Letter to the Editor, Wall Street Journal - European Edition
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8 October 2008
Sir
Your outstanding coverage of the present monetary crisis has so far made no reference to the impact of the ludicrous “scientific precision” of Basel 2 EU directives. They have finally kicked their inventors in the teeth, as widely predicted by economists and others at the time.
Officially directives 2006/48 and 49, Basel 2 demands that banks and other financial institutions apply an EU-formulated “Risk Assessment Model” at the end of each and every day’s trading to show if it is solvent. If not, it must inform the authorities immediately and stop trading. No problem in a rising market.
But a huge problem in a volatile or falling market, not least because the “Model” fails to take any account of inevitable changes in market sentiment. Neither is the short-term impact of new information factored in, regardless of its accuracy or inaccuracy. The “Model” also ignores the essential underlying worth of assets.
In the UK, both Northern Rock and Bradford and Bingley fell foul of Basel 2. It threatens the theoretical solvency of all major banks in the EU in a falling market, and accelerates the problem exponentially.
This banking crisis is is far worse than it should have been, not least because the ivory-tower bureaucrats in Brussels ignored sound advice based on market experience. We are all now reaping the whirlwind.
Ashley Mote MEP
Independent, South-East England
European Parliament
Brussels.
To respond to, or comment on this Email, please email ashley.mote@btconnect.com
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