The Basel Committee for Banking Supervision’s bank regulations vs. mine.

A tweet to: @IMFNews, @WorldBank, @BIS_org @federalreserve, @ecb @bankofengland @riksbanken @bankofcanada

"Should you allow the Basel Committee to keep on regulating banks as it seems fit, or should you not at least listen to other proposals?

Bank capital requirements used to be set as a percentage of all assets, something which to some extent covered both EXPECTED credit risks, AND UNEXPECTED risks like major sudden downgrading of credit ratings, or a coronavirus.

BUT: Basel Committee introduced risk weighted bank capital requirements SOLELY BASED ON the EXPECTED credit risk. It also assumes that what is perceived as risky will cause larger credit losses than what regulators perceive or decreed as safe, or bankers perceive or concoct as safe. 

The different capital requirements, which allows banks to leverage their equity differently with different assets, dangerously distort the allocation of bank credit, endangering our financial system and weakening the real economy.

The Basel Committee also decreed a statist 0% risk weight for sovereign debts denominated in its domestic currency, based on the notion that sovereigns can always print itself out of any problem, something which clearly ignores the possibility of inflation, but, de facto, also implies that bureaucrats/politicians know better what to do with bank credit they are not personally responsible for, than for instance entrepreneurs, something which is more than doubtful.

Basel Committee's motto: Prepare banks for the best, for what's expected, and, since we do not know anything about it, ignore the unexpected 

I propose we go back to how banks were regulated before the Basel Committee, with an immense display of hubris, thought they knew all about risks; which means one single capital requirements against all assets; 10%-15%, to cover for the EXPECTED credit risk losses and for the UNEXPECTED losses resulting from wrong perceptions of credit risk, like 2008’s AAA rated securities or from any other unexpected risk, like COVID-19.

My one the same for all assets' capital requirement, would not distort the allocation of credit to the real economy.

My motto: Prepare banks for the worst, the unexpected, because the expected has always a way to take care of itself.

PS. My letter to the Financial Stability Board
PS. A continuously growing list of the risk weighted bank capital requirements mistakes

PS. Risk-weights are to access to credit what protectionist tariffs are to trade, only more pernicious.

PS. I am no newcomer to this issue

“The raison d’être of macroprudential policy is to ensure the financial system supports the economy.” Mark Carney left out: “EFFICIENTLY”.

Mark Carney In his last speech as Governor of the Bank of England stated:

“The raison d’être of macroprudential policy is to ensure the financial system supports the economy.”

Yes, but absolutely not in the way of how a brochure at the Bank of England’s museum, explaining quantitative easing, states it, by: “Putting more money into our economy to boost spending”

Our financial system should support our economy by allocating financial resources as efficiently as possible… and that, with current risk weighted bank capital requirements is something it definitely does not achieve. For example:

Assigning a risk weight of 0% to the sovereign’s debt and one of 100% to the citizen’s debts de facto implies that a bureaucrat knows better what to do with a credit for which’s repayment he is not personally responsible for than for example and entrepreneur. And that sort of veiled communism has failed here, there and everywhere.

Assigning a risk weight of 0% to residential mortgages and one of 100% to debts of unrated entrepreneurs’, de facto implies that financing the purchase of a house is more important than financing those who could help create the jobs needed to be able to service utilities and repay mortgages… something which I hope everyone understands is not so. It caused houses to morph from being affordable homes into being risky investment assets.

Assigning a risk weight of 20% to corporate AAA rated debt and one of 150% to corporate debt rated below BB-, de facto implies that the former, besides being able to obtain much more credit and at much lower rates, also deserves even better terms… and that is plainly an immoral discrimination… and besides an utterly stupid one. Anyone who believes that the excessive bank exposures that could cause profound bank crises are built up more with assets rated below BB- than with assets rated AAA, has never ever left his desk and walked on Main-Street.

Soon the history on banking will include: Between 1988 and 202x, believe it or not, banks were regulated by experts using risk weighted bank capital requirements based on that what was perceived as risky, was more dangerous to our bank system than what was perceived as safe

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

Central banks and regulators should not be allowed to discriminate in favor of asset owners or those perceived or decreed as safe.

Again, I visited the Bank of England’s museum.

The silence about what’s happening to our banks as a consequence of the introduction of risk weighted capital requirements was still total.

Into my hands came a brochure titled “Quantitative easing explained: Putting more money into our economy to boost spending” It reads:

A direct cash injection: The Bank creates new money to buy assets from private sector institution’

Purchases of financial assets push up their price, as demand for those assets increases and corporate credit markets unblocked

Total wealth increases when higher asset prices make some people wealthier either directly or, for example, through pension funds.

My comment: “some people” this is a clear recognition that quantitative easing helps more those who own assets than those who don’t. Central banks should not be allowed to carry out such under the table non transparent discrimination.

The cost of borrowing reduces as higher asset prices mean lower yields, making it cheaper for households and businesses to finance spending.

My comment: Because of risk weighted bank capital requirements the benefits of any “lower yields” are primarily transmitted to those perceived or decreed as safe, for example, the sovereign and the beneficiaries of residential mortgages. 

More money means private sector institutions receive cash which they can spend on goods and services or other financial assets. Banks end up with more reserves as well as the money deposited with them.

Increased reserves mean banks can increase their lending to households and businesses, making it easier to finance spending.

My comment: Again, because of risk weighted bank capital requirements, banks increases in lending will primarily benefit those perceived or decreed as safe, for example, the sovereign and the beneficiaries of residential mortgages. 

My conclusion: Central banks should not be allowed to carry out such here confessed under the table non transparent discrimination in favor of those who own assets and those who generate lower capital requirements for banks. The combination of quantitative easing with the main transmission channel for monetary policy, bank credit, being distorted by risk weighted bank capital requirements has de facto introduced communism/crony capitalism into the financial sector.