Saturday, November 10, 2007
Our commercial banks besides being able to repay our deposits are supposed to help generate the economic growth that creates decent jobs and to distribute the opportunities in the society to those most able…otherwise a mattress would suffice.
Bank regulators, through the Basel Accord, 1988, and all the ensuing regulations, created a methodology for calculating the minimum capital requirements of the banks that was exclusively based on the perceived risk of default in their lending operations. And they followed it up by appointing the credit rating agencies as their commissars or official risk perceivers.
The above immediately created a world of opportunities and perhaps even needs for regulatory arbitrage and which has now degenerated in the current state of general and absolute incomprehension about what is going on.
The promised risk elimination has just turned out to be the hiding and the dangerous accumulation of risks. In my country whenever there is a tremor everyone applauds as these help keep the big earthquakes away, but Basel is only managing to keep the tremors away.
To further evidence the current confused state of affairs in developing countries we see how the banks finance more and more the public sector and securitized consumers instead of entrepreneurs; and in develop countries we frequently find more courses that analyze how credit rating agencies might change their opinions about a firm than courses about how to analyze the finances of a firm.
Now if we are ever going to have a chance of getting out of this mother of all the financial imbroglios there cannot be much doubt that we urgently need to start doing some back tracking on our current bank regulations… and allow our banks to be banks again.