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A new monetary order requires the old regulatory order.

Thursday, March 25, 2021 17:03

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I refer to Chris Watling’s “Now is the time to devise a new monetary order” March 19.

Sir, it is hard for me to understand how Watling, correctly pointing out so many distortions in the allocation credit and liquidity, can do so without specifically referencing the role of the risk weighted bank capital requirements.

For “the world economy [to] move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation is based on perceived fundamentals”, getting rid of Basel Committee’s regulations is a must.

For such thing to happen, discussing and understanding how distorted these are, is where it must start.

E.g., Paul Volcker, in his 2018 “Keeping at it” penned together with Christine Harper valiantly confessed: “The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”.

Sir, why is that opinion of Volcker rarely or perhaps even never quoted? Could it be because in a mutual admiration club it’s not comme-il-faut for a member to remark “We’re not wearing any clothes?

Volcker mentions “The US practice had been to assess capital adequacy by using a simple ‘leverage ratio’- capital available to absorb losses on the bank’s total assets”

Going back there, would return banks to loan officers; and send all those dangerously capital minimizing/leverage maximizing creative financial engineers packing.

@PerKurowski

Source: http://teawithft.blogspot.com/2021/03/a-new-monetary-order-requires-old.html

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