IMF & World Bank Spring Meetings: Time again for finance ministers not daring to ask bank regulators THE QUESTION

Dear regulator

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?

Questions on bank regulations which experts are not answering... or even discussing

If all bank crisis in history have resulted from excessive exposures to what was perceived as “absolutely safe”, or at least very safe, and none ever, from excessive exposures to what was perceived as "risky"… what is the rationale behind the pillar of current Basel regulations, namely capital requirements for banks which are much lower for what is perceived as "absolutely safe", or at least very safe, than those for what is perceived as “risky”? Does not all empirical evidence suggest instead that the capital requirements should be slightly higher for what is perceived as "absolutely safe" than for what is perceived as "risky"? 

Since perceived risk is already cleared for by banks on the asset side of the balance sheet, by means of interest rates, amount of exposure and other terms, why did the Basel Committee for banking supervision decided banks needed to clear for the same perceived risk, in the liabilities and equity side of their balance sheet, by means of risk-weighted capital requirements? Does this not doom banks to overdose on perceived risk?

Current capital requirements, allow banks to earn a much higher risk-adjusted return on equity when lending to what is “absolutely safe”, “The “Infallible”, and so banks avoid lending to “The Risky”. But since “The Risky” includes for example small businesses and entrepreneurs, and whose access to credit is absolutely indispensable for the real economy to move forward, who is then supposed to finance what is “risky”? Bureaucrats or citizens? Is not taking smart risks on behalf of the society exactly what bankers are supposed to do?

Bank regulations that so much favor “The Infallible”, those already favored by bankers and markets, and so much discriminates against “The Risky”, those already sufficiently disfavored by bankers and markets, can only lead to increase the gap between the haves, the rich, the history, the old, the developed, and the have-nots, the poor, the future, the young, the undeveloped. Is that what you want?

Please, if you are able to extract an answer from the experts that is reasonable, send me a copy of it to

perkurowski@gmail.com

PS. If bank regulators must meddle, why do they not meddle in a more useful way?