My tweets on “How the Basel Committee doomed our bank systems and our economies”
The Basel Committee doomed our bank systems and our economies.
For around 600 years risk adverse bankers had, not always successfully, tried to do their best to clear for perceived credit risks, by means of risk adjusted interest rates and the size of bank exposures.
When what bankers had perceived as risky turned out to be even more risky, since the exposures were generally quite small, it hurt but banks could manage.
When what bankers perceived as safe turned out to be risky, since the exposures were then very large, big crises often ensued.
But then, starting in 1988 with Basel I, and really exploding in 2004 with Basel II, risk adverse regulators decided they also wanted to clear for those same perceived credit risks, and to that effect introduced risk weighted bank capital requirements.
In the softest words I can muster, that was extremely dumb. As bank supervisors they should be almost exclusively concerned with bankers not perceiving the credit risks correctly. Instead they bet our bank systems on that bankers would perceive credit risks correctly.
Banks everywhere were then taken out of the hands of savvy loan officers, and placed in the hands of creative equity minimizing financial engineers, who then ably marketed the nonsense that more bank capital hindered bank lending and was therefore bad for the real economy
The 2008 crisis caused by AAA rated securities backed with mortgages to the US subprime sector, with which European banks and US investment banks were allowed to leverage 62.5 times with these, should have loudly reminded them about the dangers of the “safe”.
But regulators refused to admit their mistake and kept risk weighting in Basel III.
The result is an ever increasing dangerous overcrowding of “safe harbors” and the abandonment of the “riskier oceans.
“A ship in harbor is safe, but that is not what ships are for.” John A. Shedd.
And those who used to populated safe harbors, like insurance companies, pension funds, personal saving accounts and other, have been expelled to the risky oceans, confronting loans to leveraged corporates, emerging markets and others for which they're less prepared than bankers
To sum it up, risk-weighted bank capital requirements guarantees especially large crises, resulting from especially large exposures to what’s perceived especially safe, and is held against especially little capital.
Let’s get rid of these regulators… now!
And not only are they dangerously bad regulators… by decreeing risk weights of 0% for the sovereign and 100% for the citizens, they also evidence being dangerous statist/communist regulators.
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