How could our bank regulators have fallen for our bankers’ so childish and selfish arguments?

We all know Mark Twain’s saying about bankers wanting to lend you the umbrella when the sun shines and wanting it back as soon as it looks like it is going to rain. Of course bankers are risk-adverse… aren’t most of us?

But suddenly bankers discovered that bank regulators were even more risk-adverse than they were (most probably because that is a pre-requisite to become a regulator) and decided to exploit that.

And so they went to the Basel Committee, the Financial Stability Board, the Fed, and for good measure to the IMF, and argued the following:

"You know taking risks tempts us very much, because doing so we can earn those higher returns on equity that make our shareholders happy and keep us in our jobs. But that can, unfortunately, turn out very bad for us… and, consequentially, very bad for you, since then many could rightly argue you are not performing your duties as regulators.

And so here is what we propose: If you allow us to hold much lower equity for what is ex ante perceived as absolutely safe, from a credit point of view, than what we must hold against what is perceived as risky, then we will be able to earn much higher risk-adjusted return on equity on what is absolutely safe… and so we do not need to go to where it seems risky... and so we, and you ,will all be able to live our happy risk-free ever after."

In essence that was like some children convincing their parents that they should be rewarded with ice cream if they ate up the chocolate cake, and punished with having to eat spinach if they dared to eat up their broccoli.

And since bank regulators fell for it, now banks have dangerously overpopulated “safe havens” like the infallible sovereigns (Greece), the AAAristocracy (securities collateralized with mortgages to the subprime sector) or real estate (Spain)… and have equally or even more dangerously, left “risky” bays unexplored, by withholding credit to medium and small businesses, entrepreneurs and start-ups.

Just like if the children had been able to convince their parents, they would now be obese after gorging on fats and carb, and not having any of those fibers, proteins and vitamins they like much less.

And the Western World, built among others upon a lot of risk-taking by banks, is now stalling and falling… and no one seems too concern about this regulatory risk-aversion.

And, because of the less importance of equity, and therefore of shareholders, the bankers also, by means of the bonuses they award themselves, been able to stay with a much larger share of the profits.

So, now you tell me, who has been the dumb and dumber of all this? The bank regulators… or we who trusted them blindly?