January 06, 2013

Basel keeps tightening the noose around the neck of “The Risky and Excluded”, and thereby killing the real economy.

Sir, Brooke Masters, FT’s chief regulation correspondent, reports on January 6 that “Banks win more flexible rules” with respect to the assets that might count towards the liquid coverage ratio LCR, and that “the results are largely good news for bank profits because institutions will be allowed to count more, higher-yielding assets in their liquidity buffers”. 

What no one seems to care one iota about is that the more you widen the definitions of “The Infallible and Included”, by allowing  banks to  lend to them against ultra low capital requirements, and including them in these liquidity requirements, the more you will tighten the rope around the necks of “The Risky and Excluded”, primarily all those small, medium sized business and entrepreneurs with no ratings or not so good ratings, but whose access to bank credit is still vital for the strength and sturdiness of our real economies. 

Indeed these bank regulators are as dangerous as they can be. For instance, Sir Mervyn King, called the agreement “a very significant achievement [and] a clear commitment to insure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort.”; as if the lack of liquid assets, and not the lack of good assets, was the fundamental problem. 

What was the primary cause of the current crisis? That all the investments in triple-A rated securities backed with lousily awarded mortgages to the subprime sector in the US, or the huge loans to sovereigns like Greece were not sufficiently liquid, or that they were outright bad? No doubt the later! 

And why did these assets become so bad? Simply because the bank regulators whetted too much the appetite of the banks for this type of assets.

When are we going to parade these Basel regulators down Fifth Avenue wearing their well earned cones of shame and as we must do?

Never forget that in the real economy, the existence of favorable conditions, like access to bank credit,  is much more important for “The Risky” than for “The Infallible”