The same Basel induced temptations keep plaguing the banks

Sir since it was the extremely low capital requirements that were authorized for banks whenever the risk perceived by the credit rating agencies was non-existent that started the stampede into subprime land, John Plender is absolutely right when he writes “Banks let off the hook as flawed model is preserved” July 15. It does not matter much if you increase the minimum capital requirement averages if, on the margin, you keep on interfering in the same arbitrary way in the risk allocation mechanisms of the market.

Today, the banks are still authorized to leverage themselves 62.5 to 1 on the loans they give to corporate borrowers rated AAA to AA- or need to capital requirements at all when lending to sovereigns rated AAA to AA- and so, today, all the temptations to head off in the wrong direction are still there.