January 15, 2016

WEF/Davos. Clarify the mystery of how global regulatory lunacy invaded the Basel Committee for Banking Supervision.

Sir, Gillian Tett referring to the turmoil in China, low oil prices and the dramatic drop in the Baltic Dry Index writes: “the elites breezing into Davos for the World Economic Forum next week should take note… that globalisation does not always proceed in a straight line” “Globalisation moves in mysterious ways” January 15.

“Mysterious ways” indeed. The elites in Davos would do well asking themselves how on earth the development of bank regulations to be applied globally, the Basel Committee, landed in hands of “experts” who think that what is rated ‘highly speculative’ below BB-, is much more dangerous to the banks and to the banking system than what is rated ‘prime’ AAA?

In Basel II the capital requirement for what was rated AAA to AA was 1.6 percent while for below BB- it was 12 percent.

In Basel II, banks could therefore leverage over 60 times their equity with what was rated AAA to AA and 8 times with what was rated below BB-.

So with Basel II banks could obtain much much higher risk adjusted returns for what is rated AAA to AA than for what is rated below BB-.

And neither has the Financial Stability Board found something curious with that regulatory concept that so distorts the allocation of bank credit to the real economy.

And here we are with a financial crisis that originated in AAA land, and a real economy that is weakening because of lack of access to bank credit for “risky” SMEs and entrepreneurs. How many #Davos201x will it take to ask the right questions?

@PerKurowski ©