May 14, 2017

Eliminating bank failures by means of risk-weighted capital requirements, just sounded too good to be questioned.

Tim Harford discussing statistics writes: “We often pay attention to the wrong thing, scrutinising the numbers with a forensic eye without asking about what those numbers really describe. Sometimes there is no intent to deceive; there doesn’t need to be… We deceive ourselves… If we don’t understand the definition there is little point in looking at the numbers. We have fooled ourselves before we have begun.” “Where the truth lies with statistics” May 13.

Indeed and one of the reasons we fool ourselves is that what those statistics are supposed to offer us, sound so attractive that we ignore to look to closely at them.

Basel I and II offered: “In order to make your banks safe we are going to require these to hold capital based on the risks they take”. Who would say no to such an offer? It sounded so attractive that all were willing to overlook that the formulas and calculations provided had nothing to do with the failure of banks, but all to do with the failure of the clients of the banks, which of course is pas la meme chose.

The Basel II offer also included: “And if you order now, we also throw in, for free, those few experts that can expertly decide for all of us what’s risky or not, namely the credit rating agencies”

Basel III now offers: “And if you order now, we also throw in, for free, some liquidity weighted assets requirements holdings that will guarantee banks have the money available to repay when asked”

In short, because regulators offered the moon, the world was gladly disposed to accept anything, even if it would be something like going back to a geocentrically view of the world.

As long as bank regulators, even in the face of failures, are capable with such straight faces insist in that they can make our banks safe, it seems we can’t refrain from believing them. Sir, we are indeed a sorry bunch.

PS. Here are some questions that seemingly are not to be made less we must abandon our hopes that regulators know what they are doing.