The risk weighted capital requirements give banks great incentives to hide risk from their regulators.

Sir, Eric Platt and Alistair Gray write “US regulators have joined investors in voicing concern over risky bank lending… particularly when projections make a company appear more creditworthy… ‘The agencies continue to see cases of aggressive projections used to justify pass ratings on transactions that examiners consider non-pass’… although they said the number of cases was “at much lower levels than in prior periods” “Wall Street watchdogs sound alarm over risky bank lending” July 4.

In good old banking days, around 600 years, before Basel Committee’s risk weighted capital requirements, bankers argued their clients riskiness in order to collect higher risk premiums. Now banks argue more their clients safety, in order to convince regulators that they can hold less capital. That distortion makes the efficient allocation of bank credit to the real economy.

“The Fed and its fellow regulators… give deals a pass or non-pass rating which is then used to build a picture of banks’ lending activities.”

Considering that bank crisis only result from unexpected events or excessive exposures to something perceived, concocted or decreed as safe, and never ever from something perceived as risky, does this pass or non-pass rating activity make any sense? Absolutely not! It is as silly as can be… except for those who earn their livings from working on bank regulations. 

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

“the agencies said that risks had declined slightly but remained “elevated”. Lending considered to be non-pass had fallen from 10.3 per cent to 9.7 per cent of the overall shared national credit portfolio” As I see it, we could just as well argue that where the real dangers lie, increased from 89.7% to 90.3%.

Sir, again for the umpteenth time, without the elimination of the insane risk weighted capital requirements, there is no way our banks will recover their sanity. I am amazed on how you have decided to keep silence on this.

@PerKurowski