September 25, 2012

Basel III is dead because it is just as wrong as Basel II or even worse.

Sir, Brooke Masters writes that “Time is running out for the opponents of Basel III" as “it has been nearly two years since regulators from 27 countries struck a landmark banking reform deal aimed at preventing future financial crisis.”, “Basel naysayers delve into detail in battle to dilute reforms", September 29. That is sheer nonsense. 

If the "deal struck" had any chance to prevent better a future financial crisis then that could be correct, but, as it stands, it can only result in causing the repeat of another financial crisis, precisely because of the same reasons as the current. In Basel III, not only do capital requirements for the banks remain as in Basel II determined by the ex-ante perceived risks, favoring any assets officially perceived as “not risky”, and discriminating against assets deemed “risky”, but now, to top it up, the liquidity requirements will also do so.

I agree completely with those who want simplified rules and banks to rely exclusively on a “leverage ratio” and to that effect I have written some couple of hundred letters to FT over several years, which were all simply ignored in the name of I do not know what. 

But the real reasons for the need of change have not surfaced yet, basically because they are too embarrassing for those responsible, but they will, sooner or later, and you can bet on that. 

What happened? Bank regulators, scared witless by the possibility that bankers would expose themselves too much to assets deemed as “risky”, something that bankers never or very rarely do, created huge incentives for banks to concentrate on assets that were, ex ante, perceived as “not risky” and, in doing so, they fomented an incredible dangerous highly leveraged bank exposure to the “not risky”, something which has us already placed over the brink of disaster. 

You do not create jobs, or a sturdy economy, based on favoring the access to bank credit of the “not-risky” more than it is already favored, and thereby making it harder and more expensive for the "risky", like small businesses and entrepreneurs to access the bank credit they need. If you do so, your economy will become flabbier and flabbier, day by day, until it completely breaks down. Capice?