October 05, 2012

Some are waking up to the colossal failings of Basel bank regulations... when will FT?

Sir, Shahien Nasiripour and Tom Braithwaite report “US regulators urged to outdo Basel III rules” October 5. In it they mention that “some like Jeremiah Norton, a director on the FDIC´s five man board, have voiced doubts about the proposed risk-weighting scheme, which links capital levels to assets risk”. Might he have tried to answer some of my wicked questions on bank regulations? Like: 

1st: When do banks most need capital, when the risky turn out risky, or when the “not-risky” turn out risky? 

2nd: If bankers do as Mark Twain says, namely “lend you the umbrella when the sun shines and wanting it back when it rains”; and all bank crisis ever have result from excessive lending to what was perceived as “not risky”; and the perceptions of risk have already been cleared for in the interest rates and the amounts of the loans, then what is the logic behind allowing banks to hold less capital requirements when they engage in what is perceived as “not risky”, as current bank regulations do? 

3rd: What economists can be so dumb not understanding that if you allow banks to leverage 60 times or more their bank equity for some assets and only 12 times for other, producing thereby vastly different returns on equity, you will drastically distort the economic efficient resource allocation that banks are supposed to perform? 

More sooner than later, everyone is going to wake up to the fact that our current bank regulations are built upon absolutely insane foundations. And then of course, the silence of the Financial Times on this issue is going to be a source of immense embarrassment for the paper and especially for those responsible of, notwithstanding its motto, ordering its silence on it, during so many years.