December 30, 2013

Since risk-weighted capital requirements are still in place, nothing is really new on the dangerous bank regulatory front

Sir, Wolfgang Münchau quite remarkably writes “Don’t fret about asset prices – this time is different” December 29. For that he refers to “all the changes in global bank regulations”. What changes? The capital requirements for banks are still risk-weighted and so these still give banks huge incentives to dress up as absolutely safe what might not be.

And given that the banks have less capital after the crisis, and must therefore go to where capital is required the least, banks are most probably building up huge dangerous exposures to what is officially ex ante considered as “absolute safe”, like in Europe to the “infallible sovereigns”.

The Basel Committee has ordered the banks to report in January 2015 the leverage ratio, that which is based on not risk-weighted assets… and that could become a really scary report.

And frankly are we not to fret what could happen to asset prizes if a retreat of the quantitative easing is declared?