Thursday, May 16, 2013

The Basel Committee violates democracy

Imagine that in the parliament of any European country (or in the US Congress) supposedly to make banks safer, someone proposes the following: 

To allow banks to hold far less capital when lending to "The Infallible" than when lending to “The Risky”; so that they earn a return on equity far higher when they lend to "The Infallible" that when they lend to "The Risky"; so that they lend to "The Infallible" and refrain from lending to "The Risky". 

And then, in the discussion of such a proposal, it is concluded that this would mean that those being perceived as "The Infallible" and who already pay less interest, and who already have more access to credit when compared with that of "The Risky", shall have even more generous access to bank credit. 

And so therefore this would also mean that those being perceived as "The Risky" and who already pay much higher interest, and who already have a much more restricted access to credit when compared with that of "The Infallible", will suffer even more adversities accessing bank credit. 

And in the debate, when asked about who "The Infallible", those favored are, and who "The Risky", those to be so obnoxiously discriminates are, the response is: "The Infallible" are primarily good governments and private borrowers who have a triple-A credit rating, and "The Risky" are primarily all those small, medium and large businesses and entrepreneurs who do not have a credit rating issued by one of the three major rating agencies. 

What possibilities do you believe the previous proposal has to be approved? 

None! They would throw it out faster than fast, and surely its proponent would have to wave goodbye to his political career, as he would be the laughing-stock of the year. 

And especially so when in the discussions it appears that no banking crisis in history has resulted from excessive lending to "The Risky", as these have all resulted from excessive lending to who were considered members of “The Infallible", but were not. 

And especially so when you hear the question: "If banks will not finance " The Risky", those who perhaps most can generate the new sources of employments our youth craves for and needs ... who the hell will finance then? You and me?” 

And especially so when you hear the opinion: "The signaling of some bureaucrats intervening the signals of the market, sounds to me a recipe for making banking much more insecure than it currently is". 

But the sad fact is that these banking regulations exist and are called Basel II and are already applied throughout Europe. 

According to Basel II, a Spanish bank, for example, must maintain 8 percent in capital when lending to a "risky" Spanish businessman, but was required to hold only 1.6 percent in capital when lending to Greece, or even zero capital when lending to its own government, or for example to the government of Germany. 

And therefore citizens, I suggest you find out where on earth did the Basel Committee get the authority to impose something of such fundamental importance, something which all your respective parliaments would never have approved of. It seems to me that it completely violates the procedures of a democracy.