July 17, 2012

What if “swift execution” had been the pillar of Basel II?

Sir, in May 2003, as an Executive Director of the World Bank, during a workshop on Basel II, I told some hundred regulators: 

There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.” 

When we now read Gillian Tett´s “America´s timely lessons in killing off toxic banks” July 17, we should think about what would have happened if “swift execution” had been the pillar of Basel II, instead of those mindless capital requirements based on perceived risks which could only guarantee increased toxicity and the too-big-to-fail banks?