July 29, 2013

More capital-equity against what is least likely to pose a risk to the bank system is the pillar of Basel II and III

Sir, Edward Luce in “Betting on start-ups can revive a tired presidency” July 29 writes “the effective equity cushion at the largest US banks is between 4 and 6 per cent of their balance sheet. For the small Main Street banks that still make “character loans” – lending money to customers they know – that cushion is 9 per cent. In other words, US regulators are twice as strict with those banks that are least likely to pose a risk to the system.”

That is not a US problem only as in Europe it is even worse. The Basel Committee is in this respect much worse than the US Federal Reserve, FDIC and the Office of the Comptroller of the Currency. The pillar of Basel II and III bank regulations are capital requirements based on perceived risk, which precisely forces bank to hold more capital-equity for what is perceived as risky and is therefore not that risky.

This is the problem that I have written about the Financial Times more than a thousand letters but which you have ignored, presumably because someone did not like something I wrote and decided I should be ignored-censored.