My What Ifs on risk weighted bank capital requirements
“Assets assigned the lowest risk, for which bank capital requirements were therefore nonexistent or low, were what had the most political support: sovereign credits & home mortgages… A ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker
"What If"... on risk weighted bank capital requirements
What if Basel Committee’s “Risk weighted bank capital requirements” had been labeled “Risk weighted bank equity/shareholders’-skin-in-the-game requirements”? Would the world have better understood the distortions caused?
What if one single Business School had questioned Basel Committee’s risk weighted bank capital requirements which imply bureaucrats know better what to do with credit, they’re not personally responsible for, than e.g., small businesses and entrepreneurs?
What if one single School of Economics had questioned Basel Committee’s risk weighted bank capital requirements which imply that residential mortgages are more important than e.g., small businesses and entrepreneurs?
What if one single statistician had explained to the Basel Committee that they might improve their risk weighted bank capital requirements by taking some lectures on conditional probabilities?
What if one single Nobel Prize winner in Economics had explained the dangerous procyclicality of the Basel Committee’s risk weighted bank capital requirements?
What if one Judge of the US Supreme court had questioned the constitutionality of risk weighted bank capital requirements with decreed weights: 0% Federal Government – 100% We the People?
What if one renowned PhD had warned about the systemic risk introduced when, for purposes of risk weighted bank capital requirements, too much decision power was allocated to some few human fallible credit rating agencies?
What if one single renowned historian had reminded the Basel Committee that all major bank crises had resulted from excessive exposures built-up with assets perceived as safe, never with assets perceived as risky?
What if classifying government debt and residential mortgages as demand carbs; and loans to small businesses and entrepreneurs as supply proteins, would that have made a difference when deciding with what seeds our economies should be sowed?
What if instead of risk weighted bank capital requirements, we had purpose weighted bank capital requirements? Oops, what if the risk weighted bank capital requirements already concealed a purpose?
What if instead of besserwisser hubristic risk weighted bank capital requirements, we had a humble one single bank capital requirement against all assets?
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