Measuring bank regulation and supervision
After the release of the third round of the Bank Regulation and Supervision Database in July, on October 26 a workshop will take place where academics, bank supervisors, and market participants can discuss the strengths and shortcomings of this data, and the resulting policy implications.
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But unfortunately, once again, probably because it is not in their frame of minds to see, the dangerous implications of the regulatory arbitrated run towards safety will be ignored.
Credits which are perceived as having a lower risk than others have a natural market advantage that translates into lower interest rates. But the bank regulations that have been developed by the Basel Committee on Banking Supervision, through their minimum capital requirements, have added through their regulatory arbitration an additional and artificial benefit that favors "low-risk" credits, as they are perceived by the credit rating agencies.
The above is producing a run towards either a more objectively "safe portfolio" or providing further stimulus for "risk-hiding". Since the largest needs for development do not ordinary make a living in the land of the low risks it is clear that development finance is the largest victim from this run and we could even say that the development power of the commercial banks in developing countries has as a result been severely diminished.
But also developed countries will pay for this, not only as already evidenced by the subprime-mortgage mess, but also since no society can survive as viable maximizing risk avoidance. As I see it our future generations will pay dearly for this baby-boomers invented run to safety.
Posted by: Per Kurowski | Oct 2, 2007 12:11:36 PM
Regarding Per Kurowski's comment above, I would argue that the risk avoidance affect on developed countries' banking system is not as significant. The same could be said about developing countries ? (I don't have much experience here). Things bogged down to how Basel II are carried out in practice, more importantly, who will supervise/ examine it. One thing that at least make the large banks in developed world comfortable about is the seemingly vague criteria as to who will be the law enforcer and which punishment entails. Most of the time now it is their local financial authorities who have been acted more as carer in the past without much power to interfere and investigate their books.This way a sophisticated financial market group can effectively keep their prevalent strategy while modifying reports and criteria to suit the new rules.
I am not saying this is a good or bad thing as far as legal improvisor goes. Of course Basel brings about many benefits to the market, at least boosted the recognition of risk management and internal risk control. However to say that it will undermine the risky sectors or loans is a bit too early perhaps. The world market responds to profit potential and we can see lately despite of tightening rules there are a positive trend in emerging market investments from private sector.
Posted by: Nathalie Huynh | Oct 8, 2007 6:45:32 AM