December 12, 2015

For the good of the real economy, let’s pray the day of the so much needed bank regulatory enlightenment arrives soon.

Sir, Caroline Binham and Laura Noonan informs that “The Basel Committee on Banking Supervision said yesterday it had dropped a plan to ban banks from relying on rating agencies when they calculate risks in their portfolio” And with that “The banking lobby has beaten back a global reform plan that it claimed would result in a “substantial” increase in capital”, “Lenders win Basel U-turn on assessing risk” December 11.

I am not sure because the Basel Committee recently issued a Consultative Document on the issue and we should wait what could come out of it.

Anyhow, what is completely missed is that banks already look at credit ratings when setting their risk premiums and the amounts of exposure. And so when also having to use the same credit rating to set their capital requirements, means that the credit risk info contained in those ratings is excessively considered. And any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

The day the Basel Committee wakes up to the dangers of distorting the allocation of bank credit to the real economy based on credit risks, something that has not one iota to do with whether borrowers pursue objectives that deserves fair access to bank credit, that day everything will change.

For the good of the real economy and of the perspectives for our young to find good jobs in the future, let us pray that day of regulatory enlightenment arrives soon.

@PerKurowski ©