And it still is, say Jens Hagendorff and Francesco Vallascas;
Recent research shows that capital requirements are only loosely related to a market measure of bank portfolio risk. Changes introduced under Basel II meant that banks with the riskiest portfolios were particularly likely to hold insufficient capital. Banks that relied on government support during the crisis appeared to be well-capitalised beforehand, suggesting they engaged in capital arbitrage. Until the regulatory concept of risk better reflects actual risk, the proposed increases in risk-weighted capital requirements under Basel III will have little effect.
Which is something that Peter Wallison pointed out back in 2006
, that Basel II actually weakened American banking's capital structure;
The international bank capital accord proposal known as Basel II is a statistical and probabilistic effort to replicate what the market would do if government regulation had not interfered with market discipline. The proposal has many flaws, and a recent test suggested that it would reduce bank capital requirements substantially below current U.S. levels.
Advantage, Mr. Wallison. He proposed a remedy;
In other areas, formulas and mathematical models have failed to represent the real world accurately; there is little reason to believe that a model of how the market might assess bank risk would be any more successful. A leverage ratio seems essential, at least as a stopgap measure, but a better idea would be to use a special kind of subordinated debt to discover the market’s perception of a bank’s risk position.
Game, set, match to the man from AEI.
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