Thursday, January 12, 2012

In banking, when will the shadows take over?

Bank regulators, in Basel II, allow the banks to lend to a corporate rated AAA holding only 1.6 percent in capital but require them to have 8 percent when lending to a BBB rated corporate. That discrimination, when compared to what would have happened in an undistorted market, results of course in much more lending and at cheaper rates to the “safe” AAAs, and much less and more expensive lending to the BBBs.

That of course led to the current crisis of overexposures to what is perceived ex-ante as absolutely not risky; and the continuously dangerous overcrowding of safe havens, like lending to AAAs and infallible sovereigns; and the insufficient exploration of risky but potentially rewarding bays, like lending to small businesses and entrepreneurs. 

The question is, how much can you discriminate against risk-taking in the formal banking sector before the shadow banking, “la banca sommersa”, takes over?




“One of the dangers is that banks deviate all assets that in their opinion carry a lower capital requirement than what the regulator-credit rating agencies order into other formal or informal places of the market, while loading up their balance sheet with assets for which the risk/capital allocation seems a bargain; giving new meaning to the Thomas Gresham's principle that states that "bad money drives out good money.”