August 25, 2010
Sir Sheila Blair opines that “The road to safer banks runs through Basel”, August 24. She is in her right to ask for safer banks but let me remind her that there are plentiful of people with no savings and no jobs who most want and need the banks to travel on the road of being more productive for the society, and that will not happen by going through the Basel Committee where not a word is spoken about the purpose of the banks.
But even in having the Basel Committee helping making the banks safer, Sheila Blair is wrong, because since that Committee has yet to understand what is wrong with their regulatory paradigm, it is not as she says “now moving to correct the problem”.
Blair correctly indentifies capital misallocation as the cause of the bust, but that was in itself caused by giving the banks, in real and relative terms, higher incentives to pursue what ex-ante is perceived as not risky, the AAA-ratings. We simply need to ask… where else but in excessive investments in what ex-ante is perceived as not being risky have all the bank crisis originated? The answer is nowhere!
The Basel Committee must be made to understand that they do not have the right to interfere in the markets by imposing on it, through the different capital requirements for banks, their own set of arbitrary and regressive discrimination of what is perceived as having higher risk.
Currently small businesses and entrepreneurs, those usually perceived as riskier, but who could perhaps most help us to generate the next generation of jobs, must pay around 2 percent more in interest rates, just in order to be competitive when accessing bank credits, just because of the discriminating capital requirements. The members of the mutual admiration club in Basel seem incapable to understand that… and unfortunately that seems to go for Sheila Blair too.
August 20, 2010
Sir Joseph Stiglitz recognizes “the invisible hand was invisible because it was not there”, and lays the blame for this squarely on “bank managers in their pursuit of their self interest”. “Needed: a new economic paradigm” August 20.
But Stiglitz, is not capable, or willing, of understanding the much more important market interference played by the capital requirements for banks based on perceived risks; which regulators arbitrarily placed as a non-transparent layer of incentives and disincentives on top of the premiums used by the market to clear for risks.
He even speaks about “excessive risk-taking” without getting that since most losses we caused not by for instance investments in Argentinean railroads, but in triple-A rated securities collateralized by mortgages, in the USA, what we really suffered from was an excessive regulatory induced risk-aversion.
That is why I am sure that when Stiglitz mentions that he believes “a new paradigm is within our grasp” he is still just a paradigm as far away from it, as he has ever been.
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.
August 19, 2010
Sir Stephen Cecchetti affirms that the current proposals from the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) that will impose higher capital and liquidity requirements on the banks is “A price worth paying to make banks safer”. It is just the same old story! When will we hear about making the banks more useful, or at least less useless?
Cecchetti correctly mentions that “lower capital means higher returns on equity but a smaller buffer against loan defaults and investment losses”. He ignores though the fundamental problem that the lower capital requirements are applied discriminating in favor of what is perceived ex-ante as having lower risks… and therefore increasing the returns of what is perceived ex-ante as having lower risks… and therefore pushing the banks to excessively invest in what is perceived ex-ante as having lower risks… precisely the stuff that financial and bank crisis are made of.
Eliminate the discrimination in the capital requirements and banks will start lending more to the small business and entrepreneurs who though most likely to be perceived ex-ante as more risky are also most likely to hold in their hands more of our future generation of jobs…which will thereby make our banks more useful.
Sir, this financial crisis was caused primarily because regulators by means of imposing different capital requirements for banks depending on the perceived risk of default created huge incentives for the banks to excessively pursue what was AAA rated.
In what Brooke Masters and Megan Murphy describe about the new Basel rules, “Suspense over”, August 19, evidences that the regulators, more than two years after the crisis got on its way, do still not understand the problems that their arbitrary regulatory discrimination causes.
In the proposed regulations there are some steps toward lowering the overall leverage possibilities of a bank, but there is not one word about eliminating the discrimination that, on the margin, where it counts, decides so much about where and at what cost bank credits go.
August 18, 2010
Sir, what have those being perceived as more risky, like the SMEs, ever done to you, for you to agree with the financial regulators they should be discriminated against by generating higher capital requirements for the banks when they are lent funds?
Don’t you know that there is no risk of excessive investments in what is perceived as risky, like the SMEs, since that risk is taken care of by the sole perception that a risk exists. There is though always a risk of excessive investments in what is perceived as not risky, because that is precisely a risk that the perception of no risk creates.
Therefore requiring the banks to hold higher capital requirements when the perceived risks are higher is just a stupid argument ably exploited by those who just want to lower the capital requirements for banks when these lend to them.
The market already discriminates against perceived risk by charging higher risk premiums. Therefore, for regulators to put on an additional layer of discrimination against higher perceived risk by requiring the banks to hold more capital for what is perceived as risky is as wrong as it can be.
To eliminate the capital requirements based on risks will not signify a subsidy of any sort to the SMEs, what it signifies is the elimination of an onerous discrimination against the SMEs.