September 14, 2015

Basel Committee’s desktop Don Quixotes with Basel III, keep fighting banking windmills, with ever-greater complexity

Sir, John Authers quotes Robert Shiller “You would think that when interest rates are higher people would just sell stocks, but the financial world just isn’t that simple”, “Fears mount over US stocks bubble” September 14.

Had bank regulators understood that “The financial world just isn’t that simple” it would have saved us many tears. As is, with much hubris they proceeded to design their risk weighted capital requirements, and for which they congratulated each other effusively and then went to bed, thinking they got it solved. Most of them even thought that “risk” included more than credit risks; very few if any knew the risk weights were portfolio invariant, the higher up in the regulatory echelons you were the less you apparently needed to concern yourself with such nitty-gritty; and nobody cared one iota about what that regulatory risk aversion could do to the allocation of credit to the real economy.

It should seem logical that the more complex something is, the simpler are the relations you should maintain with it. But no, the desktop Don Quixotes of the Basel Committee, with Basel III, keep on fighting banking windmills, with ever-greater complexity.