The Basel bank reforms are just the continuation of a failure

Sir, Brooke Masters, while reporting “Countries fail to enact Basel bank reforms” October 19, writes: “Basel II is seen as having contributed to the 2008 banking crash by allowing banks to understate risk and hold too little capital against unexpected losses”. 

“Allowing banks to understate risk”? What is she talking about? If you read the risk-weights assigned by the regulators in the Basel II documentation you would find, for instance, a risk-weight of a mere 20 percent for a sovereign rated like Greece was during its build up of public debt, and which allowed banks to hold only 1.6 percent in capital when lending to Greece, and which therefore allowed the bank to leverage their capital 62 to 1 when lending to Greece. It was, without any doubt, the regulators who understated the risks! Don’t let them get away with that! 

It is also reported there that the “risk-based structure remains an essential tool of the stricter Basel III framework which includes higher capital requirements”. I do not want to be a party pooper but, let me remind you that the stricter and higher the basic capital requirements for banks are, the worse the dangerous distortions produced by the discriminating risk-weights. 

That some countries fail to enact the reforms is not that surprising, since what’s really incredible is that so many of these allow the same producers of the utterly failed Basel II to produce Basel III, while keeping the same script faults.