basel iii, page-19

ThatsMagic

Congratulation on your interest in the history of the Basel Committee. Having spent part of my career reading and interpreting Basel and APRA prudential statements, I tip my hat to anyone who would do it out of interest!


Clarification: Risk on matched gold positions are zero risk weighted!

Who follows Basel rules?

In Australian, all ADIs licenced under the Banking Act. In reality, you can't function as a bank anywhere in the world without being Basel compliant. (I was once offered Basel work in Pakistan!)

Evaluating Basel after 2008 is an interesting exercise.

I think that the two biggest mistakes by the Basel Committtee were:

1. The broad application of zero risk weighting of government bonds. This allowed German banks to buy up heavily on Greek, Spanish and Italian governement paper ... (you can fill in the dots).

2. The 50% risk weight applied to residential mortgage lending. This allowed banks everywhere to fill their balance sheets with home lones fuelling the housing bubble and ultimately exposing themselve to destruction when home prices eventually collapsed.

Not all Basel regulations were bad:

1. The Market Risk accords have worked well, particulary in controlling net leverage on derivatives in bank trading books.

2. The scaling of capital for corporate credit quality introducted under Basel II helped reduce the incentive for regulatory arbitrage, and almost certainly helped reduce levels of distress in corportate loan books in 2008-9.

3. The introdcution of an Operational Risk provision in Base II have been tested under fire and found to work well.

I think that the Japanese experience is a lesson in what could go wrong if gold were to be uses as a reserve asset. If something bad happens in the gold market, the banks are screwed!

Cheers