October 09, 2016
Sir, Caroline Binham and Jim Brunsden, with help of Laura Noonan, report that the Basel Committee for Banking Supervision is introducing reforms that include a contentious “output floor” that would limit banks’ ability to use their own internal models to assess risk. “In many cases this will effectively raise the amount of capital that banks have to hold” “Basel group warns of call for lenders to ramp up capital” October 8.
What do they mean with “in many cases”? How can anyone believe all banks authorized to use internal models do not use these to minimize the capital they need to hold …so that they can maximize their returns on equity?
Sadly, what is really contentious with all this, is how on earth we ended up with such infantile regulators.
Anyhow the authors report these reforms are creating some discord between the US and Europe; to such an extent it “tests the viability and purpose of the Basel group, founded 41 years ago to harmonise banking rules around the world.”
Sir, if that would signify the end of the Basel Committee, you know I will not shed a tear. Neither would the millions of SMEs and entrepreneurs who over the years have been denied fair access to bank credit, if they finally came to realize that was a direct consequence of Basel’s regulatory discrimination.
Knowledgeable bank regulators know below BB- rated assets are risky. Wise ones know what’s AAA rated is dangerous. The world is overdosing on information and knowledge and it sorely needs more wisdom.
PS: Here is an aide memoire on the regulatory monstrosity of the risk weighted capital requirements for banks.