Dr Andreas Dombret your Basel I, II and III will be discovered as a truly ugly piece of Ramsey statue.

I will quote from Dr Andreas Dombret speech “Basel III - goal within sigh” delivered at the Bundesbank symposium on "Banking supervision in dialogue", Frankfurt am Main, 15 March 2017. 

The Member of the Executive Board of the Deutsche Bundesbank stated:

“The statue of Ramses is not only a work of art; it is also testament to the highest quality of craftsmanship, which is one major reason it has survived for three thousand years. Figuratively speaking, this is how we, too, must approach the Basel reform package. It’s not just about developing uniform, consistent rules – risk sensitivity is another of our guiding principles. During the negotiations, we will therefore call for higher risk to go hand in hand with higher capital requirements.”

Dr. Dombret if you and your regulatory technocrat buddies keep on insisting that what is perceived as risky is the stuff major bank crises are made of, your Basel regulations will doom the banks and the real economy.

You state “The equity ratio of German banks and savings banks has risen by more than half a percentage point to currently 16.2% since September last year, which was due primarily to the reduction in risk-weighted assets”, and I ask: How do you know that the reduction in risk-weighted assets did not affect those assets your banks most need to hold for your real economy not to stall and fall? 

Dr. Dombret, if you read this comment please answer these following questions, if you dare!

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

Does Deutsche Bundesbank want research that now “discovers” bank regulation mistakes it should have known of before?

Discussion Paper: Deutsche Bundesbank No 40/2015

Arbitraging the Basel securitizationsframework: evidence from German ABS investment

Matthias Efing: (Swiss Finance Institute and University of Geneva)

"Non-technical summary Research Question: The 2007-2009 financial crisis has raised fundamental questions about the effectiveness of the Basel II Securitization Framework, which regulates bank investments into asset-backed securities (ABS). The Basel Committee on Banking Supervision (2014) has identified “mechanic reliance on external ratings” and “insufficient risk sensitivity” as two major weaknesses of the framework. Yet, the full extent to which banks actually exploit these shortcomings and evade regulatory capital requirements is not known. This paper analyzes the scope of risk weight arbitrage under the Basel II Securitization Framework. 

Contribution: A lack of data on the individual asset holdings of institutional investors has so far prevented the analysis of the demand-side of the ABS market. I overcome this obstacle using the Securities Holdings Statistics of the Deutsche Bundesbank, which records the on-balance sheet holdings of banks in Germany on a security-by-security basis. I analyze investments in ABS with an external credit rating to uncover risk weight arbitrage on the demand-side of the ABS market."

Results: The analysis delivers three main results.

“First, I provide security-level evidence that banks arbitrage Basel II risk weights for ABS. Banks tend to buy the securities with the highest yields and the worst collateral in a group of ABS with the same risk weight (and, therefore, the same capital charge). My findings corroborate the hypothesis that institutional invsstors bought risky ABS to some extent for motives of regulatory arbitrage.”

What does that mean? That banks, for the “same risk weight”, buy what offers them the highest expected risk adjusted return on equity. Is that not what they are supposed to do? Would we, or the regulators like banks to minimize their risk-adjusted returns on equity?

"Second, banks operating with low capital adequacy ratios close to the regulatory minimum requirement are found to arbitrage risk weights most aggressively. From a financial stability perspective this finding is troubling as it smplies that the presumably more fragile banks are also most pervasively optimizing the very capital regulation designed to constrain them." 

What does that mean? That banks that are more pressured by capital constraints might act more aggressively? Is that not to be expected? 

"Third, banks with tight regulatory constraints buy riskier ABS with lower capital requirements than other banks. The ABS bought by banks that arbitrage risk weights, promise an as much as four times higher return on required capital than the ABS bought by other banks."

What does “riskier ABS with lower capital requirements” mean? ABS perceived ex ante as safer have lower capital requirements. It looks like confusing ex post realities with ex ante perceptions. 

What does ”as much as four times higher return on required capital” mean? Simply that capital requirement minimization has become more important in delivering expected risk-adjusted returns on equity than the correct analysis of risk.

My conclusion:

This paper just evidences that the most important research needed is that which explains how on earth the regulators of our banks could have come up with something so stupid as the portfolio invariant ex ante perceived risk based capital requirements for banks.

And again how these regulations distort the allocation of bank credit to the real economy remains a non-issue.

Here is a link to a brief aide memoire on some of the fundamental Basel capital requirements’ mistakes.

Dr Jens Weidman, why did it take you so long to figure this out?

Dr Jens Weidmann, President of the Deutsche Bundesbank, at the Tagesspiegel event "Deutschland Agora 2014", Berlin, 16 January 2014 said the following.

“In order to break the disastrous nexus of banks and governments, the regulatory treatment of government bonds will, however, also have to be changed.

Currently, banks can invest unlimited amounts in euro-area government bonds. Under the current capital rules, a zero risk weight applies to these assets, which means that these government bonds can be fully funded with borrowed money, in other words, they do not require any capital backing. This constitutes preferential treatment, and has been a factor in banks in several peripheral euro-area states, in particular, raising their exposure to domestic sovereign bonds during the crisis; they have thereby tied their fate to that of their national government.

In my opinion, credit ceilings and risk-based capital backing would be a sensible way of breaking the nexus - that would basically mean applying similar rules to those for bank loans to private-sector debtors. Such rules would also promote bank lending to enterprises.

Support for this proposal is growing, its logic is compelling, but implementation is probably not on the cards for 2014… In the longer term, however, such regulations are, in my opinion, an indispensable prerequisite for a stable monetary union and a healthy financial system.”

And I just ask Dr Jens Weidman… why did it take you so long to figure this out? And if you accept that correcting for it is "indispensable", why not more urgency?

In November 2004, soon 10 years ago, after ending my 2 year term at the World Bank as one of its Executive Directors, in a letter published by the Financial Times I wrote: 

“Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?