The international bank capital regulations known as Basel III may be weakening the financial system by promoting herd like behavior by the banks.
The new capital requirements require dramatically higher levels of capital, which is intended to make individual banks less likely to fail. But because the regulations treat certain assets as less risky than others, they encourage banks to load up on the same types of assets.
This effect of the capital adequacy rules was confirmed by Jamie Dimon, the chief executive and chairman of JPMorgan Chase , during the fourth-quarter earnings call Friday morning.
Dimon said the bank was concentrating on increasing its exposure to assets that have advantageous risk weighting , while limiting exposure to assets that have disadvantageous risk weighting. What’s more, he said that banks all around the world are doing the same thing.
This isn’t a problem if the regulators have correctly assessed the risk of various types of loans. But regulators have a terrible record of making these assessments.
In the decade or so before the financial crisis struck, regulators gave privileged status to mortgage backed-securities . As a result, the banking systems in the United States and Europe were badly over-exposed to the U.S. housing market.Page 1 of 3 | Next Page