December 19, 2012

Basel, stop forcing banks to lend to the King and AAAristocrats

Sir, you argue that the current proposed liquidity requirements for banks under Basel III be widened so as to include more qualified assets, like “blue-chip equities which trade in deep and liquid markets”, “Keeping it liquid”, December 19. It sounds logical, but in reality just adds another layer of that type of Basel II nonsense which has gotten our banks into problems. 

For a start, it can only create a false sense of security. As long as a bank has “good” assets a bank is liquid, as simple as that, and all the liquidity of some “deep” markets can dry up in minutes if the quality of those assets have been compromised. 

The fact that an asset is considered liquid already benefits the value of that asset, and so pushing by means of regulations for banks to hold liquid assets will just help to distort its real value, just the same way the Basel II or proposed III capital requirements based on perceived risk, distort the market in favor of “The Infallible” and against “The Risky”. 

You correctly mention that “the liquidity rule as it stands, is an instrument of financial repression by governments”, but let me remind you that is just the way current basic capital requirements repress, though on that we have not heard any protests from you. Hopefully you are at long last waking up to this fact. But, just extending the beneficiaries of the repression, to besides the King also include the Aristocracy, will only increase the discrimination against those not blessed, like against all who have no credit rating or a not so good credit ratings, but whose access to bank credit is just as or even more important for the economy. 

Basel II sounded logical too, that is as long as you ignored the fact that what is perceived as “risky” has never ever caused a bank crisis, only what has been erroneously perceived as absolutely safe does that… and in that sense, having more regulations that push “The Infallible”, is just a certain way of guaranteeing that when the next bank crisis occurs, it will be even much larger than need be. 

To me it is frankly incredible how a sophisticated paper like the Financial Times can have fallen into the mental trap of being able to believe that a little tweaking here and there, by regulators will do it. And this by regulators who recently allowed banks to leverage their equity 62.5 times to 1 to Greece. On the contrary, the world, and most especially Europe, needs to rid itself of the scheming and tweaking bank regulators who arrogantly push on, even in the face of absolute failure. 

Let the banks fulfill as best as they can their function of allocating economic resources. And for that, nothing distorts less, than one single capital requirement for all bank assets.