Monday, December 2, 2013

The mother of all market rigging is carried out by regulators in the allocation of bank credit to the real economy.

Forget it! If anyone should ask about more disclosure, that should be those borrowers who had the access to bank credit rigged against them by the regulators, only on account of them being perceived as “risky”, and this even though they already had to pay higher interest rates, get smaller loans and accept harsher terms, precisely because they are perceived as risky.

And this is how the rigging was carried out.

Before current Basel Accord inspired bank regulations came into effect a bank looked at how to maximize the return on equity by analyzing the lending all over the spectrum of perceived risks… and that is what can lead to an efficient allocation of bank credit in the real economy. 

Not now, with the Basel Committee's risk weighted capital requirements. Now banks evaluate the returns on loans to the AAA rated, in terms of holding only 20 percent of the basic capital requirement, while when evaluating the competing return offered by a loan to a “risky” small business, and entrepreneur or a start-up, it must use 100 percent of the basic capital requirements. And, if lending to an “infallible sovereign”, then it can basically measure its returns on zero percent of basic capital requirements.

And perhaps what is the saddest of it all, might be that the bank regulators are not even aware of that this is rigging the access to bank credit all in favor of "The Infallible" and all against "The Risky"... those risky who act on the margins of the real economy and who we most want to have access to bank credit in competitive terms.

Damn these sissy regulators. God, make us daring!