November 03, 2015

The bank regulatory absurdity, and the journalistic irresponsibility of FT ignoring it are both of epic proportions.

Sir, Angus Deaton writes: “the role of politics needs to be understood, and built in to any careful interpretation of the data. We must always work from multiple sources, and look deep into the cogs and wheels.”, “Statistical objectivity is a cloak spun from political yarn” November 3.

Indeed and among those most responsible for “looking deep into the cogs and wheels” must be the press, the journalists. But too often they don’t.

For instance, during the last decade I have sent the Financial Times over 2.000 letters that on my Tea with FT blog have the label of “subprime banking regulations”.

In these letters I have argued that the credit-risk weighted capital requirements for banks, introduce a regulatory credit-risk aversion that dangerously distorts the allocation of bank credit to the real economy. And because the risk weights are based on the intrinsic riskiness of the assets, and not on the risk for the banks of those assets, it does not help the banking system to become any safer, in fact, just the opposite.

For instance Basel II had a basic 8 percent capital requirement. That, when risk weighted 20% for what was rated AAA to AA, resulted in a 1.6 percent capital requirement, an authorized 62.5 to 1 leverage. And, when risk weighted 150 % for what had a credit rating of below BB-, it resulted in a 12 percent capital requirement, an authorized leverage of 8.3 to 1.

Sir, explain to me, what kind of analysis can justify that loans to those rated below BB-, always awarded in much smaller amounts and with much higher risk premiums, are 7.5 times riskier than huge exposures, with very low risk premiums, to what is AAA to AA rated? 

When have ever those rated below BB- represented more dangers than those rated AAA and who could have a too good credit rating?

Minds capable of such regulatory nonsense should clearly not be allowed to regulate our banks… or promoted to other important posts. Bankers might quite often be dumb, but in general they are not suicidal.

Sir, the Basel Committee’s regulatory absurdity is of epical proportions. And FT’s journalistic irresponsibility ignoring that absurdity is equally of epical proportions.

On April 24, I thought you had finally understood what all was about, when you published your “Banking cannot prosper within a culture of fear”, but seemingly I was wrong.

PS: The capital requirement for banks when holding AAA to AA rated sovereign debt was set at zero percent in Basel I and II. If a bank held only these safe assets, with current negative interests, this would break the bank in just a few days.

@PerKurowski ©