Thursday, July 9, 2015

The Financial Stability Board makes efforts to identify “Risk Free Benchmarks”...and I don't know whether to laugh or cry

The Financial Stability Board issued a report on trying to identify “Risk Free Benchmarks

That, in ordinary circumstances, is a very difficult thing to do, since so many other factors than just pure risk considerations, are involved in creating interest rates… for instance tax considerations. 

But, when bank regulators, with Basel I and II, introduced credit-risk weighted capital requirements for banks, by distorting the allocation of bank credit so completely, they made it impossible to determine anything close to real risk free-rates.

The easiest way I have found to explain this issue is by making the following question: What would the rates on for instance US Treasury Bonds and Germany’s Bunds be, if banks were required to hold the same percentage of capital against these that they are required to hold against a loan to an American or a German SME?

PS. The subsidized risk free rate