August 07, 2017

Why is it so hard to understand Basel I’s 1988 statist regulatory distortion of credit in favor of sovereigns?

Sir, I have written 59 letters to John Plender over the years, mostly about the distortions in the allocation of bank credit to the real economy the risk weighted capital requirements cause. These letters, as well as other 2500 to you, denouncing the serious and fundamental flaws with the Basel Committee’s risk weighted capital requirements, have been basically ignored… let us say censored.

For instance in May 2016 I wrote: “I am amazed John Plender leaves out the fact that… courtesy of the Basel Committee, banks currently need to hold especially little capital against that public debt... for which “the issue of solvency would resurface”

And all that because unilaterally the regulators, in 1988, with the Basel Accord suddenly decided that sovereigns posed no credit risk, and no one protested the statism that was thereby de facto introduced.

To workout our banks out of such bind, will take huge amounts of fresh bank capital and very specialized knowledge, or intuition on how to go about it, without disastrously affecting the bank lending to the rest of the economy.”

And in November 2004 FT did publish one letter in which I wrote: “I also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Now, John Plender writes: “The risk-weighted Basel capital adequacy regime, despite post-crisis tweaking, is fundamentally flawed. Sovereign debt enjoys excessively favourable treatment so eurozone banks stuff their balance sheets with the IOUs of seriously over-indebted governments”, “Lessons from the credit crunch” July 7.

Sir, when in a year or two I might publish a book on my impossibilities to communicate with FT, you or someone in FT will have some explanations to do.

In this world of fake news, shutting up someone who might be denouncing something that could be akin to financial sector terrorism is just as bad.