August 04, 2006

Basel is a monstrous factory of systemic risks.

Sir, Daniel Tarullo with his “A Simple escape route from the gridlock of Basel II”, August 4, reminds us of how the good intentions of building up a system of minimum capital requirements for the international banking system are turning into the greatest financial systemic risk factory ever seen. For instance the system favors bigger banks which will only signify placing more eggs in the same basket. It has delegated the diversified views of the market into the hands of a couple of few credit rating agencies in such an incestuous fashion that Paul Davies, FT August 3, reports that Fitch Ratings is going to launch a service predicting the likelihood of credit rating downgrades. It helps to tilt the financial markets towards doubtful areas such as the public sector finance incentives and away from the much more vital small entrepreneurs. And finally, to top it up all Basel mechanisms might just end up regulating nonexistent entities since much of the financial activities are responding by going elsewhere, to shadier places, where they are allowed to work as they best seem fit and can perhaps easier escape the Basel risks.