July 16, 2018

If you want accurate data on bank risks, you have to start by removing all the incentives for banks to misrepresent their data

Charles Taylor, a former chair of the supervision and implementation group of the Basel Committee on Banking Supervision writes: “big banks should always be able to paint an up-to-date, comprehensive picture of the risks they face… [But] management often seem not to care” “Banks’ approach to risk data is deeply inadequate” July 16.

Sir, if a big bank reported an increase risk in a category of assets, what would the regulators most likely response be? To “either restrict banks’ activities or boost their capital requirements”… even Charles Taylor dixit.

While, especially the large banks are more in the business of obtaining their highest risk adjusted returns on equity, not by traditional lending but by minimizing capital requirements, that will simply not happen. And to believe it could, is just further proof of how naïve the current bank regulators are.

Taylor writes: “One of the lessons of the 2008 financial crisis was that watchdogs need timely information for the system as a whole.” Nonsense! The prime lesson from that crisis is that the watchdogs have no idea about what they’re up to. Imagine, just for a starter, their risk weighted capital requirements are based on such crazy theorem that holds that what is perceived as risky is more dangerous to the bank system than what is perceived as safe.

Sir, just as an example, we are talking of a “watchdog” that thought it was ok for banks to leverage 62.5 times if only a human fallible credit rating agency had assigned an assets and AAA to AA rating.

The “watchdog” seems to invest a lot of hope in “the Legal Entity Identifier [will] make it easier to track specific buyers and sellers” Ok, but what are they supposed to do with that? Make the risk weighted capital requirements for banks portfolio variant? Good luck with that! But please remember, bankers can screw up the portfolio of their bank, while regulators could do the same with all banks, simultaneously.

Taylor writes: “By 2017, only three of the 30 “global systemically important banks” were up to snuff” And so the question that has t be made is, could those three not be the most able to game it all? Like Volkswagen gamed carbon emission tests?

What to do? Although the road there is full of dangers, the final destination must be one single capital requirement (10%-15%) against all assets. No more distortions! 

Sir, again, I am amazed on how FT can, at this late stage of the game, still buy in so much into what the so utterly inept Basel Committee regulators try to sell.