February 18, 2013

The Basel Committee’s nanny-cartel’s truly colossal bribery of global bank business must be stopped.

Sir I refer to “Banks’ risk tactic under fire” by Shahien Nasiripour, Brooke Masters and Tracy Alloway, February 18.

I sincerely cannot understand how supposedly intelligent people, acting as regulators, can allow themselves to be dragged in by bankers into such silly discussion as to the adequate length of the periods to be used in VAR.

Can’t they get it into their heads that they do not have to concern themselves much with credit risk models, or credit ratings being correct, and concentrate on what to do when these prove to be wrong? This is just like the fire brigade worrying excessively about the quality of the fire detectors installed in homes, while forgetting to maintain the engines of their fire-trucks.

But of course, the real problem with current bank regulators is that they do not understand the magnitude of the distortions they have created. For instance a rule that “could force some banks to increase sharply the amount of capital they hold against trading assets” will immediately make bank capital much scarcer and thereby dramatically impact negatively the lending to what requires higher levels of capital.

The fact that banks were allowed to hold silly little capital for what was ex ante perceived as safe resulted into that, ex post, when some of it turn out to be risky, they had little capital to cover for it. Also let us not forget that whatever capital they had left came mostly from those requirements imposed on them when lending to the "risky". And it all meant then that banks had to retrench from lending to the “risky”, which is what they will now be forced to do even more.

Huw Van Stenis, a Morgan Stanley analyst, is quoted praising the Basel committee “harmonising some inputs makes a lot of sense”, but that of course ignores the fact of life that the greater the harmonization the greater the dangers of a catastrophic systemic risk. 

Sir, you have an editorial today titled “Beating bribery in global business”. Since the Basel Committee’s nanny-cartel fixed the game, bribed the bankers, with their capital requirements based on perceived risk, and got us the crisis it paid for, I sincerely hope Sir you one day accept that is a colossal bribery of global business that must be stopped... and not covered for.