Here are 26 reasons for why I believe the bank regulators in the Basel Committee are complete idiots… or something worse.
In 1999 in an Op-Ed I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the banks”. But little did I suspect the regulators in the Basel Committee would be so incredibly inept!
So here are the reasons... for now 26... but still counting!
Undefined purpose: The regulators never defined the purpose of our banks before regulating these. That’s why they only cared about banks’ safety, as mattresses into which stuck away cash, and cared not one iota about the vital social purpose of banks of allocating credit efficiently to the real economy. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926
No understanding of TBTF banks growth hormones. Nothing like the micro capital requirements, against assets of large international banks with a lot of specialized activities, has served as the growth hormones for the Too Big Too Fail banks.
Macro-imprudence: Prudential regulation helps failed banks to fail expediently. Macro-imprudent regulation impedes failed banks from failing… which builds up huge mountains of combustible materials waiting for a Big Bang.
And they only dig us deeper in the hole: Basel I has only 30 pages, Basel II grew into 347 pages and Basel III is growing into a more than a thousand pages monster. It seems they want to solve the shortage of jobs by creating bank regulation consultancy jobs. Every day that goes our banks finance less and less of the riskier future only to refinance more and mote the, for the time being, safer past.
PS. Bank capital requirements would be better if based on ex-post risks of models based on ex-ante risk perceptions.
PS. And what to say about those who keep the failed Basel Committee regulators regulating? Perhaps another John Kenneth Galbraith quote applies: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”