By Michael Pomerleano
The Basel II accord has done more harm than good for stability. In a previous post last month on the failure of financial regulation, I pointed out that Basel II has glaring deficiencies that virtually provide a navigational map to creating off-balance sheet instruments.
The regulatory incentives regarding capital requirements in Basel II contributed to the subprime crisis. It gave banks incentives to:
- “originate and distribute” as opposed to originate and hold
- securitise every asset and buy it back without changing the credit risk profile
- use credit default swaps to reduce capital requirements even further
- stuff toxic securities into structured investment vehicles