A designated group of Wise People, often self-designated from a mutual admiration club, does not guarantee any wisdom

Sir, Howard Davies the chairman of the Royal Bank of Scotland, when discussing financial regulations after Brexit writes. “The choice is presented as being between continued market access, as a rule taker from Europe, or taking back control of our own regulation and losing market access. The dilemma is nothing like so stark —EU bank capital regulations derive from the Basel Accords, and the UK remains a full member of the Basel Committee.” "Post-Brexit financial regulation cannot be left to negotiators" November 1

And to Work “out a new arrangement which responds to these realities” he suggests designating a group of Wise People.

Indeed, but Britain, Europe, we all need is bank regulators acting like wise men, and not like self-interested not accountable to anyone bankers.

Let me for the umpteenth time ask some questions.

What creates those excessive exposures that can endanger a bank system?

That which is perceived as very safe, or that which is perceived as very risky?

The regulators obviously believe the second, the very risky, as they in Basel II assigned a risk weight of 20% to what is AAA rated and one of 150% to what is below BB-rated.

What do you think is a more important purpose for our banks?

Lending to sovereigns and the AAA rated those with already ample access to credit, or lending to SMEs and entrepreneurs those that could help the economy to keep moving forward?

The regulators obviously believe the first, as they in Basel II allowed banks to leverage 62.5 times to 1 or more when lending to sovereigns and AAA rated, but only 12.5 times to 1 when lending to the unrated.

But have not Basel III changed it all? No, the risk weighted capital requirements remain in place and, on the margin, are just as distorting as ever.

How has this happened? The regulators acted like bankers and looked at the risks of bank assets, instead of wisely concerning themselves with if bankers perceived or managed the risks correctly.

Any risk, even if perfectly perceived, causes the wrong action if excessively considered.

And so for Britain and for the long-term prospects of the English banks that we have learned to admire, assure yourself of getting rid of all that pernicious Basel influence and so that your bankers can again be savvy loan officers, and not just the small equity minimizers they have so willingly become… in order to maximize their bonuses.

@PerKurowski

Credit risk-weighted capital requirements make it impossible for banks to price risk

Sir, I refer to Howard Davies’ in FT’s A-List, “Dilemma of defining risk” September 10.

There Davies states: “Regulators accept that banking necessarily entails risk. Their view, however, is that banks should know what risk they are taking on, why they are doing so, and should ensure that risk is priced properly”.

Indeed, it should be so, but it is not! 

Regulators, by using credit risk weighted capital requirements for the banks, not only send the message that they do not believe banks know what risk they are taking on, and worse, much worse, they make it completely impossible for banks to price risk properly. As is, banks price risks adjusted for the capital required, and that distorts all.

Regulators have yet not understood that the risk they must be concerned with has nothing to do with the credit risk of a bank’s exposure and all to do with how a bank manages those credit risks. Today they act like a nannie helping a child to cross a street looking only at the traffic light and not looking at the kid.

What should regulators do? Fix some capital requirements in order to cushion for any unexpected losses. But for the unexpected, you cannot, as regulators, by their own admission have done and do, use the expected.

To me it is surrealistic to read Douglas Flint expressing how the main preoccupation of bankers is “to protect themselves and the firm from future censor” by regulators when it is the regulators who should hang (illustrative… I think) for their mistakes. 

As is Basel II and III risk weighted capital requirements for banks is a true regulatory nightmare.

The first step needed to stop global finance and local economies from disintegrating.

Sir, Howard Davies and Susan Lund write about the risks of “a system where nations rely on domestic capital formation and concentrate risk in local banking system”, "Three steps to stop global finance disintegration” March 21, 2013.

I disagree. The surreptitious global capital control system imposed by the Basel Committee, with their capital requirements based on perceived risk, concentrates bank exposures, everywhere, to what is perceived as “absolutely safe”. In other words it might be more correct to say “concentrate safety in local bank system”.

Even now, while Basel II is still in effect, a German bank can lend to a triple A rated borrower anywhere, holding only 1.6 percent in capital, meaning being able to leverage 62.5 to 1 its equity, while, if lending to a “risky” German small business or entrepreneur, it needs to hold 8 percent in capital, a leverage of 12.5 to 1. That makes it impossible for the banks to allocate resources efficiently in the real economy.

And so to me the most important step the banking system needs to take is to dismantle that odious Basel regulations which favor “The Infallible”, those already favored, and discriminate against “The Risky” those already being discriminated against. That, which can be done, will be no easy task as so many imbalances have already been built into the system.

But that most probably requires firing all current bank regulators who after more than five years since the mistake must have become apparent, are not recognizing it, and indeed, with Basel III and its liquidity requirements also much based on perceived risk, are digging us even deeper into the hole.

More than about who sets the basic capital requirements for banks a sensible regulatory reform needs to worry about who sets the risk-weights.

Sir Howard Davies and David Green are correct suggesting that the setting of the capital requirements for banks should be placed in the hands of the monetary policy committee or whoever else sets the interest rate policy, as they are tools for a similar purpose, “Final touches for sensible regulatory reform” May 20. Currently that basic capital requirement decision is not even in the UK, having been delegated to the Basel Committee and which, for no special reason at all, seems to have carved out in stone an unmovable 8 percent.

But Davies and Green, much more than about the basic capital requirements, should worry about who takes the decisions on the risk-weights. It is those weights which really explain why, from mid 2000 until December 2009, the banks could lend to Greece with only 1.6 percent capital, while if they lent to any unrated UK entrepreneur they needed 8 percent in equity. This was because the Basel Committee, in Basel II, with precious little and quite dubious explanation, assigned a 20 percent risk weight for sovereigns rated A+ to A and corporate rated AAA to AA, while giving a 100 percent risk weight to any unrated clients. This arbitrary risk discrimination imposed on top of how the market already discriminates based on risk is the fundamental cause of this crisis, as it among others caused the stampede after triple-A rated investments.

http://teawithft.blogspot.com/2004/08/towards-counter-cyclical-basel.html