August 26, 2015

If we are going to have a Basel IV that works for the economy, it cannot be built on principles of Basel I, II or III

Sir, Simon Samuels is half right when opining: “It is one thing to decide that tighter regulations are worth the cost. It is another to exacerbate that cost through delay and indecision” “Make up your mind on banking regulation” August 27.

Half right because much more than tighter regulations, we need better and less distorting regulations.

In his article Samuels, surely quite unwittingly, describes well how the risk-weighted capital requirements in Basel regulations distort the allocation of bank credit. When he writes: “a business that has a 17 per cent return on equity under Basel III might earn a paltry 3 or 4 per cent under Basel IV”, he should not ignore that a lot of lending that previously gave banks a decent return on equity, equally became bad business with the introduction of the risk-weighted capital requirements.

Before the introduction of credit risk weights, all borrowers competed with their risk-adjusted margins on equal terms for the access to bank credit. Now those who are perceived as safe, and which therefore generate lower capital requirements, are favored because their risk-adjusted margins can be leveraged many times more on bank equity than those of the “risky”. The problem of SMEs and entrepreneurs is that their voice is much less heard than that of the banks and of the AAArisktocracy.

I do understand that Samuel, as a bank consultant, shows much concern for the banks… but let me assure him that any delays and indecisions about correcting current bank regulations are hurting the real economy much more… and, implicitly, therefore also hurting the banks too.

Bankers, if good citizens, should know that making great returns on equity based on misallocations of credit to the real economy… hurts the future of which their kids are also a part.