The Basel Committee’s credit risk weighted capital requirements for banks… explained by Mark Twain

Many hold that Mark Twain said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”... and so

The so anxious Basel Committee for Banking Supervision thought banks lend out their umbrella much too little when the sun was out, and much too much when it looked like it was going to rain.

And so even though banks already cleared for credit risk perceptions, by means of risk premiums and size of exposures, the bank nannies decided that the capital banks should be required to have, should also consider those same credit risk perceptions; more risk more capital – less risk less capital.

And that means banks can now leverage much more their equity, and the societal support they receive, for instance by means of deposit guarantees, when lending out the umbrella on sunny days than when lending it out on rainy days.

And so banks are lending out less than ever the umbrella when it looks like to rain… and as a consequence the real economy is getting wet and getting a cold.

And all for nothing since never ever have major bank crises resulted from too much lending of the umbrella on days perceived as rainy, but always from too much lending when a sunny day was announced, but the weatherman got it all wrong.

I ask, where would we be if our forefathers’ banks had been subject to credit-risk weighted capital requirements?