Thursday, June 18, 2015
In 1988, the G10 countries, signed up on the Basel Accord. With it, with Basel I, the regulators imposed on banks capital requirements based on ex-ante perceived credit risks.
And the risk weight assigned to the private sector was 100 percent, while the risk weight assigned to their governments was zero percent.
That meant banks needed to hold NO capital when lending to their governments, but 8 percent when lending to the private sector (the basic Basel 8 percent standard capital requirement, multiplied by the risk weight).
That meant that banks could leverage their equity and the support they explicitly and implicitly received from taxpayers infinitely, when lending to their governments, but only about 12 to 1, when lending to the citizens.
That meant in essence, that the regulators decreed that government bureaucrats would be able to use bank credit much more efficiently than the private sector.
That meant in essence, that the free Western world signed up to communistic precepts.
Is that not a historic turning point for our Western World? Tell me, how many times have you heard this being discussed?
And then, in 2004, with Basel II, regulators decided that the risk weight for those private sector borrowers rated AAA to AA was to be 20 percent, while for the unrated ordinary citizens and their SMEs, it remained 100 percent.
And that meant that regulatory risk aversion was also introduced with respect to bank credit to the private sector in the Western world... making it impossible for SMEs and entrepreneurs to have fair access to bank credit.
And since that its been going down down down and these two sad historical event are still being ignored.
Any civilization unwilling to take risks will stall and fall.
God make us daring again!