Friday, October 30, 2015
It is not only the suffering bank regulators have caused, and cause, but also that their regulations, especially in Europe, amounts to intellectual torture… pure waterboarding. Listen to this:
Bank regulators ask (instructs) the credit rating agencies: “Go out there and do a perfect credit rating job”.
And logically the banks will consider those perfect credit ratings in order to set their interest rates, and decide on the amount of their exposure to the credit risks indicated by those ratings.
But then the regulators also require the banks to hold capital (equity), based on the same perfect credit ratings.
That is because even though regulators knew that capital is to be required against unexpected losses, since they faced difficulties in calculating the unexpected, they decided to base it on the expected credit losses.
And, if you give an excessive consideration to a perfect credit rating, then of course the resulting credit decision will be wrong.
And so now, for these capital requirements to be able to allocate bank credit correctly to the real economy, the credit ratings need to be adequately wrong. What is perceived as safe must be much safer, and what is perceived as risky must be much riskier.
And of course, who has ever heard of a major bank crisis that resulted from banks lending too much to what they perceived as risky?
And with this dangerous regulatory nonsense: more perceived credit risk more capital – less perceived credit risk less capital, regulators allow banks to leverage their equity (and the support they receive from taxpayers) much more when lending to The Safe than when lending to The Risky; and which meant banks earn higher risk-adjusted returns on equity when lending to The Safe than when lending to The Risky; which means banks will lend too much to The Safe and too little to The Risky.
And so a monstrous financial crisis resulted… as always, from excessive financial exposures to what was perceived a safe, but in this case aggravated by the fact that banks, thanks to the regulators, stood there naked with especially little capital to cover themselves up with. And the resulting human sufferings are huge.
And so our banking system, because of its regulators' obsessive credit-risk aversion, also negates the future generations that kind of risk taking that helped the current one to be where it is. And so the resulting human sufferings will be huge.
And because now, years later, some regulators discovered that their risk weights might have impeded the fair access to bank credit of the “risky” SMEs… they now, magnanimously, decided that: “Capital charges for exposures to SMEs should be reduced through the application of a supporting factor equal to 0,7619 to allow credit institutions to increase lending to SMEs.”… 0,7619? Why not 0,7618? Why not 0,0001? At least for the small and micro, those with less than 50 employees… when have excessive bank loans to these “risky” ever created a financial crisis?
Please Basel Committee, please Financial Stability Board, and please European Commission, no more waterboarding… I can’t stand it more… my head, and my heart, hurts… what do you want me to do? What do you want me to confess?