November 26, 2010

I strongly object to Basel I, II and III.

Sir, I have written you hundreds of letters that reference my strong objections to the regulatory paradigms used by the Basel Committee and I know my arguments are not baseless… and you know that too. Can you at least once, for the record, publish these objections… or is there something that you want to silence? You are the Financial Times and so I should be able presume this topic should be of interest to you:

I strongly object what is basically the only pillar of bank regulations created by the Basel Committee in Basel I, II and III, namely having the capital requirements for banks to be based on perceived risk of default.

First: All systemic bank failures in history have occurred only as a result of excessive lending to what is perceived as not-risky, and never because of excessive lending to what is perceived as risky, which makes these capital requirements counterfactual.

Second: The market and the banks already discriminate against higher perceived risk by means of the risk-premiums imbedded in the interest rates, and so these capital requirements are just an extra layer of risk-aversion that hinders the banks to help the world to take the risks it needs in order to move forward.

Third: Since needing less capital when doing business with the “less risky” makes the profitability of bank business with the “less risky” to shoot up to the skies, this causes the banks to forget or discriminate against the “risky”, such as the small businesses and entrepreneurs on whom we depend so much for the future generation of jobs.

Ps. And the above does not even mention the problems of having empowered the credit rating agencies with a risk-information oligopoly.