Tuesday, November 3, 2015

Stupid bank regulators looked only at data about bank clients defaulting and not on data about why banks default

In Basel II, in which the basic capital requirement for banks was set at 8 percent, it was decided that those credit rated AAA to AA were going to be risk-weighted 20 percent, and those rated below BB- were going to be risk-weighted 150 percent.

That translated into:

AAA to AA rated generating a capital requirement of 1.6 percent and allowing a leverage of bank equity of 62.5 to 1.

Those rated below BB- generating a capital requirement of 12 percent and allowing a leverage of bank equity of 8.3 to 1.

That of course discriminates immensely, odiously, against the fair access to bank credit of those rated below BB-

That of course distorts completely the allocation of bank credit to the real economy.

And I just have to ask… when have ever those rated below BB- represented more dangers than those rated AAA and who could have a too good a rating?