AIG was only an addict and the Basel Committee its pusher
Sir, Henny Sender in “AIG saga shows how dangerous credit default swaps can be”, March 8, writes interestingly about the “regulatory capital forbearance” trades but without mentioning a word about the financial regulators who created such markets.
If she would take her time to read the current minimum capital requirements for banks she would find that if a bank lends to a sovereign country rated AAA it can have as much leverage it wants, there are no limits. If a bank lends to a corporation rated AAA or AA- it is authorized by the Basel regulations to have a 62 to 1 leverage. If it lends to a corporation that is not rated or one that has only received a BB- the banks are authorized to leverage their capital 12 or 8 times respectively.
Understanding this extraordinary range of authorized bank equity leverage, from limitless to 8 times, all of it depending on the criteria the credit rating agencies... where would AIG have been without the concept of an AAA? ... she could have but reached one conclusion, namely that AIG was an addict and that the Basel Committee was its pusher.
If she would take her time to read the current minimum capital requirements for banks she would find that if a bank lends to a sovereign country rated AAA it can have as much leverage it wants, there are no limits. If a bank lends to a corporation rated AAA or AA- it is authorized by the Basel regulations to have a 62 to 1 leverage. If it lends to a corporation that is not rated or one that has only received a BB- the banks are authorized to leverage their capital 12 or 8 times respectively.
Understanding this extraordinary range of authorized bank equity leverage, from limitless to 8 times, all of it depending on the criteria the credit rating agencies... where would AIG have been without the concept of an AAA? ... she could have but reached one conclusion, namely that AIG was an addict and that the Basel Committee was its pusher.
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