Sunday, December 28, 2014

Bank regulators in the Basel Committee are getting loonier by the minute.

I have always objected to that corporates with good credit ratings, who already have better access to bank credit, shall have even more preferential access to it because of bank regulations. That because credit ratings can be wrong; and because the risks are especially big when it is good credit ratings that are wrong (AIG); and mostly because doing so distorts the allocation of bank credit in the real economy.

And now the Basel Committee for Banking Supervision, in their Consultative Document: “Revision to the Standardized Approach for credit risk” writes:

“The committee seeks to substantially improve the standardized approach in a number of ways. These include reducing reliance on external credit ratings; increasing risk sensitivity; reducing national discretions; strengthening the link between the standardized approach and the internal ratings-based approach; and enhancing compatibility of capital requirements across banks.”

“Corporate exposures would no longer be risk-weighted by reference to the external credit rating of the corporate but they would instead be based on a look-up table where risk weights range from 60% to 300% on the basis of two risk drivers: revenue and leverage.”

The risk weights above, calculated for the basic 8% capital requirement of Basel III, translates into 4.8% to 24% capital requirements; which then translates into a range of allowed leverages of bank capital of 19.8-3.1 to 1.

And that means now it is those corporate who come up as winners on a “look-up-table”, having more revenues and less leverage, which will generate less capital requirements for banks; and therefore allow banks to leverage their capital more when lending to them; and so therefore allow banks to earn higher risk-adjusted returns when lending to them; and therefore have preferential access to bank credit.

And so now I ask, regulators… why on earth shall corporates have more or less access to bank credit based on their revenues and leverage, than what access to bank credit corporates already have based on their revenues and leverage?

Basel Committee, why do you besserwisser insist in distorting the allocation of bank credit to the real economy this way? Is not the health of the real economy what in the long run is the most important factor in achieving bank stability?

“Look-up-table”? Man, you sure are getting loonier by the minute! Do you really think your table can do a better job analyzing credits than credit rating agencies? Do you think good banking is something achievable by children connecting dots?

PS. And it is stated: “These alternative risk drivers have been selected on the basis that they should be simple, intuitive, readily available and capable of explaining risk consistently across jurisdictions.”

What on earth do the regulators mean with that? That what is truly important when regulating banks is that the criteria of how to regulate banks should be comfortable and easy to manage for bank regulators?

PS. We have seen some merger activity based on tax considerations. Are we now to see mergers based on the Basel Committee’s “look-up-table” positioning?