The Basel Committee’s besserwissers, on top of the ordinary defenses of banks, built a dangerous Maginot Line,

When banks use ex ante perceived credit risks (EAPCRs) to determine the interest rates (risk premiums) the amounts and other contractual terms of their exposures… all these their defenses, it might still at the end of the day, at least for some individual banks, end up like a totally useless Maginot Line.

But, when regulators decide to base their capital requirements for banks on precisely the same EAPCRs, then they are, de facto, on top of the defenses built by the bankers, building an extremely dangerous Maginot Line that could bring the whole banking system down.

That is because giving 200% weight to the EAPCRs will mean that “The Safe” be perceived as safer than what the EAPCRs validate, and “The Risky” will be perceived as riskier than the EACPRs validate. And the banking system will therefore lend too much to The Safe ("infallible sovereigns" and AAArisktocracy) and too little to The Risky (SMEs and entrepreneurs.

God make us daring!

God save us from hubristic besserwisser regulators’ mumbo jumbo scheming!

The only moment when we currently could deem our banks to be safe, and the credit allocation to the real economy is not distorted, is when the EAPCRs are adequately wrong. Meaning The Safe are in reality safer than perceived; and The Risky are in reality riskier than perceived… What a crazy world!

PS. May I humbly remind you of The Per Kurowski’s Rule?

The Joker on the Basel Committee

I can hear now the free market answering a confounded citizen by describing the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008:

"You know, they're schemers. Schemers trying to control their worlds. I'm not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … it was nothing personal, you know that I'm telling the truth. It's the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…" AAA rated collateralized debt obligations and MBS, and some of their 0% risk weighted sovereigns

When I think of a small group of bureaucratic finance nerd technocrats in Basel, thinking themselves capable of exorcizing risks out of banking, for ever, by just cooking up a formula of minimum capital requirements for banks, based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly empowering the credit rating agencies; and which all doomed, sooner or later, to take the world over a precipice of systemic risks; like what happened with the lousily awarded mortgages to the subprime sector, or to Greece when regulations assigned it only a 20% risk weight and doomed it to excessive public debt... I cannot but feel deep concern when I hear about giving even more advanced powers to the schemers.

PS. Years later I found out that even if Basel II would initially have risk weighted Greece 20%, European authorities assigned it a 0% risk weight, which meant European banks could lend to Greece's government without having to hold any capital against that exposure. Unbelievable! What champion schemers!

PS. Here is an updated aide-mémoire on some of the many mistakes with the risk weighted capital requirements for banks.