Basel is now only increasing the regulatory discrimination of “The Excluded Risky”

Sir, imagine a father with five sons who has declared he just loves the oldest one. Clearly the other four are not happy about that. But now the father declares that he also loves the second son. Will the three remaining unloved sons feel better or worse?

That is the question you have to answer when trying to interpret the meaning of the announced relaxation of the Basel liquidity rules for banks.

Lex in “Basel tov”, January 7, believes that this relaxation should make it “less likely do deter financing of activity in the real economy”. 

Not so! The distortions in the markets in favor of “The Infallible” and against the excluded “The Risky”, will increase. And that could only worsen the conditions in the real economy, as those who represent the least risks for banks, are not necessarily the most important actors on the margin of that economy.

Let me phrase it like this: In the real economy the existence of favorable conditions is much more important for “The Risky” than for “The Infallible”

Basel keeps tightening the noose around the neck of “The Risky and Excluded”, and thereby killing the real economy.

Sir, Brooke Masters, FT’s chief regulation correspondent, reports on January 6 that “Banks win more flexible rules” with respect to the assets that might count towards the liquid coverage ratio LCR, and that “the results are largely good news for bank profits because institutions will be allowed to count more, higher-yielding assets in their liquidity buffers”. 

What no one seems to care one iota about is that the more you widen the definitions of “The Infallible and Included”, by allowing  banks to  lend to them against ultra low capital requirements, and including them in these liquidity requirements, the more you will tighten the rope around the necks of “The Risky and Excluded”, primarily all those small, medium sized business and entrepreneurs with no ratings or not so good ratings, but whose access to bank credit is still vital for the strength and sturdiness of our real economies. 

Indeed these bank regulators are as dangerous as they can be. For instance, Sir Mervyn King, called the agreement “a very significant achievement [and] a clear commitment to insure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort.”; as if the lack of liquid assets, and not the lack of good assets, was the fundamental problem. 

What was the primary cause of the current crisis? That all the investments in triple-A rated securities backed with lousily awarded mortgages to the subprime sector in the US, or the huge loans to sovereigns like Greece were not sufficiently liquid, or that they were outright bad? No doubt the later! 

And why did these assets become so bad? Simply because the bank regulators whetted too much the appetite of the banks for this type of assets.

When are we going to parade these Basel regulators down Fifth Avenue wearing their well earned cones of shame and as we must do?

Never forget that in the real economy, the existence of favorable conditions, like access to bank credit,  is much more important for “The Risky” than for “The Infallible”