Our bank regulators, unwittingly, committed an act of high treason

There can hardly be a more insidious way to destroy a nation than to make its banking system more risk averse than what it normally is. 

And that our current bank regulators did, unwittingly, with Basel II, when they allowed the banks to hold so much less capital when lending to “The Infallible” than when lending to “The Risky”… and therefore to be able to earn so much more return on their equity when lending to “The Infallible” than when lending to “The Risky”… and therefore also to be able to pay the bankers so much higher bonuses when lending to “The Infallible” than when lending to “The Risky”. Doing so the regulators effectively "bribed" the banks to lend only to “The Infallible” and to abandon all bank lending to “The Risky”.

And that, of course, caused the bank exposures to “The Infallible”, those ex-ante perceived as absolutely not risky, precisely those to whom excessive lending has always caused all major bank crisis when they, ex-post, turn out to be “The Risky”, to explode as never before. 

Just one piece of evidence: Basel II, approved by G10 in June 2004, allowed the banks to lend to a sovereign rated like Greece holding only 1.6 percent of quite loosely defined bank capital (equity) while, if lending to a Greek small business or entrepreneur, they needed to hold 8 percent in capital. That allowed the banks to leverage their capital 62.5 times when lending to the Greek sovereign but only 12.5 times when lending to a Greek small business or entrepreneur. That, if the bank could make a net risk and cost adjusted margin of 1 percent when lending to either the sovereign the small business or the entrepreneur, meant the bank could expect to earn 62.5 percent on capital per year when lending to the Greek sovereign, compared to only 12.5 percent when lending to a Greek small business or entrepreneur. 

And of course the Greek sovereign received too much bank loans. And of course the Greek small business and entrepreneur received too little bank loans. 

And now when the Greek sovereign, as s direct result of this is in the absolute doldrums it cannot receive any more loans from banks, and Greek small businesses and entrepreneurs, those Greece most need to help it out of its current predicaments, are completely locked out from access to bank credit. 

I tell you, if I thought bank regulators had done this on purpose, to Greece, Europe and America, I would suggest shooting them… no doubt.

But what I cannot comprehend is how we can allow regulators who unwittingly were so dumb, to keep on regulating, to give us Basel III, which, with now also liquidity requirements based on ex-ante perceived risk, can only make it all so much worse. 

A nation is built and thrives on risk-taking. “God make us daring!” The moment the past, what has been built, “The Infallible”, becomes more valuable to its society than the future, what can be built, “The Risky”, and excessive risk adverseness sets in, the nation stalls and falls. It is as simple as that.