August 20, 2010

It is not the capital requirements but the risk-weights that Basel needs to correct

Sir in “Basel faulty” August 20, you argue that “capital ratios…must be at least doubled from Basel II”

What do you mean by that? That when lending to small businesses and entrepreneurs the banks should hold 16 percent in capital instead of the current 8 percent, even if that 8 percent has been more than enough to cover any losses on loans to small businesses and entrepreneurs?

No, what needs to be revised are the risk-weights by which Basel for instance reduces to only 20 percent the value of the risk-exposure when lending to private triple-A rated clients, and which translates in an effective capital requirements of only 1.6 percent. These risk weights should all be set at 100 percent, so as to end that odious and dangerous regulatory discrimination of risk that is non-transparently layered on top of how the market prices for risk.

Increasing all risk weight to 100%, especially after considering that most of the current losses were provoked by AAA rated operations, that would be the right thing to do… over a period of time.