarde

Dear Mme Christine Lagarde.

I wish you all the best of luck as the new Managing Director of the International Monetary Fund… albeit that luck I wish not only for yourself, but also because at this moment it really behooves us all that you’ll have lots of it.

But, just as another of the most humble stakeholders in the IMF, an ordinary citizen, and since IMF has a fundamental role in leveraging knowledge and ideas with respect to the world’s financial system, I would beg you to consider the following that I feel is crucial for yours and our chances of success.

Currently the “capital requirements for banks” are set by discriminating borrowers based on their “perceived risk of default”, mostly as perceived by the credit rating agencies. More perceived risk, more capital, and vice-versa.

But, this is not logical, given the fact that what regulators need not to concern themselves much with the risks that are perceived, but should concern themselves mostly with the risks that are not perceived.

And, it is also not logical, given the fact that there has never ever been a financial crisis resulting from excessive lending to what is perceived as “risky”, since, except for cases when fraudulent behavior has been present, they have all resulted from excessive lending to what is perceived as “not-risky”. Just look at the current crisis, 100% caused by leveraging the perceived as "not-risky" and then discovering these, later, as being very-risky!

And, it is also not logical, given that those perceived as “risky” are already compensating the capital accounts of the banks by means of paying higher risk-adjusted interest rates.

And, it is also not logical, given that it imposes on those deemed as “risky”, like the small business and entrepreneurs, the need to pay additional interest margins to banks, which I currently calculate in the order of 270bp, just to compensate for the regulatory advantages given to those who are perceived as “not-risky”, the triple-A rated.

And, it is also not logical, given that those deemed as “risky”, like the small business and entrepreneurs, with little or no access to capital markets, are often those whose credit needs we most expect our banks to serve.

Mme Lagarde, if you absolutely think bank regulators must interfere by defining capital requirement for banks in ways that discriminate among borrowers, then… why not have the regulators discriminate the capital requirements for banks based on the potential of the different borrowers to generate the next generation of decent jobs?

Again, wishing you (and us) the best of luck

Yours sincerely,

Per Kurowski

A former Executive Director at the World Bank (2002-2004)

Our crazy bank regulations explained in red and blue