Mr. Irving Fisher, could you please explain the rationale behind Basel's capital requirements for banks, to us “The Risky”?

Mr Irving Fisher.

On March 13 you gave a speech titled “Ending too-big-to-fail”. 

In it you said “I am here today to speak of the plight of hardworking Main Street bankers who simply want to be given a level playing field and fair treatment in competing with megabanks”. And you then frequently and correctly mention all the subsidies of TBTF banks paid through the implicit government guarantees. 

It is a great speech, nothing wrong with it, BUT, when is someone of your caliber to stand up and equally ask for a level playing field and fair treatment of all those bank borrowers perceived as “risky”. 

“The Risky” they know and accept they have to pay higher interest rates, get smaller loans, and be subject to harsher contractual terms, “that’s life”. But why on earth should they have to pay even higher interest rates, and get even smaller loans just because some regulators decide to impose on banks, capital requirements which are also based on the same perceived risk. 

That allows the banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”. 

And that allows the banks to leverage the risk-adjusted-margins many times more when lending to “The Infallible” than when lending to “The Risky”. 

And that allows the banks to earn much higher expected risk adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”. 

And that forces “The Risky” to compensate the banks additionally. And that is not a level playing field or a fair treatment 

And these very low capital requirements associated with anything dressed up as “safe” also constitute one really potent growth hormone for the TBTF banks. 

Mr. Fisher you said “Regulators cannot enforce rules that are not easily understood” 

Recently Floyd Norris, in “Masked by Gibberish, the Risks Run Amok” March 21, quoted the following from the unhappy Barings trader Nick Leeson´s memoirs: “And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.” 

And that is precisely what I think happened with the capital requirements for banks, once these had been accidentally concocted, all regulators were afraid of looking stupid about not understanding these, and kept silence… and, this really unforgivable, they are still silent about it

And so Mr. Irving Fisher, on behalf of all those medium and small businesses and entrepreneurs, discriminated against twice by the fact they are perceived as "risky", if you have understood it, please explain to us the rationale behind those capital requirements for banks. 

I mean since “The Risky” have never ever caused a major bank crisis, only “The Infallible” who turn out risky do that, one could even make a case for higher bank capital requirement for banks when lending to “The Infallible” than when lending to us “The Risky”. 

And by the way Mr. Fisher, I also believe that giving “The Risky“ a level playing field and fair treatment, is the best way, by helping their clients, to help those hardworking Main Street bankers.

Sincerely,

Per Kurowski