October 10, 2018

To minimize the next unavoidable financial crisis, get rid of the dangerous risk weighted capital requirements for banks.

Sir, Martin Wolf backs IMF’s Global Financial Stability Report of October 2018 by requiring that “above all we must keep [bank] capital requirements up”, “How to avoid the next financial crisis”, October 9.

No one, except of course those bankers whose bonuses depend a lot on not having to compensate much capital, would argue against banks having to hold more capital. But, after a bank crisis that resulted exclusively from excessive bank exposures to assets especially perceived as safe, and that therefore regulators allowed banks to hold against especially little capital, it should be clear that even more important than more capital, it is to get rid of the risk weighted capital requirements for banks, those which so distort the allocation of bank credit.

Wolf writes: “The pre-crisis world was one of globalisation, belief in markets and confident democracies” Really? If so that’s because way too few knew what was happening.

“Confident democracies” In 1988, with the Basel Accord, one year before the Berlin Wall fell, bank regulators, without due consultations, smuggled in risk weights of 0% for the sovereign and 100% for the citizens. Sir, no matter how you see it, that is statism imposed by unelected autocrats that has nothing to do with democracy.

“Belief in markets” When regulators, with Basel II of 2004, assigned a risk weight of 150% to what was rated below BB- and only 20% to what was rated AAA to AA, they very clearly, stated, bankers don’t see shit, so we must help them out.

Sir, some might take comfort that current figures, even not as good as if the crisis had not happened, are still acceptable. They will soon wake up to the fact that these relative decent post crisis results, come from kicking the crisis can forward, and from the debt-financed anticipation of demand. That can, will soon start rolling back on our children and grandchildren. Great kicking authorities!

PS. Again! Had regulators understood that risk-weighted capital requirements for banks only guarantee especially large exposures, against especially little capital, to what’s perceived or decreed as especially safe, an especially big crisis like that of 2008 would not have happened