Here for discussion is an alternative, less distorting, risk-weighted bank capital requirement regulation.

I have for more than a decade strongly opposed the Basel Committee’s risk-weighted capital requirements for banks. 

This primarily because these seriously distort the allocation of bank credit in the real economy, but also because they make little empirical sense, since what historically have caused all major bank crises, are not big bank exposures to what ex ante is considered risky, but always too large exposures to what was erroneously perceived ex ante as absolutely safe.

But since it seems that regulators do not feel they are doing their job if they don’t do risks weighting, my criticism has not been sufficiently considered.

In that respect let me here briefly express a simple alternative of risk-weighing the capital of a bank.

Though it would not increase the ultimate long term safety of the banks, because of the fundamental regulatory mistake of confusing ex-post risks with ex-ante perceptions, it could at least produce much less distortion in the allocation of bank credit.

1. Calculate the risk-weighted size of the bank’s balance sheet. 

2. Divide that number by the gross balance sheet of the bank. 

3. Multiply the resulting ratio times a basic capital requirement, for instance Basel II’s 8 percent.

4. Make the resulting percentage the general capital requirement for that bank in particular and to be applied to all its assets.

5. Make a medium term plan on how to increase that percentage for that particular banks, to for instance Basel II's 8 percent.

Comments? perkurowski@gmail.com

If I was the FDIC, I would ask bank regulators two questions

If I was the Federal Deposit Insurance Corporation, mandated to insure depositors for when banks fail, I would not lose one minute of sleep concerning myself with bank assets perceived as “risky”, but I would certainly toss and turn all night, thinking about assets that are perceived as “absolutely safe” and might not be. 

“The Risky” assets those take care of most of my risks on their own, by means of lower bank exposures, higher interest rate premiums and tougher contract terms. 

It is always “The Infallible” assets which represent the really expensive dangers to me, since if these assets, as sometimes happens, ex-post turn out to be very risky, then the bank exposures are usually enormous, the earned risk premiums much too low, and the contracting terms much too lax. 

And so, if I was the FDIC, I would ask the current bank regulators about what they are thinking when they allow banks to hold so much less capital against “The Infallible” than against “The Risky”. 

And since if I was the FDIC, and therefore also responsible for “promoting sound public policies … in the nation's financial system”, I would also ask the regulators whether allowing banks to leverage their equity much more when lending to “The Infallible” than when lending to “The Risky”, does not introduce distortions that make it impossible for the banks to assign resources in the real economy, with any type of efficiency.

In short, if I was FDIC, current capital requirements based on perceived risk would be completely unacceptable.

What are historians going to say about the Basel Committee's capital requirements for banks based on perceived risk?

I am sure historians will be scratching their heads trying to figure out how the bank regulators of the Basel Committee for Banking Supervision, and of the Financial Stability Board, could have been so dumb so as to base their capital requirements for banks on perceived risks already cleared for by markets and banks through interest rates, amounts exposed and other contractual terms. 

And with it they doomed our banking system to overdose on perceived risks and create obese exposures to "The Infallible" and anorexic exposures to "The Risky". 

In other words the regulators castrated the banks of the Western World and made these sing in falsetto.

Most probably the historians will be explaining it in terms of the incestuous group think which can result when allowing “experts” to debate such matters in a mutual admiration club subject to absolutely no accountability at all.

Damn you dumb bank regulators!