Wednesday, November 12, 2008

The Joker on the Basel Committee

I can hear now the free market answering a confounded citizen by describing the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008:

"You know, they're schemers. Schemers trying to control their worlds. I'm not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … it was nothing personal, you know that I'm telling the truth. It's the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…" AAA rated collateralized debt obligations and MBS, and some of their 0% risk weighted sovereigns

When I think of a small group of bureaucratic finance nerd technocrats in Basel, thinking themselves capable of exorcizing risks out of banking, for ever, by just cooking up a formula of minimum capital requirements for banks, based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly empowering the credit rating agencies; and which all doomed, sooner or later, to take the world over a precipice of systemic risks; like what happened with the lousily awarded mortgages to the subprime sector, or to Greece when regulations assigned it only a 20% risk weight and doomed it to excessive public debt... I cannot but feel deep concern when I hear about giving even more advanced powers to the schemers.

PS. Years later I found out that even if Basel II would initially have risk weighted Greece 20%, European authorities assigned it a 0% risk weight, which meant European banks could lend to Greece's government without having to hold any capital against that exposure. Unbelievable! What champion schemers!



PS. Here is an updated aide-mémoire on some of the many mistakes with the risk weighted capital requirements for banks.