Saturday, January 30, 2016
Regulators have imposed credit risk weighted capital requirements for banks… more perceived risk, more capital – less perceived risk, less capital.
That allow banks to leverage more their equity and the support they receive from society like for instance deposit insurance guarantees when lending to The Safe than when lending to The Risky.
That means banks earn higher expected risk adjusted returns on equity when lending to The Safe than when lending to The Risky.
And so banks will lend more and on easier terms to The Safe, and less and on relatively harsher terms to The Risky.
And too much lending in too easy terms against too little capital to what is ex ante perceived as safe, but that ex post can turn out risky, is precisely the stuff major bank crises are made of.
And too little lending and on too harsh relative terms to what is ex ante perceived as risky, like to SMEs and entrepreneurs, is precisely the stuff that hinders sturdy economic growth.
Banks no longer finance the riskier future they only refinance the safer past... and our young are going to pay dearly for it.