Monday, October 24, 2011

Current bank regulations cause criminal harm to the economies.

Our banks must currently submit to regulatory capital requirements that are based on the ex-ante perceived risk of borrowers. The higher that perceived risk, the higher the capital, and vice-versa. 

This amounts to an odious and arbitrary regulatory discrimination against those borrowers perceived as “risky” and which serves absolutely no purpose and on the contrary causes serious damages to the world economy. These regulations have both caused the current crisis and are hindering the recovery, and they need to be denounced. 

Those borrowers that are considered as “risky”, like the small businesses and entrepreneurs, already pay the cost for that in the markets, primarily by means of having to pay higher interest rates and less access to bank credit. 

Those borrowers that are considered as “not-risky”, like the triple-A rated and “strong” sovereigns, already receive the benefits from that, primarily by means of having to pay lower interest rates and having more and easier access to bank credit. 

Allowing then the banks to leverage more their capital and thereby earn more risk-adjusted interest rates when lending to those perceived as “not-risky”, imposes on those perceived as “risky” the need to make up the difference in the opportunity for returns on equity to the banks. 

Even those perceived ex-ante as “not-risky” can be hurt, as is the case of Greece, where obviously the fact that banks could lend to it against only 1.6 percent in capital, created artificially favorable conditions for an excessive build up of debt. 

That those capital requirements beside the damage they cause serve absolutely no purpose can easily be ascertain by the fact that never ever has bank lending to those perceived ex-ante as “risky” originated a bank crisis.

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue!