December 29, 2014

Sources for disappointments are plentiful indeed: Basel III Revisions to the Standardized Approach for Credit Risks

Sir, Wolfgang Münchau certainly sounds disappointed in “Clever wrapping disguises Europe’s worn-out policies” December 29. And so do I feel.

You know I have always objected to that corporates with good credit ratings, who already have better access to bank credit, shall have even more preferential access to it, because of bank regulations. And that because credit ratings can be wrong; and because the risks are especially big when it is good credit ratings that are wrong (AIG); and mostly because doing so distorts the allocation of bank credit in the real economy.

But now we see a new proposal from the Basel Committee, Revisions to the Standardized Approach for Credit Risks, which indicates that, instead of using credit ratings, they want to apply “risk weights, range from 60% to 300%, on the basis of two risk drivers: revenue and leverage”.

And that, calculated for the basic 8% capital requirement of Basel III, translates into 4.8% to 24% capital requirements; which then translates into a range of allowed leverage of bank capital of 19.8 - 3.1 to 1.

And that means than now it would be those corporate who come up as winners on a “look-up-table”, having more revenues and less leverage, which will generate less capital requirements for banks; and therefore allow banks to leverage their capital more when lending to them; and so therefore allow banks to earn higher risk-adjusted returns when lending to them; and therefore have preferential access to bank credit.

And so now I need to rephrase and ask: why on earth shall corporates have more or less access to bank credit based on their revenues and leverage, than what access to bank credit corporates already have based on their revenues and leverage?

FT, explain to me, why do you believe the Basel Committee insists in distorting the allocation of bank credit to the real economy? Is not the health of the real economy what in the long run is the most important factor in achieving bank stability?

And to top it up their document also states: “These alternative risk drivers have been selected on the basis that they should be simple, intuitive, readily available and capable of explaining risk consistently across jurisdictions”… as if that is which is really important when regulating banks.

PS. We have seen some merger activity based on tax considerations. Are we now to see mergers based on the Basel Committee’s “look-up-table” positioning?