Wednesday, December 24, 2014

Santa, anyone, please give us a clue. What did the we in the Western world do to deserve so dumb bank regulators?

Our current crop of bank regulators, those who were put in place under the sign of the Basel Accord, and who operate out of the Basel Committee for Banking Supervision, and in close collaboration with the Financial Stability Board, decided that:

The pillar of their regulations was to be the Credit-Risk Weighted Capital Requirements for Banks.

And with that they allowed banks to hold much less capital (meaning equity), against exposures that were perceived as absolutely safe, than against exposures that were perceived as risky.

And all, as if what is perceived as absolutely safe does not attract sufficiently the bankers attention; and all, as if what is perceived as risky, makes the banks salivate.

And that allowed banks to earn much higher risk-adjusted returns on equity on “safe” exposures than on “risky” exposures... which distorts the allocation of credit to the real economy... and all as if creating distortions is something free of risks.

And of course this led banks to create dangerous and calamitous exposures, against little capital, to such supposedly safe assets like AAA rated securities and loans to infallible sovereigns like Greece… all of which set off the current crisis.

And of course this leads banks to reject lending to all those "risky" tough risk-taking small businesses and entrepreneurs we all need to get going when the going is tough, as it is now.

So please, Santa, anyone, show us some mercy: What did we do to deserve such dumb regulators and, much more importantly, since with Basel III they keep digging us deeper into the hole they have placed us in... how do we get rid of them? 

Bank regulation decisions:
Automatic: "Safe" is safe and "risky" is risky
Deliberate: "Risky" is safe and "safe" is risky

PS. Santa by helping us with this you could actually bring our unemployed youth many jobs… would that not be some great Christmas gifts?