Tuesday, January 12, 2016
Had banks not held excessive financial exposures related to AAA rated securities backed with mortgages to the subprime sector, or to loans to sovereigns like Greece, the greatest bank crisis of our times would not have happened… and there can be no doubt about that.
Those excessive financial exposures, to assets that were ex ante perceived or deemed as safe, should have been an expected consequence of allowing banks to earn much much higher risk adjusted returns on equity on these assets, than what they could earn for instance on “risky” loans to SMEs and entrepreneurs.
That resulted from regulators allowing banks to hold much much less capital (equity) against “The Safe” than against “The Risky”; by which banks could leverage their equity many many times more with supposedly safe assets than with supposedly risky ones.
And the cost of the greatest bank crisis of our times is still underestimated and is still growing, because it does not include the cost of all those growth opportunities the world, as a consequence, missed and misses by not lending to “risky” SMEs and entrepreneurs.
Favoring with regulations what’s safe over what’s risky, something that also promotes inequality can only be the result of a deeply ingrained risk adverse pessimism. Therefore, while these faulty regulations are still in place, referring to a feeling of optimism about the future is a contradiction in terms.
The economy is, by going for the “safe” carbohydrates, growing obese. A muscular growth requires the intake of “risky” proteins.
Banks are no longer financing the riskier future they are just refinancing the safer past.
How come the Home of the Brave (and Europe) that became what it is because of its willingness to take risks, has accepted this senseless regulatory risk aversion?
Bank capital should cover unexpected losses but what is perceived as safe, has always a greater potential of delivering these than what is perceived as risky and therefore avoided.
How come those most guilty for the greatest bank crisis of our times have not been named, much less held accountable?