Here is conclusive evidence of that current bank regulation experts, dangerously, do not know what they are doing
The risk-weight the regulators assigned in Basel II to those corporates (private sector) rated AAA to AA was 20%; and to those rated below BB- one of 150%
That might have been a correct reflection of the ex ante risks of the AAA to AAA and the below BB- rated failing but, it is definitely not the risk for banks conditioned on the bankers having seen and acted upon those perceived risks.
That is: what are the real risks considering the risks that are perceived?
That is: motorcycles are very risky, that’s why so many more people die in accidents of the safer cars.
That is: clearly the below BB- rated do not pose danger for the banking system while the AAA to AA rated to which banks could build up excessive exposures definitely do.
In other words the bank regulators assumed bankers did not perceive credit risks at all, that bankers were totally blind, and so that they, the regulators, had to shoulder that whole responsibility.
That completely distorted the allocation of bank credit to the real economy, something that represents huge dangers for the banking system and for the health of the rest of the real economy.
This amazing incompetence of the regulators, mostly of the Basel Committee and the Financial Stability Board, has remained unquestioned by most experts. Could that be because they are all suffering from an excessive confidence in fellow experts, or could it be because of what John Kenneth Galbraith once said: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”?
You tell me!
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