In 1988, the world’s bank regulations were changed. By means of Basel I, and for the purpose of determining the capital requirements for banks, the risk weight for lending to OECD sovereigns was set at zero percent, the risk weight for lending secured with houses 50%, while the risk weight for lending to the private sector was set at 100 percent.
Since the basic capital requirement was set at 8 percent that meant that banks could leverage 62.5 times to 1 (100/1.6) when lending to quasi-sovereigns, 25 to 1 (100/4) when financing the purchase of houses and 12.5 times to 1 (100/8) when lending to the private sector.
That pushed, and even doomed, banks to lend too much to the governments, sight unseen, and too much to the housing sector, and basically to abandon the traditional role of commercial banks, namely to intermediate deposits from savers to productive investors, and to provide credit for carefully selected and monitored initiatives from the private business sector, like to SMEs and entrepreneurs.
Quite a few Swiss, German, Dutch, Belgium, Scottish and French banks reached leverage of over 40 times, under the closed eyes of finance ministers and regulators who are now abusively scolding official borrowers in august fora such as the European Parliament.
BASEL should go back to being just a city in Switzerland. And let investors be required to do their own credit analysis, instead of relying on "lending by numbers" under the foolish guidance of the BASEL Committee and rating agencies.
In the Eurozone, now creditors and debtors are calling each other bad names, like children in the school yard. Or is it like elected officials in parliament?
Credit workout renegotiations do often bring out the worse in both debtors and creditors, when they come to the realization that they fooled each other, and there's no way to "get blood from a stone".
And let the CREDITOR who has never made a bad loan throw the first stone.
Mariana Abrantes de Sousa
See more about Subprime bank regulations and supervision in http://subprimeregulations.blogspot.pt/
quinta-feira, julho 09, 2015
Creditors throwing stones from the commanding heights of BASEL
Debt Workout 201