Saturday, November 2, 2013

Why the Bank of England, BoE, like most other bank regulators, is pissing outside the pot.

I invite you to read the Bank of England publication “Bank capital and liquidity

It states: “It is the role of bank prudential regulation to ensure the safety and soundness of banks, for example by ensuring that they have sufficient capital and liquidity resources to avoid a disruption to the critical services that banks provide to the economy.”

But, if that comes with avoiding that those in the real economy who most need and deserve access to bank credit, do not get it, only because they are perceived as more “risky”, then the regulators are most definitively pissing outside the pot.

The regulator divides here the balance sheet of the bank in 3 categories: Cash and Guilts, Safer loans, and Riskier loans.

If then, as they do, they allow banks to hold much much less capital against Guilts and Safer loans than against Riskier loans, that simply means that banks will be earning much much higher expected risk adjusted return on Guilts and Safer loans, that on Riskier loans.

And that means that “The Infallible” will have even more access to bank credits, which could turn these into risky, and make it very dangerous for the banks, while “The Risky” will get even less access to bank credit and make it very dangerous for the real economy.

“The Infallible” are the sovereigns, the housing sector and the AAAristocracy. “The Risky” are medium and small businesses, entrepreneurs and start-ups.