Had there been a Basel Committee on Tennis Supervision, Roger Federer would be history by now.

The Basel Committee for Banking Supervision (BCBS) in order to make bank systems safer imposed risk weighted bank capital requirements. The lower the perceived risk the lower the capital the higher the leverage allowed. The higher the perceived risk the more capital the lower leverage allowed. 

For example, in Basel II of June 2004 they held that against any private sector asset that was rated AAA to AA banks needed to hold 1.6% in capital, meaning they were allowed to leverage 62.5 times. Against any private sector asset that was rated below BB- banks needed to hold 12% in capital, meaning they were allowed to leverage 8.3 times. 

In terms of tennis that would mean that those players ranked the highest would be able to play with the best rackets, and be allowed many more serves than those player ranked lower. Someone not only unranked but also lousy player like me would be happy to have one serve and at least be allowed a to uses a ping-pong racket if playing against Roger Federer. 

But what would have happened if there had been a Basel Committee on Tennis Supervision that implemented these regulations?

To make a long story short, the best tennis players would have it easier and easier to win, and would have less and less need to practice. Those betting on them would bet ever-larger amounts at ever-lower odds… until “Boom!” (2008 Crisis) suddenly the best player was discovered to completely have lost his ability to play and lost in three blank sets to a newcomer.

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

Crimes against humanity can also unwittingly be committed through subtle and nonviolent means, like with bank regulations

Let us suppose a continuation of regulators who, in order for banks not to crash under their respective watch, decreed that banks should concentrate all their activity lending to “infallible” sovereigns, to those with good credit ratings, to the safe financing of houses; and to stay away from lending to all those who are perceived as risky.

That because they, like bankers, they looked at what could be risky for banks, and not as they should have done, as regulators, at the risks that might not be perceived.

And the consequences of it is that millions of those who though they are perceived as risky could help the economy move forward and generate new jobs, such as SMEs and entrepreneurs, have their access to bank credit denied.

And so hundred of millions of our young will not get jobs and have to remain living in their parents’ basements… that is unless they revolt and send their parents down to the basements.

And yet, sooner or later, especially large bank crisis will result, because of unexpected events, or because of excessive exposures to something that was perceived, decreed or concocted as safe, but that ex post turned to be risky. And these crises are made so much worse when banks have to hold especially little capital against those ex-safe assets.

This is precisely what the risk-weighted capital requirement for the banks created by the Basel Committee for Banking Supervision cause.

These allow banks to leverage more with what is “safe” than with what is “risky” and thereby obtain higher risk adjusted returns on capital with what is “safe” than with what is “risky”.

As a direct consequence, millions of job opportunities for our young have already been lost forever; and the first big crisis already occurred in 2007-08, only that in this case the central bankers, with their quantitative easing and ultra low interest rates, kicked that can forward.

And here we are, sitting on artificially inflated stock market valuations and house prices that, when true need arises, will never be able to be converted back into the same effective real purchase power that was invested in them.

And all that huge sovereign debts accumulated in the process can only be repaid with help of the printing machine, and never in terms of the real purchase power that was invested in its generation.

And the human sufferings, and the consequent strains all this will impose on our social fabric will be immense… especially when like now in many countries it will be compounded by big demographic changes.

Does all this not indicate that these regulations could be classified as a horrendous and perhaps even punishable regulatory crime against humanity?

Or will the inquisition of the high priests of bank regulations just excommunicate me, like any Galileo?

Where do I nail these my Theses about the risk weighted capital requirements for banks, so as to at least achieve a discussion of them? 

Or will the inquisition of the high priests of bank regulations just excommunicate me, like any Galileo?

A challenge: Can you spot the lunacy in the Basel Committee’s risk weighted capital requirements for banks?

These are the facts established by Basel II in 2004.

1. Very safe AAA to AA rated = 20% risk weight = 1.6% capital requirement = 62.5 times to 1 allowed leverage.

2. Very risky below BB- rated = 150% risk weight = 12% capital requirement = 8.3 times to 1 allowed leverage.

So what’s crazy with that?

Let me give you a clue! 

What can create those kinds of excessive bank exposures that could bring down a bank system?

If bank regulations had been privatized, how much would a Basel Committee Ltd have paid in fines for 2007-08 crisis?

I ask, because in courts it would have been quite easy to demonstrate that the banking sectors excessive exposures, to for instance AAA rated securities backed with mortgages to the subprime sector in the US, or in loans to a sovereign like Greece, those which caused the crisis, were the direct result of the risk weighted capital requirements for banks.

By strangely awarding lower risk weights to what was perceived as safe, which translated into lower capital requirements, the banks could leverage their equity with exposures to the “safe” many times more than with exposures to what was perceived as risky, like loans to SMEs.

As an example the risk weight for the AAAs was 20%, for sovereigns it hovered between 0 and 20% (Greece) and for SMEs 100%. That meant banks could leverage their equity 62.5 times with AAAs, unlimited to 62.5 times with sovereigns, but only 12.5 times with SMEs. That meant banks would earn much higher expected risk adjusted returns on equity on AAAs and sovereigns than on SMEs. 

I mentioned above, “strangely awarding”, because any regulator who knows what he is doing, would have gone back to analyze what causes bank crisis. Doing so he would have discovered that excessive exposures to what were ex ante perceived as risky never ever occur, (ask Mark Twain). All crises result from either unexpected events (devaluations), criminal behavior (loans to affiliates) or excessive exposures to something ex ante perceived very safe but that ex post turned out to be very risky.

So if society had brought this in front of a court, how much would Basel Committee Ltd have been fined? Clearly so much that it would have been out of business; so much more than what happened to Arthur Andersen when it was brought down for failing in its auditing of Enron.

And all that before all those “risky” SMEs, those who as a result of these regulations had their access to bank credit impaired, would have sued Basel Committee Ltd for the loss of their lifetime opportunities. 

But what has happened to the regulators responsible for the Basel Committee for Banking Supervision? Nothing, zilch, zero, nada, in fact many of them have been promoted.

And anyone knows what has happened to those emission controllers that were cheated by Volkswagen? Nothing? Perhaps there is a real case for privatizing regulations and controls, that way we could at least have some accountability.

PS. In the case of the larger more “sophisticated” banks the Basel Committee even went as far as allowing these to use their own models to calculate capital requirements, something like allowing Volkswagen to calculate their own carbon emissions.