June 19, 2013

The UK Parliamentary Commission on Banking Standards report “Changing banking for good” is, unfortunately, incomplete.

Sir, I refer to your “Holding UK banks to higher standards” were you comment on the just published report by “The Parliamentary Commission on Banking Standards” June 19. Unfortunately, it is seriously incomplete.

Current bank regulations allow for different capital requirements for different bank assets, based on their perceived risk. But, since these perceived risks are already cleared for by interest rates, amounts of exposures and other terms, this introduces a distortion that makes it impossible for the banks to perform with efficiency, their vital function of allocating resources in the real economy.

In fact, the risk-weighting calibration procedure used in Basel II is absolute lunacy and only the result of the regulators not having been sufficiently questioned by weak egos who do not want anyone to know that they don´t understand an iota about it all.

And, I am not the only one arguing this. For instance in a recent paper titled “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked” Anat Admati and Martin Hellwig write: “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

And therefore, the report, which starts so correctly by referencing “The UK banking sector’s ability both to perform its crucial role in support of the real economy” should, as a minimum, have asked regulators to explain, satisfactorily, why their capital requirements based on perceived risks are not flawed, meaningless and highly distortive. But, of course, FT should also have asked the regulators those same questions, a long time ago.