Friday, December 12, 2014

The Basel Committee seems not to get it, and therefore insists on being dumb... or?

I have just read the Basel Committee’s “Revisions to the securitization framework”. In it they have approved to “reduce the reliance on external ratings”… as if that was the real problem.

Whoever is the perceiver of risks, internal or external, if the perceived risks used are correct, then banks would need no capital… and any bank then in problem, should better just be put out of business… as fast as possible. 

The real systemic dangerous problem arises when those risk perceptions of are wrong…and that is why it is so silly to have capital (equity) requirements for banks based on the used perceived risks being correct… independently of who is the perceiver of these risks… internal or external. 

Though in fact, since the more credible the “risk perceiver” is, the bigger is the risk of creating potentially dangerous exposures, the Basel Committee might have opted for a strategy of decreasing the credibility of the risk perceivers… if so it is undoubtedly an interesting development... 

At least the Basel Commitee could finally be understanding what I meant when in the Financial Times, in January 2003 I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds”