March 16, 2015

Why worry about bank’s risk models, when the regulators’ own “standardized” risk weights are more than bad enough?

Sir, Laura Noonan writes about the regulators increased concern with how financial modeling by banks can influence their risk weighted assets and thereby the equity they need to hold, “Regulators push banks hard on capital ratio flexibility” March 16.

I care little for those discussions because as I see it, the regulators’ own “standardized” risk weights are more than bad enough.

In 1988, the Basel Accord, Basel I, approved that banks had to hold 8 percent in equity when lending to the private sector but the banks were allowed to lend to OECD’s central governments against no equity at all.

The introduction of such an amazing pro-government bias, I would even call it outright communism, distorted all common sense out of the allocation of bank credit to the real economy. And with Basel II in 2004 they made it worse. And now with Basel III they are digging us even deeper into the hole.

Perhaps, with luck, banks’ own risk models do not assign the same “infallibility” to the sovereigns as regulators do.