April 19, 2016

The “risk” appetite that caused the 2007-08 crisis was for AAA-rated securities, residential mortgages and sovereigns.

Sir, Laura Noonan quotes Bank of England’s Andrew Haldane with: “I think the risk culture, not just from the regulator but from financial firms, is much different [than before the crisis], the risk appetite is much diminished.” “WEF group issues urgent call for fintech forum” April 19.

What risk appetite before the crisis? Was there any excessive exposure to something that was not perceived, decreed or concocted as safe? No, of course not!

In Basel II regulators assigned a 35 percent risk weight to residential mortgages; AAA-rated securities backed with mortgages to the subprime sector carried a 20 percent risk weight; and the risk weight for sovereigns rated like Greece, hovered between 0 and 20 percent.

Now, soon a decade later, regulators seemingly still think that ex post realities and ex ante perceptions are the equivalent. They keep on thinking that the expected is a good basis for estimating directly the unexpected.

The worse risk to a banking system derives from excessive exposures; and those excessive exposures are always built up with something ex ante perceived as safe… but which ex post could perhaps be risky. And that is currently made much worse, by the fact that those “safe exposures” require the banks to hold the least capital.

So NO, in terms of dangerous excessive exposures to “the safe” I would, contrary to Haldane, hold that the real appetite for real bank risk has not stopped growing for a second, it has even accelerated. 

Sir, again, for the umpteenth time, in Basel II the regulators set a 150 percent risk weight for assets rated below BB-. How on earth can anyone justify that assets that when booked carry a below BB- rating, are riskier for the banks than all other 100 percent and below risk weighted assets?

And how is it that, even after the evidence of the 2007-08 crisis, they still believe so? It is mind-boggling to me… and it should be to you too Sir.

Something is truly rotten in that mutual admiration club we know as the Basel Committee for Banking Supervision.

@PerKurowski ©