March 07, 2018

There is not too much need for banks to game regulations when regulators have already gamed these so much.

Sir, John Plender addresses correctly many current concerns with the financial system in general and with banks in particular “Beware the threat of low-quality debt and opaque shadow banks” March 7.

But when he writes: “Remember, among the many things that lay behind the financial crisis of 2008-9 was the banks’ urge to game the Basel capital adequacy regime”, then I just have to step in.

There was no need to game regulations that had already been so much gamed by the regulators. Basel II, with its standardized risk weights, risk weighted any private sector carrying AAA to AA ratings with 20%, residential mortgages with 35% and, with much solidarity; European regulators risk weighted Greece 0%.

Translation: Based on the basic capital requirement of 8% banks needed to hold 1.6% in capital against the AAA to AA rated, 2.8% against residential mortgages and 0% against loans to sovereigns, like Greece.

Translation: Banks were therefore allowed to leverage their capitals 62.5 times with assets rated AAA to AA rated, 35.7 times with residential mortgages and limitless against loans to sovereigns, like Greece.

Also had regulators required banks to hold 8 percent against all assets the wriggling room for gaming would have been much reduced.

The risk weighted capital requirements for banks are most certainly the most absurd regulation concocted ever. It only guarantees that banks will dangerously overpopulate safe havens against especially little capital; and that those risky bays where for instance entrepreneurs are usually found, and that need to be explored for our economy to thrive, will not be sufficiently funded.

This should have been absolutely clear for more than a decade but yet, this is being obsessively ignored by most.