Monday, December 14, 2015
Regulators currently tell banks: “More credit risk, more capital (equity) – less credit risk, less capital.
And so right now our banks earn much higher risk adjusted return on equity on what is perceived or made out to be safe, than on what is perceived as risky. All for no good reason at all.
Q. What has credit risk to do with the worthiness of something having access to bank credit? A. Nothing!
Q. What assets are least likely to detonate major banks crises? A. Those ex ante perceived as safe!
In Paris, during COP21, I would have suggested that we tell bank regulators to stop favoring the access to bank credit of The Safe, and quit discriminating against the access to bank credit of The Risky.
Instead they should base their capital requirements of banks on sustainability and job creation – Sustainable Development Goal’s (SDGs) ratings. That way banks would earn higher risk adjusted returns on equity when financing what we most need and want them to finance. Otherwise, why on earth should society support banks so much?
Of course SDGs ratings could be gamed, as credit risk ratings often are, as carbon trading often is. But yet there would be much more oversight about the SDG ratings of projects than what there currently is of the credit risk ratings produced by 3 human fallible credit rating agencies.
Friends, would it not be nice to put some much needed worthy social impact purpose back into our banks?
Please help me stop our banks from mostly refinancing our safer past, and make them work harder on our sustainable future.