Like a lot of you, I devote a lot of elbow-grease to figuring out the strategic impact of the ever-more complex Basel rules. Recently, I’ve been bench-pressing in anticipation of new market-risk standards, trying for the life of me to remember how the “expected shortfall” will work (if at all). But, the successful hedge-fund launch of a product touting its straight-ahead regulatory arbitrage that flies right in the face of Basel suggests that I’m just taking all this far too seriously. Hey, everyone, lighten up – no matter what the rulebook says, the fleet of foot will outrun earnest regulators refining every last formula in each of their awesome tomes.
Who’s the speedy little arbitrageur? It’s a U.K. hedge fund, Chenavari, that last Wednesday raised $209 million to float a new venture offering high-cost credit-risk transfer to banks hard pressed for regulatory capital. You may remember this – in 2011, it came to light that Citibank, among others, was paying big bucks for complex credit derivatives that seemingly made risk disappear for weighting purposes. At the time, the Basel Committee got a bit grumpy and issued a warning statement, with the FRB harrumphing in its wake shortly thereafter. As widely reported in the financial press, deals continued apace, so Basel pulled itself together two years later and, in March of this year, issued a more prescriptive proposal actively to ban high-cost transfers, or at least sort of to do so when national regulators care to follow suit. That consultation is still pending, perhaps deferred because Basel’s been so busy of late peer reviewing all of its members to discover just how wildly risk weightings vary. A fix it now demands is an over-arching leverage rule, but Basel doesn’t say at the same time why it can’t simply fix the worst abuses of its own risk-weight rules.
So, back to our friend the hedge fund. It contemplates returns of as high as the sixteen percent it has recouped to date on all the structures it has sold so far to happy bankers. In a touching note, the release argues that the new fund will add “transparency” to risk structures, thereby satisfying regulators. We can’t imagine that the fund will in fact disclose its customers or the terms of each structure, but if it does, maybe transparency will miraculously illuminate the market. If all the transparency does is tell us how rich Chenavari is getting, as we suspect, nice for them, but not so much for Basel.
Why does it take Basel so long to do so little about such obvious transgressions of its most basic rules? We know it has no actual enforcement powers over member regimes, but it could surely do more to sanction bad practice to put these same regulators on notice that, at the least, there might be a bit of chiding over the caviar next time they sit down to sup in Switzerland. Next week, Basel will receive comments on its consultative paper seeking to add more “simplicity” and “comparability” to its magnum opus of prudential regulation. I shall send it one plea – do fewer rules aimed at fewer, clearer targets and then make them matter more by holding supervisors to account.