December 08, 2012

Basel II to Basel III is just one “the more things change, the more they stay the same" charade.

Sir, Simon Rabinovitch in “Beijing sets timetable for Basel rules”, December 8, refers to Basel’s “9.5 percent capital adequacy ratios” for the banks. And quite often do we find in FT other references to that which I consider truly devious terminology. 

It is devious because it conveys a message of banks having some "adequate" 9.5 percent in capital against assets, while in truth that percentage can be highly inadequate, as it is in reference to the risk-weighted assets, and, if the risk-weights are wrong, then of course everything is wrong. 

In this respect the term, for better transparency, should read “the 9.5 percent capital adequacy ratios for banks based on the assumption of the risk-weights being adequate”. I am sorry if it makes it a bit long, but that is the way it is, and it is certainly not my fault. 

The current crisis, and why Basel II turned out to be such a disaster, had very little to do with the basic 8 percent requirement, and all to do with loony subjective risk-weights applied by bankers and regulators alike, which distorted and diluted the real bank capital required. 

Basel III should have been about eliminating the distortions and the dilution in bank capital produced by the risk-weights, but it does not. Basel III is therefore a charade perfectly described by Jean-Baptiste Alphonse Karr’s "Plus ça change, plus c'est la même chose" sort of "The more things change, the more they stay the same". 

And you in FT, you better make up your mind about if you really want to keep on being complicit of that charade or, if really “without fear and without favour”, you dare start asking the following: 

“Since it is immensely more dangerous for a bank when something perceived as absolutely not risky, turns out to be risky, than when something perceived as risky, is confirmed to be risky, what is the logic in allowing banks to hold less capital for what is perceived as absolutely not risky? And do not different capital requirements, for different bank assets, produce distortions that hinder banks from allocating economic resources efficiently”.