America, who do current bank regulators really regulate for?

Current regulators allow banks to hold much less equity when lending to sovereigns, the AAArisktocracy and the housing sector, than when lending to small businesses and entrepreneurs.

And that means banks can earn much higher risk-adjusted returns on equity when lending to sovereigns, the AAArisktocracy and the housing sector, than when lending to small businesses and entrepreneurs.

And that of course means that banks will lend too little and in relative terms too expensive to small businesses and entrepreneurs.

That must obviously be because regulators sincerely believe that when banks lend, for instance to the government, that is something much less risky for the citizens-society-tax-payers, than when banks lend to small businesses and entrepreneurs.

Where do they get it? Is it not a monstrous risk to distort bank lending in such a way that it might not  reach its most productive use, from which all could benefit, one way or another?

Today I heard an interesting conference about how the U.S. Small Business Administration (SBA) was doing so much lending to small businesses and entrepreneurs… because banks were not lending enough to these.

It blew my mind!

If so it must be because bank regulators think it is much less risky if government bureaucrats lend to small businesses and entrepreneurs than if bankers do. They are wrong. Bankers put at least some shareholder’s equity on the line, while regulators are lending out 100% in current or future anonymous tax receipts… or in future inflation if things go really bad.

So who do these bank regulators really regulate for?

As I see it the U.S. Small Business Administration should be up in arms against regulations that distort the allocation of bank credit, and so odiously discriminates against the fair access to bank credit of small businesses and entrepreneurs.

And before anyone screams at me about banks taking risks with small businesses and entrepreneurs, show me the first major bank crisis ever that has resulted from excessive bank exposures to what ex ante was perceived as risky... and I'll show you many resulting from lending to fallible sovereigns and members of the AAArisktocracy who, ex post, turned up as vulgar very risky.

All this is the result of a horrendous regulatory mistake committed by the Basel Committee for Banking Supervision and the Financial Stability Board. Those regulators concerned themselves with the risk of the assets of banks, instead of with the risks of how banks would manage the risk of those assets.

PS. How come they all can so blithely ignore the Equal Credit Opportunity Act (RegulationB)?

PS. Is the US Congress really aware of the regulatory risk aversion that has been introduced through the backdoor in the Home of the Brave?

  

PS.  Has Homeland Security looked into at what a threat distorting credit allocation could pose for the economy?

PS. And America, if it serves you as consolation...though it should not... in Europe it is even worse.