I don’t know whether to laugh or cry, but current bank regulations are just as loony as they can be
With Basel II, the regulators decreed for instance that the risk-weight of a private corporation rated AAA to AA, was 20%, while the risk weight of a corporation rated below BB-, was 150%.
Since their basic bank equity requirement was 8 percent, that meant that banks needed to hold only 1.6 percent in equity against any loan to an AAA to AA rated corporation, while having to hold 12 percent in equity when lending to a corporation rated below BB-.
And that meant that banks were allowed to leverage their equity over 60 times to 1 when lending to an AAA to AA rated corporation, but limited to a 8 to 1 leverage in the case of lending to BB- rated private corporations.
And all that… in the name of bank safety!
As if there was any sort of danger that many banks in the banking system would dangerously overexpose themselves to BB- rated private corporations?
As if the danger does not lie in the possibility that an AAA to AA rated corporation, those which bankers love to lend to, could suddenly turn up to be worse than a BB-rated private corporation.
Regulators, like Jaime Caruana, Mario Draghi, Mark Carney, Stefan Ingves and some other are just like nannies telling kids…
If you go into that dark forest that looks horrible to you...
then we will force you to eat broccoli and spinach...
But, if you stay out on the fields where everything looks safe and beautiful...
then we will allow you to eat as much chocolate cake and ice cream you want.
This even though you could become dangerously obese (or too big to fail)
It can also be rephrased as if you eat broccoli you must eat spinach too but, if you eat chocolate cake you can have as much ice cream as you want.
And worse, much worse, some banks, the biggies, the TBTF, those would hurt the most if they failed, they are allowed to run their own internal models to decide on how much broccoli or spinach (not) to eat
“May God defend me from my friends: I can defend myself from my enemies” Voltaire
“A ship in harbor is safe, but that is not what ships are for.” John A Shedd
“One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” George Orwell
“There are some mistakes it takes a Ph.D. to make”. Patrick Moynihan (supposedly)
At the World Bank 2003: “In Basel Committee’s drive to reduce bank vulnerabilities, there’s a clear need for an external observer of stature to assure that there’s an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth.”
PS. All those distortions have also been put on steroids by excessive quantitative easing QEs.
PS. A tweet to IMF and World Bank April 2021. "Excess of carbs e.g., government loans, residential mortgages; insufficient proteins e.g., bank loans to entrepreneurs and lack of exercise e.g., no creative destruction/zombification, causes GDP obesity. Can IMF/WBG develop a Body Mass Index for GDP?"
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