September 03, 2015

FT, why should bank regulators have the right to game the capital requirements with their credit risk weights?

Sir you write: “bad accounting practices can contribute to financial instability. Booms flatter their measured profitability, which encourages them to take more assets on to their balance sheets. Thus leverage begets more leverage throughout the banking system, until asset prices can rise no longer and the whole edifice comes crashing down.” “Banks should not be able to game accounting rules”, September 3.

Of course you are absolutely right we need the good accounting practices, but, frankly, don’t you think that no matter how bad the accounting, it could never have caused the kind of bank leverages that the regulators allowed for with their credit-risk weighted capital requirements. For example what about the over 60 to 1 leverages authorized in Basel II for bank exposures to AAA rated securities or to sovereigns rated like Greece was until November 2009? What about that infinite leverage authorized by Basel I in 1988 when regulators decreed the risk weights for OECD sovereign to be ZERO percent? If that is not gaming what is?

Sir, why do you insist in covering up for the fundamental mistake of the Base Committee; or when will anyone in FT dare to explain why these regulations do not dangerously distort the allocation of bank credit to the real economy?

And you also write: “Bankers complain that a tougher regime might force them to realise more losses in the short term. Tough.”… Yes, tough on banks… but, because of banks then having less capital, and the risk weighted capital requirements, it would also be tough on all those borrowers who would have even less access to bank credit… something which would also be tough for many unemployed.