April 29, 2009

In this crisis, many wish for the cloak of invisibility.

Sir there is no way you could understand what happened in this financial crisis if you do not read what Basel II contains. It is not only that the banks now have to make up for the many write downs after all the losses they incurred but that they will also have to make up for all the undercapitalization that Basel allowed for.
When the bank lend to a company or invests in a security that has managed to get a triple A-rating Basel II has authorized this exposure to be risk-weighted at only 20% which means that 500 of it will count as only 100 which (500 exposure divided by 8 in capital requirement) results in a leverage of 62.5 to 1.
And so Martin Wolf in “Fixing bankrupt financial systems is just the beginning” April 29, should also have acknowledged to begin with the need of “fixing” the intellectually bankrupt regulators who came up with such insane regulatory permissiveness just because they trusted the credit rating agencies so much.
Is it really surprising that now “investors burned by more sophisticated risk-adjusted ratios increasingly trust... the ratio of common equity to total assets’? Of course not, though the real question that needs an answer is how the regulators could have been so naive and gullible to design these ratios and then go to sleep believing in them?
Clearly the IMF, a staunch supporter and marketer of the Basel regulations, would prefer the world to ignore this whole issue… but why should a Financial Times that proudly champions a “without fear and without favour” also do so?

The regulators they authorized a leverage of 62.5 to 1!
Uploaded by PerKurowski

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