Rep. Hensarling on Risk-Based Capital

He said,

Risk-weighting is simply not as effective. First, it is far too complex, requiring millions of calculations to measure capital adequacy. Second, it confers a competitive advantage on those large financial institutions that have the resources to navigate its mind-numbing complexity. Third, regulators have managed to get the risk weights tragically wrong, for example, treating toxic mortgage-backed securities and Greek sovereign debt as essentially risk-free. One myopic globally imposed view of risk is itself risky. Finally, risk-weighting places regulators in the position of micro-managing financial institutions, which politicizes credit allocation. Witness the World Bank recently advertising its zero risk rating under the Basel Accords for their “green bonds.”

Clearly, he understands what I call The Regulator’s Calculation Problem. Pointer from John Cochrane.

Read the rest of John’s post and weep. Weep because this could have been a year when a strong center-right Republican Presidential candidate, running on an agenda that includes these sorts of proposals, could have been so easy to support.

3 thoughts on “Rep. Hensarling on Risk-Based Capital

  1. While I agree with your views on risk-based capital, the idea that those views would fare well under a center-right President is, with all due respect, retarded.

    It was under Bush that capital requirements went full risk-based (implemented in the U.S. in 2005).

    Precisely zero mainstream Republicans who are likely to be appointed to head financial agencies agree with you on risk-based capital.

    Any center candidate (whether of left or right) will be strong supporters of risk-based capital, as they have been for the past 25 years. If you haven’t recognized that yet, it’s basically pointless that you have good views on these issues.

  2. I love the fairy tale that, absent these regulations, private banks would have taken less risk. Where that thought process comes from is a place that no one should visit.

    By the way, nice to tie in the same “reason” for the S&L Crisis.

  3. The risk weighted capital requirements of banks are determined by a complex mix of standardized weights and banks’ internal models.We have this complex mix mostly because influential banks and their political allies wanted it; they thought that it would allow banks to greater risks and increase their leverage. They were right.

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