Not Darwin but Frankenstein, not intelligent but unwise

Sir in “The great dying”, December 14, Niall Ferguson discusses the possibility that Darwinian evolution might explain the financial sector’s current difficulties although in the end he also clearly acknowledges that some “intelligent design” had to do with it.

When the bank regulators by means of the Basle Accord decided to drive risks (and creative destruction) out of banks, and imposed their exclusively risk based minimum capital requirements on the banks, they drove in fact banking business out of banks. When they simultaneously also appointed the credit rating agencies as their Blackwater type overseers of risks they also drove bankers out of banks.

The current turmoil is therefore much more a consequence of a Frankenstein’s not so intelligently meddling with the banks and Darwin has nothing to do with it that is unless of course you refer to the bank regulators themselves.

Absolutely, the Basel Accord is the root of our current financial turmoil

Sir I must voice a Hurrah John Plender! for his article titled “The Basel Accord sits at the root of the ongoing crisis” November 7. If we are ever going to have a fighting chance of getting out reasonably well from our current financial turmoil we have to make our regulators more accountable for their mistakes.

Plender refers to how through the minimum capital requirement calculations imposed a regulated arbitrage opportunity was created that forced and stimulated the creation of a parallel financial world that ended up much more difficult to comprehend. To this we would also add the fact that when the regulators then appointed the credit rating agencies as their frontline commissars, then really they set the table for the systemic risks to build up.

Also when Plender asks “whether top executives, let alone non-executives, can really understand the risks being run in such large, complex [financial] institutions”, worrisome as that might be, much worse is having to ask whether our bank regulators really know what they are up to.

Development rating agencies?

Sir Saskia Scholtes and Chrystia Freeland report that “Moody’s to revise ratings by end of year” and that it is now contemplating something to be marketed as “fundamental value”. Now, if that rating is only to be based on risk considerations then it does not really seem to be of such fundamental value to me. 

Of course a bank should be able to repay his deposits and that is why bank regulators in Basle are using risk to establish the minimum capital requirements. But a bank’s function is not only to be able to return the deposits but also to help promote growth and development and to assist the society in the distribution of opportunities. Otherwise a mattress would suffice. 

In this respect, besides the credit rating agencies, we perhaps should also be thinking of incorporating the criteria of development rating agencies and opportunity distribution rating agencies into the capital requirements of a bank. Only then would we be able to start talking about really fundamental values. 

It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope but it is a real tragedy when developing countries copycats it and falls into the trap of calling it quits.

PD. Are the Basel Committees’ bank regulations good for development?

Are the bank regulations from the Basel Committee an unqualified success?

Sir Christine Lagarde, France’s minister of economy, finance and employment in her “Securitisation must lose the excesses of youth” October 9 says that “In Europe, regulations initiated by the Basel Committee have served us well” and the question that begs the answer is “who are us?

By their minimum capital requirements methodology what Basel has primarily managed is to introduce a layer of regulatory arbitrated bias against risks and, long term, I do not know of any nation or continent that has been well served per se by more risk adverseness.

Yes it might be true that Basle has been able to reduce in the financial system what Alan Greenspan recently has referred to as the “benign turbulence”, but this could just have the effect of providing more stimulus to the camouflage or the hiding of the risks in other places than the commercial banks’ balance sheets, resulting in less transparency and the possibility of a dangerous accumulation of risks that could end in some real malignant turbulence.