January 31, 2012

How come the real flaw of Basel bank regulations is not even discussed?

Sir, Karel Lannoo, in “Rulemakers in Europe must flex muscles on Basel III”, January 31, gives a good description of many of the particular problems derived from the current capital requirements for banks, but is yet incapable of pinpointing the true core of what´s wrong with these… namely that regulators add their risk discrimination on top of the risk discrimination that already occurs in the market. But, of course, it is not only Mr. Lannoo, who fails to see that.

Recently John Reed, a former Chairman and CEO of Citicorp, a former Chairman of the New York Stock Exchange and currently the Chairman of the Massachusetts Institute of Technology's Office of Corporation, during an interview in a program of Bill Moyer titled “How Big Banks are rewriting the rules of our economy” said the following:

“It does not take a genius to see what happened … the presumption that you can capture risk by looking at historical volatility…. As soon as you say something appears not to be risky you get an overinvestment in it because the capital requirements are less, and then if something does go wrong the hurt is all the more because you do not have the capital to cover that risk”

But what does obviously not take a genius to see, even I saw it, and about which I have written hundreds of letter to FT, is something still totally ignored in the debate, and in the rewriting of the next Basel version. The useless and so dangerous capital requirements for banks based on perceived risks remain the main pillar of the Basel bank regulations. How come?

Ref: 17:40 to 18:15