November 01, 2013

Regulators gaming regulations massively, is so much worse than banks gaming regulations somewhat

Sir, Sam Fleming reports that “Global regulators are cracking down on banks that try to game capital rules for their trading businesses by proposing new standards for the way lenders assess risk… The new system will require banks to calculate risks according to a standardised approach in addition to their own in-house methodology” "Banks set for tougher trading rules", November 1.

There are rules which can be gamed, and then there are those which cannot. For instance, if Basel II had required banks to hold 8 percent of well defined capital against any asset, that would not have been possible to game. But, instead regulators went for the risk-weighing system which are so easy to game… even for the regulators.

In fact, it was the regulators who really gamed the whole system, with such lunacies as assigning risk weights of 20 percent, or even zero, which allowed banks to hold some assets, like AAA rated securities and loans to infallible sovereigns, against only 1.6, or even zero, capital, while assigning 100 percent risk weights, to “riskier” loans, which forced banks to hold 8 percent in capital, 500 percent more, on loans to medium and small businesses, entrepreneurs and start-ups.

And so if you ask me, much worse than banks gaming regulations, is when the regulators do so.

And let me ask. Do you think the banks, on their own, without this regulatory assistance would have been able to game themselves into 40 or even 50 to 1 leverages? No way Jose!

PS. Regulators are suffering from the Annie Oakley syndrome, and we because if that.