May 23, 2015

And the pedigree of the AAArisktocracy, thanks to Basel Committee, is worth much more than the markets ever intended.

Sir, I refer to Gillian Tett’s “Why ‘pedigree’ is the buzzword for elite employers” May 23, in order to comment on the exaggerated importance given to other pedigrees… like credit ratings.

A good credit rating pedigree naturally results in easier, cheaper and more abundant access to bank credit… and that is how it should be.

And some even thought that some market participants, like the bankers, went overboard considering that credit risk pedigree. For instance, Mark Twain has been quoted holding that a banker is the one who lends you the umbrella when the sun shines and wants it back as soon as it looks its going to drizzle a bit.

But then, in 1988 with Basel I, and later in 2004 with Basel II, some too frightened bank regulation bureaucrats, told bankers that was not enough, and that they had to consider that same credit risk pedigree in their capital [equity] too.

And as you can understand any pedigree, no matter how good and correct it is, if it becomes considered too much, will generate the wrong response to that pedigree.

And so Boom! with that manipulation, a tremendous distortion was introduced into the markets of bank-credit… and which has had the real economy suffering from too much and too cheap credit to the AAArisktocracy, which includes the “infallible sovereigns”, and too little and too expensive credit to “The Risky”, like SMEs and entrepreneurs.

And I must say I find it fascinating how an anthropologist like Gillian Tett, writing in the Financial Times, does not find the introduction of such regulatory risk-aversion, to be interesting enough to comment on it. There’s got to be something more to it.

PS. I admit without problem to an obsession against these bank regulations that are destroying the world where my grandchildren will want to find good jobs in. What I do not understand is others´ obsession in ignoring this problem.