Tuesday, December 8, 2015
Bank regulators have two choices. They can allow everyone to compete equally for the access to bank credit; or they can interfere in the allocation of bank credit by favoring one group’s access, which of course affects negatively those not favored.
And of course interference, though arrogant and dangerous, could be justified if it was done with the purpose of trying to make the real economy stronger... like for instance when financing projects that have special potential to deliver job creation, or the sustainability of our planet.
Unfortunately, current bank regulators, with their credit risk weighted capital requirements for banks, are interfering with the allocation of bank credit without a real purpose. The only thing they achieve with that, is allowing those who because they are perceived as safe already have ample access to bank credit, to find even more generous conditions; and to make it even more difficult for those who because they are perceived as risky already find it harder to access bank credit.
And by doing so regulators are not making banks any safer either, since all-major bank crises result from excessive financial exposure to something ex ante believed safe but that ex-post turned out to be risky.
And so too much credit, in too generous terms, against too little bank capital is given to those perceived as safe, like governments and corporates with high credit ratings; and too little credit, in too expensive terms, to those perceived as risky, like our absolutely vital SMEs and entrepreneurs.
What a tragedy! Let us pray the Basel Committee, the Financial Stability Board and the IMF wake up in time, before our stalling economies really fall into pieces.