J'accuse the Basel Committee for Banking Supervision

The following are facts that should be understood by any economist.

The Basel Committee’s risk weighted bank capital/equity requirements distort the allocation of credit.

By favoring the refinancing of the safer present, it builds up dangerous large exposures to what’s perceived or decreed safe e.g., public debt, residential mortgages and AAA rated securities.

By hindering the financing of the riskier future, e.g., loans to small businesses and entrepreneurs, the economy weakens and grows less.

These are extremely procyclical. When times are good and risk perceived low, banks are allowed to hold less equity, therefore able to pay much dividends and buy back shares. When times turn bad, banks stand there naked, just when its hardest for these to raise new equity.

As valiantly confessed by Paul Volcker the risk weights are much influenced by politics. 

The Nobel Prize in Economic Sciences has not been awarded to anyone who has warned or much less criticized this risk weighted regulations. As a very active member of the Basel Committee, Sveriges Riksbank that stands behind such prize, has a serious conflict of interest it has not been able to manage.

If only we could have had a Licensing Board for bank regulators.

Stephen Slivinski a senior fellow at the Cato Institute published today a Briefing Paper titled “The Case Against State Occupational Licensing Boards.” “Licensing boards seem intentionally designed to serve as the gatekeepers of an occupation and, in the process, they exhibit the look of a cartel.”

It's a great paper and below its conclusion:

“Elimination or deep fundamental reform of state licensing boards will not cure everything that is wrong with occupational licensing. Only the elimination or fundamental reform of licensing laws themselves can achieve that goal. There remain strong reasons to pursue such reforms.

However, dissolving the conflicts of interest inherent in a board system run by insiders and empowered to pursue anti-competitive objectives could lead to many improvements both at the margin and in the short term. Changing how the enforcement of these laws is carried out can incrementally decrease the economic cost associated with the aggressive, arbitrary, and self-serving enforcement that has proven to be a key defining feature of licensing board actions over the past several decades.”

That said it brought me back to a long-expressed wish: “If only we could have had a Licensing Board for bank regulators.”

1998, in an Op-ed titled “Regulations as enemy of bank missions”, I wrote:

“Frequently, in matters of financial regulations, the most honest, logical and efficient is simply to alert about the risks and allow the market, by assigning prices for these, to develop its own paths.

I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the contrary, what I propose is that it assumes it correctly. History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages. 

But what are we to do? Regulations are fashionable and there are many bureaucrats in the world trying to find their little golden niche. I just read an article about a county in Maryland, USA, where, in order to be able to work as an astrologer and provider of horoscopes, you need to be registered and obtain a license in order to “read the hand palms. The cost of such license is 150 dollars.”

PS. The page with the details of Maryland certified astrologers has disappeared, it might have been an early case of fake news :-(   Now the certification is issued by AFA Certified Astrologers - American Federation of Astrologers

Yes, how I wish a Bank Regulators Licensing Board had existed: 

If so, there would have been better chances regulators had e.g.;

Considered the purpose of banks

Thought about the risks we cannot afford not to take

Good knowledge of Bayesian conditional probabilities

Considered unexpected consequences as from empowering too much credit rating agencies.

Been aware they would distort the allocation of credit.

And on, and on, and on