Thursday, March 10, 2016
Could there be something more dangerous to the real economy, and to banks, than distorting the allocation of credit? Not really.
And yet that is what the current batch of bank regulators did, without even considering that possibility a factor. They did not even care about it.
They imposed risk weighted capital (equity) requirements for banks. More ex ante perceived risk more capital – less risk less capital.
With that they allowed banks to leverage their equity more when lending to ”the safe” than when lending to ”the risky”.
With that they caused banks to be able to earn higher risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky.
And so of course the banks are lending more than normal to those who already had easier and cheaper access to bank credit, ”The Safe”, like the sovereigns (governments) and members of the AAArisktocracy.
And so of course banks are lending less and relatively more expensive than usual to those who already found it harder and more expensive to access bank credit, ”The Risky”, like the SMEs and entrepreneurs.
And you ask how the hell did this happen? There are many explanations but the most important one was that they regulated without even asking themselves what was the purpose of those banks they were regulating.
And if that is not unprofessional what is?
“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd, 1850-1926
And to top it up they have not made our banks safer, since never ever do major bank crises result from excessive exposures to something perceived risky, these always result from excessive exposures to something perceived or deemed to be safe when booked... you see even the safest harbor can become dangerously overpopulated.
We must rid ourselves from these lousy and already very proven failed bank regulators. Urgently!