Thursday, May 29, 2014

Would you buy a used bank regulation, Basel III, from those who previously sold you the lemon of Basel II?

A bank regulation like Basel II, based on capital requirements that are much lower for assets perceived ex ante as “absolutely safe” than for assets perceived as “risky” is, in terms of how bank regulations come, a real lemon.

Suffice to say that the current crisis, just like all the other bank crises in history, has resulted from excessive bank exposures to what was ex ante erroneously perceived as “absolutely safe”, like AAA rated securities, housing sector and sovereigns like Greece, and not from what was ex ante perceived as “risky”, like medium and small businesses, entrepreneurs and start-ups.

And of course these regulations also distort the allocation of bank credit to the real economy, something which is dearly being payed by all those young unemployed who could turn into a Lost Generation

The problem though is that the same men who are to blame for the Basel II lemon are still in charge and now working on Basel III, applying the same principles… though in a more complex and even less understandable way.

Below just four of them

Stefan Ingves, the current Governor of Sveriges Riksbank, the Swedish Central Bank, and the Chairman of the Basel Committee for Banking Supervision.

Mark Carney, the current governor of the Bank of England and the current Chairman of the Financial Stability Board.

Jaime Caruana, the former chairman of the Basel Committee, now promoted to General Manager of the Bank of International Settlements.

Mario Draghi, the former chairman of the Financial Stability Board (FSB) now promoted the current President of the European Central Bank, ECB.