January 07, 2013

Basel is now only increasing the regulatory discrimination of “The Excluded Risky”

Sir, imagine a father with five sons who has declared he just loves the oldest one. Clearly the other four are not happy about that. But now the father declares that he also loves the second son. Will the three remaining unloved sons feel better or worse?

That is the question you have to answer when trying to interpret the meaning of the announced relaxation of the Basel liquidity rules for banks.

Lex in “Basel tov”, January 7, believes that this relaxation should make it “less likely do deter financing of activity in the real economy”. 

Not so! The distortions in the markets in favor of “The Infallible” and against the excluded “The Risky”, will increase. And that could only worsen the conditions in the real economy, as those who represent the least risks for banks, are not necessarily the most important actors on the margin of that economy.

Let me phrase it like this: In the real economy the existence of favorable conditions is much more important for “The Risky” than for “The Infallible”