Why the Basel Capital Construct is Broken and How to Fix It
Last week, the head of Britain’s key financial-regulatory agency, Sam Woods, stunned his Basel colleagues by suggesting that the entire edifice of Basel I, II, II.5, III, and what is rightly called IV should be tossed out in favor of something far more elegant and considerably less procyclical than the thousands of pages of Basel minutiae. Mr. Woods calls the alternative the “Basel Bufferati” in honor of the concept-car approach to auto innovation and it’s hard not to like something with such a cute name that might also achieve these essential goals. But, Mr. Woods’s Bufferati drives on the power of regulatory discretion over key considerations such as when there’s systemic risk and how susceptible to it each bank is likely to be. Been there, done that, it didn’t work…