Monday, March 10, 2014
The real risks for a bank regulator, and ours as well, has nothing to do with one or even a couple of banks going busts; it has all to do with the whole banking system melting down, or not doing well what it is supposed to do, namely to allocate bank credit efficiently in the real economy.
And that translates into that the risk of a bank regulator has little to do with the type of assets a bank holds, and a lot to do with the capacity of bankers to pick the assets the banks should hold.
But current bank regulators, with their risk based capital requirements, allow banks to hold extremely large amounts of assets against extremely little capital only because bankers, and sometimes regulators themselves, say they perceive these as being “absolutely safe”. And that allows banks to earn much higher risk adjusted returns on equity when lending to for instance the “infallible sovereigns”, the housing sector and the AAAristocracy, than when lending to the “risky” medium and small businesses, entrepreneurs and start-ups.
And that means, effectively, that regulators are assisting banks to create that kind of excessive exposures to what is perceived as “absolutely safe” which has been the source of all bank system crisis when these, surprisingly, turn out to be risky. And all this is worsened by the fact that when now one of these safe exposures blows up, banks stand there holding extremely little capital in defense.
And that also means, effectively, that our banking sector is not allocating sufficient bank credit to those in the real economy who are in most need of it.
And so to sum it up: current regulators are betting more than ever our whole banking system on the bankers being able to pick the right assets… while at the same time distorting the picking of those assets. Sheer lunacy! We need to get rid of them urgently.