Tuesday, April 18, 2017
Beginning 1988, with the Basel Accord, and much expanded in 2004, with Basel II, the Basel Committee for Banking Supervision, imposed on banks risk weighted capital (equity) requirements. Less perceived risk less capital - more perceived risks more capital.
The regulators also decreed that the sovereign would carry less risk weight than their subjects, which de facto implies they believe government bureaucrats use bank credit more efficiently than the private sector.
Banks can leverage more their equity with assets perceived as safe than with assets perceived as risky.
Banks can earn higher risk adjusted returns on equity with assets perceived as safe than with assets perceived as risky.
So sovereigns (the government), the AAA-risktocracy and those buying houses will have ampler and cheaper access than usual to bank credit.
So the “risky” SMEs and entrepreneurs, no matter how useful they might be for moving the economy forward, will find it harder and more expensive than usual to access bank credit.
So banks will be financing insufficiently the “riskier” future of our grandchildren, keeping busy refinancing the “safer” past and present of parents and grandparents.
Grandfathers or grandfathers to be, I ask you,do you believe this is to act responsibly with respect to our grandchildren’s future?
It is pure statism!
It distorts the allocation of credit in such way that it guarantees our real economies to stall and fall. As John A Shedd said: “A ship in harbor is safe, but that is not what ships are for”
It means our banks, and we all, are sooner or later going to end up gasping for oxygen in some dangerously overpopulated safe-havens. As Voltaire said: “May God defend me from my friends, I can defend myself from my enemies”.