October 02, 2012

Abandon Basel III, as fast as you can, and concentrate on how to get from here to there.

Sir, your US Banking Editor, Tom Braithwaite, holds that “Regulators need to focus on enforcing Basel III rules”, October 2. As an argument he presents “We´re now two years into Basel III, which imposes tougher capital requirements on banks around the world” and that abandon those efforts would in his opinion be sort of a shame. 

What Mr, Braithwaite fails to understand is that the tougher the bank capital requirements are, the relatively scarcer bank capital becomes, and the more do the risk-weights which determine the final capital requirements, distort and discriminate in favor of the “not risky” and against what is officially perceived as risky, like lending to small businesses and entrepreneurs. 

And so, quite the opposite, I would argue in favor of abandoning completely Basel´s risk based approach for setting capital requirements, as soon as possible, and setting one simple future maximum leverage ratio for any assets, and thereafter start navigating the very difficult trajectory from here to there. 

For starters, I would begin by halving the current capital requirements for what is perceived as “risky”, and slowly starting to move up the requirements for what is seen as “not­-risky”, until both segments reach the same level, and then move up all to the target over a couple of years. 

Alternatively, or in parallel, I would offer tremendous tax incentives on all new capital subscribed by banks which commit to reaching the final leverage target for all, in one year.