The story of the Tower of Babel is a parable of hubris. The universally true message is that, notwithstanding the grandeur of any plan, nothing will get built if the builders do not communicate with one another (i.e. Project Management 101).
But the architects of Basel II are nowhere near as ambitious as the builders of Babel. They do not wish to reach unto the heavens, merely 99.9% of the way there. Then again, since no one knows how far away the heavens are exactly, we have no way of knowing when we will reach within .1% of them?
The religion of Basel is 'Mammon', with 'Efficient Markets' and 'Principles Based Regulation' making up the un-Holy Trinity. Risk Based Capital is the Holy Grail, except the search for this elusive treasure is beginning to look more like Monty Python than the Da Vinci Code. The disciples of Basel are aiming to build a great fortress in which to contain this precious Capital, lest the Prodigal Lender squanders it.
The 'conceptual' foundations of Basel have been laid, albeit on the shifting sands of the sub-prime crisis, and the builders are already in. The Europeans and the Australians are frantically building a wall apiece, but the Americans have decided to slow down, debating exactly how many occupants the finished dwelling will have. Some of the Asians have asked to see the plans again because they don't like the design. Critics have noted the absence of plumbing - the architects have completely forgotten liquidity. No one has yet informed the client that, if the walls are not the same height, the regulatory 'floors' cannot be put in place. The builders are not working to the same timetable, nor it appears to the same plans.
This blog does not have sufficient megabytes to describe all of the small, but potentially divisive, variations in how different regulators have interpreted the overall Basel blueprint. However, one aspect provides an insight into the problems to come.
In the Book of Basel, when seeking to qualify to use an AMA (sounds like an Eastern deity?) to calculate Operational Risk Capital, a bank must consider 'Four Fundamental Elements': (1) Internal Loss Data; (2) relevant External Loss data; (3) Scenario Analysis by experts; and (4) the ghostly and unknowable BEICFs (unfortunately, not another Eastern deity but the more prosaic Business Environment and Internal Control Factors). In their edition, the US banking regulators refer to the 'Four Elements', no 'fundamentalism' here. Meanwhile, in their textual translation (in this case from English to English), APRA, the Australian regulator, have chosen to refer to the 'Four Key Data Inputs'.
Four Horsepersons of the Apocalypse more like? Chaos is bound to ensue, because, not only are the Four Elements (fundamental or otherwise) ill defined, they may be combined any way that a national supervisor considers fit! This is like everyone mixing mortar using different proportions of cement, sand and water; all very democratic, but hardly a recipe for constructing a solid lasting structure.
When Basel II is eventually finished, what will it look like? Could it be the majestic soaring spires of Chartres Cathedral, or the Walls of Jericho, ready to tumble at the first toot of the trumpet of economic reality? Or maybe the Mayan Pyramids or Stonehenge, where we marvel at the ingenuity of the builders, given their primitive tools, but ultimately have to ask the question: what in Heavens (or Hell) was it all for?
The author is well aware that the rabid rantings of a regulatory agnostic will not dent the resolve of the builders of the New Financial Jerusalem but hopes that sometime, far in the future, a financial archeologist will stumble upon the half-finished overgrown, abandoned edifice and notice the graffiti scrawled on the entrance, the Devil is in the detailing.
