March 21, 2013
Sir, Howard Davies and Susan Lund write about the risks of “a system where nations rely on domestic capital formation and concentrate risk in local banking system”, "Three steps to stop global finance disintegration” March 21, 2013.
I disagree. The surreptitious global capital control system imposed by the Basel Committee, with their capital requirements based on perceived risk, concentrates bank exposures, everywhere, to what is perceived as “absolutely safe”. In other words it might be more correct to say “concentrate safety in local bank system”.
Even now, while Basel II is still in effect, a German bank can lend to a triple A rated borrower anywhere, holding only 1.6 percent in capital, meaning being able to leverage 62.5 to 1 its equity, while, if lending to a “risky” German small business or entrepreneur, it needs to hold 8 percent in capital, a leverage of 12.5 to 1. That makes it impossible for the banks to allocate resources efficiently in the real economy.
And so to me the most important step the banking system needs to take is to dismantle that odious Basel regulations which favor “The Infallible”, those already favored, and discriminate against “The Risky” those already being discriminated against. That, which can be done, will be no easy task as so many imbalances have already been built into the system.
But that most probably requires firing all current bank regulators who after more than five years since the mistake must have become apparent, are not recognizing it, and indeed, with Basel III and its liquidity requirements also much based on perceived risk, are digging us even deeper into the hole.