Hollywood would never have allowed Basel III after the Basel II magna flop

Sir, Kishore Mahbubani writes “Now we know that bankers produced no economic value. Instead they produced financial weapons of mass destruction that almost destroyed the world… European bankers… ignoring common sense… lent money to Athens on the assumption that Greece was as solvent as, say Germany”, “To become rich is great but to pay taxes is glorious”, October 21. 

That shows precisely what happens when the whole truth is not allowed to surface. It was the bank regulators who, when they allowed the banks to leverage differently their equity, by means of capital requirements based on ex-ante perceived risk, Basel II, which created what I have called the AAA-bomb… a truly massive weapon of mass destruction. 

It was those regulations which allowed banks to stock up on Greek sovereign debt against only 1.6 percent capital, a leverage of 62.5 times, while at the same time forcing banks to hold 8 percent when lending to small businesses or entrepreneurs, a leverage of 12.5 times, which gave the incentives to created the huge exposures to where all bank crisis occur, namely where the risk is ex-ante perceived as almost non-existent. It was those odiously distorting regulations that short-circuited the markets… and still keeps these from functioning. 

And because this is silenced, we allow the same producers of the failed Basel II, to produce Basel III, with only minor changes in the script. Friends, Hollywood would never allow such a thing. No, to be able to hold bank regulators accountable, that is what would be really glorious.