February 14, 2012

There´s no reason for any risk-weighting of bank assets, after risk-adjustment has already taken place in the price and terms of these

Sir, Brooke Masters, your Chief Regulation Correspondent writes: “capping total leverage has a disproportionate impact on banks that provide basic services to the wider economy such as financing overseas trade. Because these are low-risk activities, they require very little capital under the risk-weighted-assets system, but under the leverage ratio they are treated exactly the same as high-risk derivatives and speculative loans.”, “Leverage ratio has the power to help banking tree thrive” February 14. Let me make the following comments. 

First, and as this crisis has so clearly proven, let us be crystal clear on the fact that “they require very little capital” does not by any means turn these into “low-risk activities”. 

Second, in terms of capital requirements, what is wrong with “low-risk activities” being treated “exactly the same as high-risk derivatives and speculative loans”? Have not the banks already cleared for differences in perceived risk by means of different interest rates, amounts exposed and other terms? It is precisely the double dipping into perceived risks, that have saddled our banks with excessive exposures to what is has officially been perceived as not-risky and created equally dangerous underexposures, like for instance in lending to small businesses and entrepreneurs, only because the latter have officially been deemed more risky by some wimpy bureaucrats. 

Basel Committee, please stop infantilizing our banks!