Sunday, February 22, 2015

It behooves us all to denounce the Basel Committee's dumb and odiously discriminating bank regulatory pillar.

Currently the pillar of regulations, peddled all over the world under the trademark of Basel Committee, is equity requirements for banks based on perceived credit risk… more risk more capital… less risk less capital.

That is extremely dangerous for all, especially for developing countries. 2 reasons:

By allowing banks to leverage more their equity when lending to the safe than when lending to the risky, banks will obtain higher risk adjusted returns on equity when lending to the safe than when lending to the risky, which results in banks lending too much at too low rates to the safe and too little at relative too high rates to the risky. And who are the "risky"? All those SMEs, entrepreneurs and start-ups everyone needs and wants to have fair access to bank credit, for the economy to grow and not stall and fall.

And all which that pillar guarantees is that whenever a major bank crisis happens, those which never result from excessive exposures to the risky, but always because of excessive exposures to the “safe”, the banks will stand there naked, with little or no equity to cover themselves up with.

The regulators should have asked: “What are the risks bankers will either not perceive the risks of bank assets, or be able to manage the risks correctly?”... and that is clearly something quite different from what the perceived risks of bank assets are.

It behooves us all to denounce that dumb and odiously discriminating regulatory pillar.

I hear you: “Could expert regulators really be that stupid?” Yes, that is perfectly possible, especially when they regulate in a mutual admiration club isolated from the real economy.

For instance, when was the last time you saw a small business owner or an aspiring not yet successful entrepreneur in need or bank credit in Davos, or being heard out by the Basel Committee or G20's Financial Stability Board? 
I prefer one and the same equity requirements against all bank assets, because for me it is always dangerous to distort the allocation of bank credit to the real economy.

But, if regulators absolutely must distort, in order to show us they are earning their salaries, then let us please ask them to substitute with potential of job-creation-ratings, sustainability-ratings, or any other rating of what could be the purpose of a bank, for those useless credit ratings which are already considered by bankers when giving the loans, and should therefore not be considered again in the equity.

A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

God make us daring!