December 23, 2014

Basel Committee and Financial Stability Board… please… Let it go¡

Sir, January 2003 in a letter you published I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds”.

And so one could assume that when Sam Fleming now, December 23, reports that “Banks face sharp restriction on use of rating agencies in loan risk assessment” I should be satisfied.

I am not! Because now the regulators want to impose other criteria to be used by banks for calculating how much capital (equity) they need to hold against an asset.

For instance: “Corporate exposures would no longer be risk-weighted by reference to the external credit rating of the corporate, but they would instead be based on a look-up-table where risk weights range from 60% to 300% on the basis of two risk drivers: revenue and leverage.”

And so all regulators are doing here is introducing new sources of systemic risks; and defining new tools to be used in gaming a system the regulators set up to be gamed.

Why can’t regulators just let it go and let the banks use any method each one of them finds appropriate to measure credit risks; and why can’t they just fix one capital requirement for all assets… no gaming allowed?

Sir, let me explain it to you again, for the umpteenth time.

Do you agree Sir with that a bank will and should decide how much to lend, at what interest rates and on what other terms, based on the credit-risk he perceives the borrower represents?

I assume you answer "yes" Sir, but so then, why on earth should bank regulators also stipulate that the same perceived credit-risk is also to be cleared for in the capital (equity) account of the bank? Is not clearing for the same perceived risk twice overdoing it? 

Does that not mean for instance that, if we instead of allowing two nannies to use their average risk aversion when taking care of our kids, we allow them to apply the sum their risk aversions, then we would run the risk of making real monumental wimps out of our kids?

Sir, it is very clear that our bank regulators are digging themselves and our banks ever deeper in a horrible hole of their own creation. That could be because they do not want to admit their mistakes or, much worse, God help us, because they still do not understand their mistakes.