Saturday, May 2, 2015

We might want to consider “Friends and Family” weighted equity requirements for banks.

Currently the equity requirements for banks are credit-risk-weighted… more-credit-risk-more-equity and so less-credit-risk-less-equity.

That is dumb because never ever has a major bank crisis resulted from excessive lending to someone perceived as “risky”, these have always resulted from excessive lending to what was ex ante perceived as “safe” but that ex post turned out to be risky.

The only case when individual banks have gotten into problems extending excessive credits to somebody perceived as risky is when there had been some close connections between bank and borrower.

It could therefore be a case for analyzing Friends & Family weighted equity requirements for banks… though it is hard to think of who could perform an adequate rating of such relations… as we would also need to rate his F&F relation with bank and borrower.

That said, the least we must do, is to get rid of the credit-risk-weighted equity requirements when applied to those who are not F&F. These, for absolutely no reason, odiously impede their fair access to bank credit. That kills opportunities and therefore drives inequality.