Thursday, April 14, 2016
Because of your risk weighted capital requirements, banks are allowed to hold less capital against assets that are perceived as safe than against assets perceived as risky.
That means of course that banks can leverage equity more with assets perceived as safe than with assets perceived as risky.
That means of course that banks can obtain higher expected risk adjusted returns on equity with assets perceived as safe than with assets perceived as risky.
So here is THE QUESTION:
Does that not distort the allocation of bank credit to the real economy, causing banks to lend way too much to those perceived, decreed or even concocted as safe, and way too little to those perceived as risky, like SMEs and entrepreneurs?
PS. Where did all our current bank regulators, those who are writing up Basel I, Basel II, Basel 2.5, Basel III or what have you, study their Bank Regulations 101? Who checks the CVs of these appointees, or do they appoint themselves? Might they just have dropped in like any Chauncey Gardiner?