October 25, 2010

It is very worrisome to see that Jacques de Larosiére does still not get it!

Sir Jacques de Larosiére in “Basel rules risk punishing the wrong banks” October 25 writes about the risk of the banks reducing “activities with modest margins such as lending to small and medium sized enterprises” If he wants to defend the small and medium sized enterprises then he should not forget that the primary reason for that lending having margins that are modest, relatively, is because the regulators allow other lending to occur with much less bank capital requirements… and of that truly odious discrimination he does not say a word.

He also writes that “The proposal to introduce an absolute leverage without taking into account the real risk of the asset is the most contestable element of the Basel reform, and would push banks to concentrate their assets in riskier operations.” This is pure nonsense as an absolute leverage does not mean that the risk of the assets are ignored, those risks are reflected in the risk premiums charged by the banks, and those risk premiums, higher interest rates, go straight to the capital of the banks.

In fact it was not having an absolute leverage level equal for all assets that drove the banks into an excessive lending or investment in what was perceived ex-ante as having no risk, precisely the place where all financial and bank crisis occur.

How worrisome and sad it is that a man of the statute of Jacques de Larosiére, now more than two years after the crisis detonated, does still not understand why it happened.