The regulatory powers of our bank regulators need to be urgently regulated, at least those of the Basel Committee.

What do you think the world would have said if the Basel Committee had informed it that it would regulate the banks, without considering the purpose of the banks? 

What do you think the world had said if the Basel Committee had informed that in order to make the banks safer, they were going to distort the allocation of credit to the real economy?

What do you think the world would have said if the Basel Committee had informed it that even though all major bank crises have always resulted from excessive exposures to something ex ante erroneously perceived as safe, they would allow for especially low capital requirements against bank exposures to what ex ante was perceived as safe.

What do you think the world would have said if the Basel Committee had informed it that even though the society considered that banks giving credit to SMEs and entrepreneurs was very important, they would saddle the banks with especially large capital requirements on account of those “risky” being risky.

What do you think the world would have said if the Basel Committee had informed it that it was going to assign a zero risk weight to sovereigns and a 100 percent risk weight to the citizens, and which indicated their belief that government employees could make better use of other people’s money than private citizens could use theirs. 

What do you think the world would have said if the Basel Committee had informed it that even though banks already cleared for credit risks with interest rates and size of exposure they would also require banks to clear for that same risk in the capital; and that even though any risk that is excessively considered leads to the wrong actions even if perfectly perceived.

What do you think the world would have said if the Basel Committee had informed it that because they could not estimate the unexpected losses that bank capital is primarily to cover for, they would use expected credit risks as a proxy for the unexpected.

What do we think about that even when the 2007-08 clearly evidenced the failure of the regulators, they go on as if nothing, using the same regulatory principles? I just know that neither Hollywood nor Bollywood would ever have permitted those creating the box-office flop of Basel II, to go on working on Basel III.

Sincerely, are we really sure all these regulators in the Basel Committee, and in the Financial Stability Board, are just not some Chauncey Gardiner characters?

The bank regulators of the Basel Committee are dumb and dangerous; and are not being held accountable for that

The pillar of current bank regulations is the credit risk weighted minimum capital requirements for banks; more perceived credit risk-more capital and less risk-less capital.

For instance, in Basel II of 2004, paragraph 66, we find the following risk weights for claims on corporates depending on their credit assessment.

AAA to AA rated = 20%; A+ to A- = 50%; BBB+ to BB- = 100%; Below BB- = 150%; Unrated = 100%

Since the basic capital requirement in Basel II was 8 percent then the respective minimum capital requirements were:

AAA to AA rated = 1.6%; A+ to A- = 4%; BBB+ to BB- = 8%; Below BB- = 12%; Unrated = 8%

And that translates into that banks were allowed to leverage capital (equity) as many times as follows:

AAA to AA rated = 62.5; A+ to A- = 25; BBB+ to BB- = 12.5; Below BB- = 8.3; Unrated = 12.5

That is dumb and that is dangerous.

The dumb part is easily evidenced by just asking: Who can think that what has a credit rating of below BB-; which means moving from “highly speculative” through “extremely speculative” and up to “default imminent”, is more dangerous to banks than any of the other “safer” assets?

With a reference to Mark Twain’s saying that “bankers want to lend you the umbrella when the sun shines and take it back when it looks like it is going to rain”, one could even make a case for the totally opposite, a 20% risk weight for assets rated below BB- and a 150% risk weight for assets rated AAA to AA.

And clearly no major bank crises have ever resulted from excessive exposures to risky type below BB- exposures; these have always resulted from excessive exposures to something ex ante perceived as “safe” but that ex post turned out to be risky. In fact it only guarantees that if something really bad happens with an excessive exposure to something erroneously perceived as safe, that banks will stand there naked, with especially little capital to cover them up with. 

But it is also very dangerous, primarily because it distorts the allocation of bank credit to the real economy.

By allowing banks to leverage more with the Safe than with the Risky, banks will be able to earn higher expected risk adjusted returns on equity with the Safe than with the Risky; which means banks will lend more than it would ordinarily lend to the Safe and less than it would ordinarily lend to the Risky… and that cannot be good for the real economy.

The day someone calculates how many small loans to SMEs and entrepreneurs have not been awarded because of this silly regulatory risk aversion; and we think of all the opportunities for job creation that have been lost; we will all cry... and our young could get mad as hell, as they should.

But the real story is even worse. Regulators gave the sovereigns (governments) a risk weight of zero percent; which means they think government bureaucrats are worthier of bank credit than those in the private sector. That is pure unabridged statism.

And since these regulations discriminate against the bank credit opportunities of the Risky, it also serves as a potent driver for increased inequality.

There is soon a decade since that crisis which resulted from excessive exposures to AAA rated securities, and to sovereigns like Greece, broke out; and the arguments here presented are not even being discussed. If that lack of accountability is not scary, what is?

Jaime Caruana, go home. You and your Basel II colleagues have done enough damage, and should not now block the fixes.

Jaime Caruana was the Chairman of the Basel Committee for Banking Supervision at the time Basel II regulations were approved in June 2004; and since I consider these the most outrageous, dumb and irresponsible bank regulations ever, I of course think that he should have retired a long time ago.

But no, ten years later, now as the General Manager of the Bank of International Settlements he still refuses to accept any responsibility. 

Let me for instance refer to his speech “Stepping out of the shadow of the crisis: three transitions for the world economy” given on the occasion of the BIS’s Annual General Meeting in Basel on 29 June 2014 

There he states: “A reliable financial system requires more than resilience. Resilience is the starting point, but let me mention some other key elements. The first is confidence in banks’ risk management. This goes all the way from the overall risk culture to the risk models themselves. The large reported dispersion in risk-weighted asset calculations suggests that there is still plenty of scope for inconsistency, and perhaps even for gaming the rulebook.” 

Not even a hint of the possibility that in fact it was the regulators’ who with their risk-weighted capital requirements for banks, the pillar of Basel II, gamed the rulebook and upset risk-models.

He also says: “ Stringent regulation can alleviate this problem. Constraints on modelling assumptions can improve comparability and curb arbitrage.”

Yes but who will constrain the regulators from arbitraging against their short term credit risk monsters, ignoring the risk-taking the economy needs? 

He also holds: “If calibrated rigorously, the leverage ratio can create a credible backstop for the risk-weighted ratios.” 

Yes but why was this not there in Basel II, and why is it there now only as a backstop, something which allows the risk-weights to distort more than ever on the margins?

He also says: And, implemented consistently, global minimum regulatory standards can reduce the risk of fragmentation along national borders and increase credibility. 

Indeed, but unfortunately, with wrong regulations, like Basel II, that can also increase the global systemic risk in banking.

And he suggests: “to encourage a prudent risk culture, one that allows for diversity and risk sensitivity, but penalises and prevents attempts to game regulations.”

Obviously Caruana has no idea that a prudent risk culture for regulators starts by defining which the objectives of that which is being regulated are, so as to know what they cannot risk distorting with their regulations. If Caruana and his colleagues had known that, then they would have understood that the last thing they could do was to distort the allocation of bank credit to the real economy… as they so blithely did and do!

As is those foremost responsible for gaming bank regulations to suit their own beliefs and not having been penalised for it, are the Basel Committee and the Financial Stability Board members.  

Jaime Caruana… by not being willing to admit the mistakes of Basel II, and occupying a crucial post, you are standing in the way of what needs to be corrected… so go home!

Basel Committee, Financial Stability Board, Hugo Chavez… the same shit!

For more than a decade now I have tried to ask Venezuelan politicians or government petrocrats and oiligarchs, such as Hugo Chavez, where they get that crazy idea that they are able to sow trillion dollars of oil seeds better than what each Venezuelan citizens can do sowing a couple of hundred dollars of that seed per month. And they never answer. 

http://theoilcurse.blogspot.com/

http://www.petropolitan.blogspot.com/

For more than a decade now I have tied to ask the Basel Committee and the Financial Stability Board where they get that crazy idea that if banks only lend to “The Infallible” and avoid like the pest lending to “The [dirty] Risky”, everything is going to be fine and dandy. And they never answer. 

http://subprimeregulations.blogspot.com/

http://bombaaaa.blogspot.com/

I guess the Basel Committee and the Financial Stability Board and Hugo Chavez are genetically from the same stock... in other words, the same not accepting to be held accountable to no one shit.