The Basel Committee jammed banks’ gearboxes… not only in India
Amy Kazmin reporting on India quotes Rajeev Malik, founder of Singapore-based Macroshanti, in that “A well-oiled, well-functioning financial system is the gearbox of the economy”, “Financial system is ‘like a truck with a messed-up gearbox’” September 23.
The financial system’s gearbox got truly messed up when regulators decided that banks could leverage differently their capital based on perceived risk… more risk more capital, less risk less capital… as if what is perceived as risky is more dangerous to bank systems than what is perceived as safe.
And Kazmin writes: “The financial companies that had provided much of India’s credit growth in recent years are now struggling with access to funding themselves after the shocking collapse of AAA-rated infrastructure lender, IL&FS, last year.”
Could that have something to do with the fact that since 2004 Basel II regulations banks needed to hold only 1.6% in capital when human fallible credit rating agencies assigned an AAA to AA rating to a corporation?
And Kazmin writes: “With its own voracious appetite for funds to finance its fiscal deficit, New Delhi is now mopping up much of the country’s household savings through a clutch of small schemes such as post office savings that offer higher rates than commercial banks.”
Could that have something to do with the fact that since 1988 Basel I regulations, banks need to no capital at all against loans to the government of India… but 8% when lending to Indian entrepreneurs.
Sir, risk taking is the oxygen of any development so, with such a dysfunctional gearbox, how is India going to make it? None of the richer countries would ever have developed the same with Basel Committee’s bank regulations… and all their bank crises, those that always result from something safe turning risky, would have all been so much worse, as these failed exposures would have been held against especially little capital.
Here is a document titled “Are the bank regulations coming from Basel good for development?” It was presented in October 2007 at the High-level Dialogue on Financing for Developing at the United Nations. It was also reproduced in 2008 in The Icfai University Journal of Banking Law.
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