Basel regulations increase the world’s Gini coefficient
Sir from reading your “Capital ideas for financial reform” September 8 I get the feeling that you have not understood the real problem, as you are not at all clear about the how the equity of banks has to be increased.
It is not a question of just increasing capital requirements, across the board, but of increasing them only for those operations that were benefited with extraordinary low capital requirements.
Currently a normal loan to an unrated client requires the bank to hold eight percent in equity, which is not a low capital requirements at all, and which I bet you has proven to be more than sufficient to cover for any losses sustained in operations with non-rated clients, but, for a loan to an AAA rated client, the banks is only required to hold 1.6 percent in equity. As a result the clients perceived by credit ratings as having a higher credit risk are currently effectively shouldering the responsibility for the banks having capital, and thereby subsidizing those who are perceived as having a lower default risk… as if default risks is all what finance is about.
Let me explain it some harsher development terms. The current minimum capital requirements for banks based on risk assessments increase the world’s Gini coefficient and are only compatible with a world full of risk-adverse baby boomers who want to lie down and die.
It is not a question of just increasing capital requirements, across the board, but of increasing them only for those operations that were benefited with extraordinary low capital requirements.
Currently a normal loan to an unrated client requires the bank to hold eight percent in equity, which is not a low capital requirements at all, and which I bet you has proven to be more than sufficient to cover for any losses sustained in operations with non-rated clients, but, for a loan to an AAA rated client, the banks is only required to hold 1.6 percent in equity. As a result the clients perceived by credit ratings as having a higher credit risk are currently effectively shouldering the responsibility for the banks having capital, and thereby subsidizing those who are perceived as having a lower default risk… as if default risks is all what finance is about.
Let me explain it some harsher development terms. The current minimum capital requirements for banks based on risk assessments increase the world’s Gini coefficient and are only compatible with a world full of risk-adverse baby boomers who want to lie down and die.
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