July 23, 2018

What if there had been a plumber and a nurse in the Basel Committee for Banking Supervision? Would the 2007-08 crisis have happened?

Sir, I refer to Andy Haldane’s “Diversity versus merit is a false trade-off for recruiters” July 23.

After just a couple of months as an Executive Director of the World Bank, I told my colleagues that since most of us seemed to have quite similar backgrounds (although I came from the private sector), if by lottery we dismissed two of us, and instead appointed a plumber and a nurse, we would have a better and much wiser Board. That of course as long as the plumber and the nurse had sufficient character to opine and ask, and not be silenced by any technocratic mumbo jumbo. 

For example what if when the Basel Committee for Basel II in 2004 set their standardized risk weights for the AAA rated at 20% and for the below BB- at 150%, a plumber or a nurse had been present to ask?

On first sight since the AAA rated are much less risky than the BB- rated ones, those risk weights seem to be the right ones, but has that credit risk not already been considered by the banker when deciding on the size of their exposures and the risk premiums they need to charge?

My daddy always told me of that banker that lends you the umbrella when the sun shines and wants it back when it looks like it might rain, so is it not so that what is perceived as safe is what could create those really large exposures that could turn out really dangerous if at the end that safe ends up being risky?

And is credit risk all there is about banking? What if that below BB- rated has a plan on what to do with a credit that could mean a lot for the world, if it by chance turns out right? Are you with these risk weights also not sort of implying that the AAA rated is more worthy of credit?

Those very simple questions could have changed the course of history as the banks would not have ended up with some especially large exposures to what was perceived (houses) decreed (sovereigns) or concocted (AAA rated securities) as safe, against especially little capital (equity), dooming the world to an especially serious crisis.

Sir, how do we get some nurses and plumbers, meaning real diversification, not just gender diversification into the Bank of England and the Basel Committee? These mutual admiration club types of institutions, with their groupthink séances, urgently need it