Europe, America, you might use the average risk aversion of nannies, but, never ever, as the Basel Committee does, use a sum of these.

Let us suppose a perfect credit rating. 

And that perfect credit rating is then considered by the banks and the market in general, and cleared for by interest rates, the size of the exposure and other terms.

But when bank regulators (Basel Committee) ordered that perfectly perceived credit risk, to also be cleared for in the capital of banks, then they completely messed it up.

Because a perfectly perceived risk, when it is excessively considered, causes an imperfect reaction to it. 

Let me explain it in the following way: 

Figure out the average risk aversion of nannies when letting your kids out to play… that might not be the best risk aversion to use, it might be too high, but anyhow it is acceptable. 

But, never ever add one nanny’s risk aversion to that of other nannies, because then your kid will never ever be allowed to go out and play… 

And if your kids only stay “safe” at home, they will eat too many cookies and turn obese… like some of their nannies.

And that’s what we have now, banks staying home, playing it safe and turning obese by lending to “infallible sovereigns”, house financing and member of the AAAristocracy or the AAArisktocracy; while not going out to play, in order to develop muscles, for instance by lending to small businesses and entrepreneurs.

Our banks no longer finance the "risky" future they just refinance the "safer" past.

You can use their average risk aversion,
 but, for the sake of our kids (and our banks) please, never ever the sum of it

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

When are small businesses going to ask regulators why banks need to hold more capital when lending to them?

Read Fed’s Chair Janet L. Yellen’s speech “Small Businesses and the Recovery” delivered at the National Small Business Week Event, U.S. Chamber of Commerce, Washington, D.C. on May 15, 2014

And then reflect that even though never ever has a bank crisis detonated because of excessive bank exposures to “risky” small businesses, nevertheless the regulators require the banks to hold much more capital when lending to them than when lending to the “infallible sovereign” the AAAristocracy or the housing sector.

And that means that banks can obtain much higher risk-adjusted returns on equity when lending to the “infallible sovereign”, the AAAristocracy or the housing sector, than what they can obtain lending to “risky” small businesses.

And that means that small businesses will have access to less bank credit, or to more expensive bank credit, only in order to make up for this competitive disadvantage imposed by regulators.

When are the “risky” medium and small businesses, entrepreneurs and start-ups ask for the why of this regulatory nonsense?

Inequality production 101

Lecture 2: Set much lower capital requirements for banks when lending to the "Infallible Sovereign" and the AAAristocracy than when lending to "The Risky", so that banks earn much higher risk-adjusted returns on equity when lending to the former than when lending to the latter.

That signifies that those who have made it thanks to risk taking in the past and/or are now perceived as "absolutely safe" will receive too much too cheap bank credit, while those perceived as "risky", and who have to risk it in order to make it in the future, will get too little and too expensive bank credit.

That guarantees the inequality of opportunities, and which as you should remember from Lecture 1, is the prime ingredient in any inequality production.

If asked by Janet Yellen about risk-weighted bank capital requirements, how would Margaret Thatcher have answered?

Although I am sure Janet Yellen fulfills all the formal qualifications, I really do not know sufficient about her so as to be able to provide any credible input as to her chances of doing a good job as the new Chair of the Fed. What I am sure of though, is that Yellen will need to show a type of Margaret Thatcher type of character strength, if she is going to be able to stand a chance against what is to come.

And in this respect I would also have liked, if Janet Yellen had been able to pose the following question to Margaret Thatcher:

By requiring banks to hold much more capital against what is perceived as risky than against what is perceived as absolutely safe, banks earn higher risk-adjusted returns on equity when lending to The Infallible Sovereign and to the AAAristocracy than when lending to The Risky. This causes of course banks to lend less than what they would ordinarily do, and more expensively so, to all “risky” medium and small businesses, entrepreneurs and start ups. Margaret do you think this is sane? Do you think this makes our banks safer? Do you think this helps the economy to grow muscular and sturdy?

And though certainly uttered in some much better way than what my poor British English allows me, I can almost hear Margaret Thatcher answering something as follows:

“No Dear Janet, that is as insane as it comes. We the western world did not become what we are by foolishly telling risk-adverse bankers to avoid taking risks, or by allowing bankers to binge profitably on what we for now, in shortsighted blissful ignorance, believe to be absolutely safe.”

Europe’s unemployed youth, is a result of expulsing testosterone from its banking system. Is it accident or terrorism?

To call banks cuddling up excessively in loans to the Infallible Sovereign and the AAAristocracy, an excessive risk-taking which results from too high testosterone levels, is ludicrous. That is just cowardly hiding away, guided by computer models, in havens officially denominated as absolutely safe.

The risk-taking which requires true banking testosterone is the lending to medium and small businesses, entrepreneurs and start ups.

Unfortunately bank regulators, by means of allowing for far less capital when lending “to the safe than when lending to “the risky”, guaranteed that the expected risk-adjusted returns on bank equity when lending to the former were much much higher than when lending to the latter. 

And, as any economist knows, equity goes to where the highest returns are offered. And so bankers possessing true testosterone, were all made redundant. And since the safe jobs of tomorrow need the risk-taking of today, and “the risky” got and get no loans, the European youth ended up without jobs… or even the prospective of jobs.

I have always thought this regulatory calamity was an accident resulting from allowing some very few regulators to engage in intellectual incest, in some small mutual admiration club where it is prohibited by rules to call out any member as being at fault.

But now, since more than five years after the detonation of the bomb that was armed in 2004 with Basel II, the issue of the distortion these capital requirements produce in the allocation of bank credit in the real economy is not yet even discussed, reluctantly, because I am no conspirator theories freak, forces me to admit the possibility of terrorism.

And frankly what is the difference between injecting bankers with a testosterone killing virus, and doing so with a mumbo jumbo bank regulation no one really understands?

Poor European youth… they are not yet aware that unless they expulse the current bank regulators from the Basel Committee and the Financial Stability Board, for being dumb or terrorists, they live in an economy that is going down, down, down.

All dollars (or Pounds, or Euros) should be equal!

The efficient market hypothesis, and the capacity of free markets to allocate efficiently financial resources have, as a consequence of the recent financial crisis, been seriously questioned. There is absolutely no cause for that.

In a free market all dollars pursuing assets are equal, and so the prices reflect the markets appreciations of returns, risks, and other factors… and so in essence, all assets will produce equivalent all included risk-adjusted returns. Like any bet on the roulette.

But then came bank regulators, with their risk-weighted capital requirements, more risk more capital, less risk less capital, and determined that some dollars, those being lent to what was perceived as “absolutely safe” were worth much more because these could be leveraged by banks much much more, than the dollars lent to what was perceived as “risky”. Like doubling the roulette payout when playing it safe, like betting on a color.

And of course that made it impossible for the markets to function. It would be like pricing assets in dollars Euros and Pounds, simultaneously without informing the markets of which currency was used. In fact, since bank capital when in “risk-free” land could sometimes be leveraged about 40 times more than when in “risky” land, the currencies used are perhaps more like dollars, pesos and yen. 

And so a dollar going to someone “risky” is for the banks worth de facto much much less than a dollar going to the AAAristocracy. Talk about financial exclusion! Talk about increasing inequality gaps!

Discriminating against risk-taking, in the "Home of the Brave"... you´ve got to be kidding!

Please regulators, allow a dollar to be a dollar for everyone! So that markets will work again!

PS. By the way who authorized all that?

In Europe banks no longer finance the future

These just refinance the past... (and so Europe is going down, down, down)

Let me refer again to the tragically misguided banking regulations in the world, designed by some who do not care one iota for the real economy, that which are not the banks.

The main principle of such regulations are capital requirements (equity) based on perceived risks. More risk more capital, less risk less capital.

And that results in the bank can expect to earn much higher expected risk-adjusted returns on equity , when financing the safe (refinancing the past) than when finance the risky (the future).

And that results in that the economies do not take enough risks to produce its absolutely-safes of tomorrow ... but will dedicated itself to milk the cows of yesterday, to extract their last drop of milk.

And all sheer stupidity. Regulators ignored, and still ignore, that perceived risks, such as those reflected in credit ratings, have already been cleared for by banks and markets when setting interest rates, the amounts of the loans, duration and other clauses, And so when the same perceptions of risk, are reused, now to determine the required capital, this only ensures that the banking system overdoses on perceived risk.

They also forgot that their regulatory risk with banks has nothing to do with the perceived risks of the bank's customers ... and everything to do with how the bankers perceive and react to these perceptions.

And that the above causes distortions in the allocation of bank credit in the real economy, still nothing is discussed.

For an older person, retired, with barely sufficient savings, a financial advisor must recommend a super safe conservative investment strategy which provides liquidity, traditionally bonds. But, in the case of a young professional, who is saving for retirement in 30 years, the obligatory advice is to take much more risks, such as buying stocks.

And so you can say that bank regulators follow rules adequate for the old, and not for the young. I assure you that if the European youth, such as that in Spain, Italy, Portugal and Greece, lifted their eyes just a little while from their iPads, or similar devices, and realized what was being done to them, many sites would burn...like Troy.

Worse yet, the regulators require banks to have an 8% capital when lending to an ordinary citizen entrepreneur, but allow these to lend to their governments, holding no capital at all. This has quietly introduced a perverse communism, and disrupted all price-risk equations in capital markets. Of course, all in close association with other beneficiaries like the members of the AAAristocracy.

But, you might say ... "At least we will have safe banks". Do not delude yourself. All banking crisis, whenever not a case of outright fraud, have been unleashed by excessive lending to what ex ante was perceived as absolutely safe, and which, ex post, turned out to be risky, and no banking crisis in history, has resulted because of excessive loans to what was correctly perceived as risky.

As a young man, in Sweden, in the churches where from time to time I went, they sang psalms which implored, "God, make us daring". European regulators, with respect to their banks, are now rewarding cowardice... (and so Europe is going down, down, down)

Translated from El Universal

Why the Bank of England, BoE, like most other bank regulators, is pissing outside the pot.

I invite you to read the Bank of England publication “Bank capital and liquidity”

It states: “It is the role of bank prudential regulation to ensure the safety and soundness of banks, for example by ensuring that they have sufficient capital and liquidity resources to avoid a disruption to the critical services that banks provide to the economy.”

But, if that comes with avoiding that those in the real economy who most need and deserve access to bank credit, do not get it, only because they are perceived as more “risky”, then the regulators are most definitively pissing outside the pot.

The regulator divides here the balance sheet of the bank in 3 categories: Cash and Guilts, Safer loans, and Riskier loans.

If then, as they do, they allow banks to hold much much less capital against Guilts and Safer loans than against Riskier loans, that simply means that banks will be earning much much higher expected risk adjusted return on Guilts and Safer loans, that on Riskier loans.

And that means that “The Infallible” will have even more access to bank credits, which could turn these into risky, and make it very dangerous for the banks, while “The Risky” will get even less access to bank credit and make it very dangerous for the real economy.

“The Infallible” are the sovereigns, the housing sector and the AAAristocracy. “The Risky” are medium and small businesses, entrepreneurs and start-ups.

In the hands of self righteous, arrogant, dumb and unsupervised bank regulators, Europe is doomed.

Let there be no doubt. Basel II did the eurozone in, but, Basel III, is fundamentally still a perceived risk-based bank regulatory regime. All its new concoctions, like Leverage Ratio, Liquidity Coverage Ratio and Net Stable Funding Ratio are, admittedly, only backstops, supplements or complements.

And this means that banks will still be allowed to hold much less capital against loans to “The Infallible”, like to sovereigns, the housing sector and the AAAristocracy, than against loans to “The Risky”, like to medium and small businesses, entrepreneurs and start-ups.

And that means, of course, banks will be making much higher expected risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky.

And that means, of course, banks will not lend to the future, only refinance the past.

And that means, of course, Europe will not risk exploring sufficiently the new adventurous bays it needs in order to sustain a movement forward, and to create sturdy jobs for its youth, and will therefore die, gasping for oxygen, in dangerously overpopulated safe havens.

Europe, I cry for you. You have no idea of what you have gotten yourself into. Your banking system has been overtaken by what must be the stupidest risk-averse mentality, incapable of understanding the simple fact that what is perceived, ex ante, as “risky”, has never ever caused a major bank crisis, only what has been erroneously perceived as absolutely safe do that.

Europe, for your own sake, rid yourself of the false Pharisees in the Basel Committee for Banking Supervision and in the Financial Stability Board, as fast as you can!

God make us daring!

We need “The Risky” to access bank credit, competitively, especially in bad times, as “The Infallible” alone cannot pull us out of anything

If a bank charges a 3 percent risk premium to set of small and medium businesses, entrepreneurs and start-ups borrowers, then it is reserving for sustaining losses of about 30 percent on 10 percent of these borrowers, something which, as bankers do not give loans were they think they are going to lose, is a hell of a great reserve.

But, the higher risk premiums paid by “The Risky” was something completely disregarded by the regulators when setting those capital requirements for banks based on perceived risk and that so much favor bank lending to “The Infallible”, in essence sovereigns, housing and the AAAristocracy.

You see, our current set of bank regulators, they do not care one iota about the fact that their capital requirements utterly distorts the allocation of bank credit in the real economy, and in which, it is really the access to bank credit of “The Risky”, in competitive terms, what most needs to be assured.

You see our current bank regulators care only about the banks, and that is why they are so damn bad bank regulators.

You see our current bank regulators are so scared shit about all ex ante “risk”, they fail to understand that, ex post, only “The Infallible” cause major bank disasters.

There is nothing as risky for the banks, and for us, as not taking a risk on “The Risky” of the real economy.

God make us daring!

David A. Stockman’s “The Great Deformation” did not include what is perhaps the greatest deformation.

David A. Stockman’s The Great Deformation is a truly great book, except for the fact that sadly it misses out on what in my mind constitutes the greatest deformation… namely allowing for much much lower capital (equity) requirements for banks on exposures that are considered as “absolutely safe”, than what they are required to hold for exposures considered as “risky”.

That allows the banks to grow so as to end up as Too Big To Fail, and to earn much higher risk-adjusted returns when lending to “The Infallible”, than when lending to “The Risky”.

And that distorts completely the way credit is allocated within the real economy, so that too much at too low interest rates of it goes to the "The Infallible", like the sovereign and the AAAristocracy (or AAArisktocracy) and too little to at too high interest to "The Risky", like medium and small businesses, entrepreneurs and star-ups.

And that effectively increases the de-facto risk-adverseness of banks, in the home of the brave, and in all other countries were these truly lamentable regulations are applied. And if that is not a deformation, what is?

Stockman does not mention that because of Basel II, approved in June 2004, and what SEC approved for US investment banks, April 2004, the European banks and the US investment banks could hold AAA rated securities, or lend against these securities, holding only 1.6 percent in capital, meaning leveraging their equity a mind-boggling 62.5 times to 1. 

And a result, though Stockman, in Chapter 20, “How the Fed brought the gambling mania to America’s neighborhoods”, explains splendidly the tragedy of how extremely bad mortgages were awarded to the subprime and other sectors in the US, and then packaged into dubious AAA rated securities sold all over the world, he misses out completely on the main reason for why the world demanded these securities and all other “supper-safies” so much, that it completely lost its common sense.

Let me assure everyone that if the banks had needed to hold the 8 percent they have to hold when lending to their “risky” citizen, then the current US subprime, Greek sovereign, Spanish real estate, Cyprus' banks, and similar tragedies, would not have happened. It is as easy as that… which of course does not make it any easier to swallow.

I hope that in the next edition of “The Great Deformation” David Stockman at least rewrites his chapter 20 so as to include these considerations. It would be a shame not to do so in such a good book.

And I need to repeat it again: A nation were banks need to hold 8 percent in capital when lending to the citizens, but are allowed to lend to their government against zero capital, is a deformed nation.

PS. The risk weights of 0% for the Sovereign, 20% for the AAArisktocracy and 100% for We the People, is anathema to America.

God make us daring!

Community bankers in order to defend themselves should start by defending their more typical borrowers.

There is no reason on earth why banks should need to hold larger capital requirements when lending to those perceived as “risky”, namely the medium and small businesses, the entrepreneurs and the start-ups, that when lending to “The Infallible”, the AAAristocracy. That only discriminates against the borrowers more typical of the community banks… which besides have never ever caused a major bank crisis. Only the false “absolutely safes” have.

Community bankers need to realize that no matter how much they might like low capital requirements, in the long run these, when based on risk perceptions, will always favor the larger banks, which have more readily access to the “absolutely safe”, or can more readily access the tools needed to construe “absolutely safe” images.

Poor Pakistan! Another developing country being held back by the Basel Committee

I read that “In order to further strengthen the capital related rules the State Bank of Pakistan (SBP) has decided to implement the Basel III reforms issued by the Basel Committee on Banking Supervision”

It is impossible for me to understand how a developing nation can adopt a bank regulatory framework which has, as its prime pillar, capital requirements which favor bank lending to The Infallible those already favored from being perceived as absolutely safe, and discriminate against The Risky, those already being discriminated against because they are perceived as risky.

If a developed and rich country, like France, wants to call it quits and not risk anything more, and accepts Basel II or III, and decide to castrate their banks, although that will not serve their real economy well, or save them from bank crises, that is their business… but, Pakistan?

In 2007 at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document in titled “Are bank regulations coming from Basel good for development?" Unfortunately it received no attention, as the discussions which followed there were basically only focused on promoting, not development, but political agendas.

And little has changed since those meetings. For instance, even Professor Joseph Stiglitz, who chaired the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, and who recently published a thick book titled "The Price of Inequality: How Today’s Divided Society Endangers Our Future" has still not understood how the risk-weighting of the capital requirements odiously favors bank lending to “The Infallible”, the haves, the old, the past, the AAAristocracy, those already favored by banks and markets, and thereby discriminates against “The Risky”, the not haves, the young, the future, those already discriminated against by banks and markets.

Developing nations, you need all your banks to exercise reasoned audacity and not to just follow the risk aversion instructions given by some overly anxious and nervous nannies, who have not even defined the purpose of the banks they regulate.

Regulators turned our banks into cash-cows milking machines

Allowing banks to lend to what is perceived as “absolutely safe” holding less capital than when lending to what is perceived as “risky”, allows banks to earn a higher expected risk adjusted return on equity when lending to what is perceived as absolutely safe than when lending to what is perceived as risky.

And that of course makes banks want to lend even more than usual to The Infallible, the sovereign and the AAAristocracy, and to lend much less than usual to what is perceived The Risky, the small and medium businesses and entrepreneurs.

And that in all essence means that banks are extracting the benefits of the risk-taking of the past, without investing in the risk-taking needs of the future.

In other words banks are using the past as a cash-cow; in other words regulators allowed banks using something like the mother of all a reverse mortgages, and which guarantees that our economies will extract as much equity it can for current consumption as is possible, and so leave much less for the next generation. 

Damn the bank regulators, nobody authorized them to do what they are doing.

God make us daring!

Mr. President, Mr. Prime Minister. Here is how to best help to create jobs for our youth

Our banks, for reasons that have not been adequately explained, because regulators themselves do not understand these, allow banks to hold much less capital (equity) against exposures perceived ex ante as “absolutely safe”, than against exposures perceived as “risky”.

That allows banks to earn much higher expected risk-adjusted returns on equity when lending to “The Infallible”, like sovereign and the AAAristocracy, than when lending to “The Risky”.

That distorts and makes it impossible for banks allocate economic resources efficiently in the real economy. 

And it also serves no purpose, since all bank crises in history have resulted exclusively from excessive exposures to what was erroneously perceived ex ante as absolutely safe, none from excessive exposures to what was perceived as “risky”.

And that hinders “The Risky”, the small and medium businesses and entrepreneurs, those who could perhaps generate of those jobs our youth urgently need, from having access to bank credit in competitive terms.

And therefore we must urgently eliminate this regulatory discrimination against risk taking. We did not get to where we are by avoiding risks, much the contrary.

In order to do that, the best route includes a mixture of:

Increasing capital requirements for banks, on exposures to “The Infallible”

Temporarily lowering capital requirements for banks, on exposures to “The Risky”

Creating the incentives needed to stimulate and facilitate important capital increases in the banks.

If regulators just cannot resist from interfering, ask these to give banks instead the incentives of lower capital requirements, based on potential-of-job-creation-for-our-youth ratings.

As is, banks do not finance the future they only refinance the past. God make us daring!

Mr. Fed some few questions on Basel III, bank capital, mortgages, jobs, "the absolutely safe", and the "risky"

And so Mr. Fed you will still allow banks to hold less capital against mortgages than against loans to businesses, only because, like the Basel Committee, you feels the former poses less risk for our banks. But frankly, Mr. Fed, long term, for the economy, and for the banks… how safe are houses without jobs?

And Mr. Fed you will equally still allow for capital requirements that are much smaller for exposures to what is considered (ex-ante) absolutely safe, than for exposures considered "risky".

Mr. Fed, could it really be that you do not understand that allowing banks to earn higher expected risk adjusted returns on their equity on assets perceived as “absolutely safe”, than on assets perceived as “risky”, introduces the mother of all distortions, which makes it impossible for banks to allocate resources efficiently in the real economy? 

Mr. Fed could it really be that you do not understand how the previous distortion destroys most of the effects on the real economy your quantitative easing programs could produce? 

Mr. Fed could it really be that you do not understand that the most important factor in keeping the banking system strong and healthy is a strong and healthy real economy?

Mr. Fed could it really be that you do not understand that there are no dangers for the banking system in waters perceived as risky, and that all the dangers to it lie in waters perceived as absolutely safe.

Mr. Fed do you not know Mark Twain said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”?

But when will Europe debate “Regulatory Abuse of Market Regulation”?

In Europe the European Parliament, and others related, are debating a “Market Abuse Regulation”. That is OK, though I must wonder about when they will begin debating “Regulatory Abuse of Market Regulation”?

Allowing banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”, as Basel II and III regulations do, allow banks to earn much higher expected risk-adjusted return on their equity when lending to the AAAristocracy than when lending for instance to small- and medium-sized enterprises… and that, as anyone should be able to understand, is as abusive to the market as can be!

Ask the regulators!

You tell me, is Mario Draghi being shameless, or is he just ignorant?

In a speech before the French National Assembly in Paris, 26 of June 2013, Mario Draghi, the President of the ECB, said:

“The ECB has been very active in responding to the crisis. We have robustly defended the stability of our monetary union and therefore of our money. And we stand ready to act again when needed.

However, it is important to acknowledge that there are limits to what monetary policy can achieve. This is not a question of the scope of our mandate. It is fundamentally about what different institutions are empowered to do.

One pertinent example is the current shortage of credit for many households and small- and medium-sized enterprises. Credit provision requires funding, capital and a positive risk assessment. The central bank can help ensure funding and address macroeconomic risk. But it cannot provide capital, nor can it affect banks’ assessment of the creditworthiness of individual borrowers.

Similarly, monetary policy cannot create real economic growth. If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix.”

And I repeat: “the current shortage of credit for many households and small- and medium-sized enterprises… The central bank … cannot provide capital, nor can it affect banks’ assessment of the creditworthiness of individual borrowers”

And this is the same Mario Draghi who for many years chaired the Financial Stability Board, that which fully endorsed the Basel bank regulations.

The central bank, though more precisely the regulators, do “not affect banks’ assessment of the creditworthiness of individual borrowers”, but, since they decide how much bank equity goes with each one of those assessments, they decide how much risk-adjusted return on equity banks should expect from each individual borrower. 

And since Basel regulations, allow banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”, the banks earn much higher expected risk-adjusted return on equity when lending to the AAAristocracy, than when lending to the “many households and small- and medium-sized enterprises”

And that constitutes precisely the fundamental cause for “the current shortage of bank credit to many households and small- and medium-sized enterprises”.

And that is so especially now, given the immense bank capital shortage that has resulted from for instance having allowed banks to lend to ("almost infallible") Greece holding only 1.6 percent in capital, something which implies a mindboggling allowed leverage of equity of 62.5 times to 1.

And so, you tell me, is Mario Draghi being shameless, or is he just ignorant?

The regulators force “risky” borrowers to pay the banks a kicker for them lending to the “safe”

I can perhaps understand paying widows and orphans a kicker when they invest in something “absolutely safe” and which earns them a very low return, but, to pay that kicker to a bank, that really sounds outrageous. 

And this what regulators actually do when they allow banks to leverage much more their equity for exposures to assets deemed “absolutely safe”, like the AAAristocracy or solvent sovereigns, than what they can leverage “risky assets”, like medium and small businesses and entrepreneurs. 

And the worst is that the kicker is not paid by the government. No! It is paid by those perceived as “The Risky”, by means of interest rates higher than ordinary and by getting bank loans smaller than ordinary. 

Really, that banks are regulated to earn much higher risk-adjusted returns on equity for “safe” than for “risky” is just plain crazy distortion.

And that this is not even an issue, never ceases to surprise me.

Dodd-Frank Act… legislative surrealism!

The Dodd-Frank Act signed today seems to me a surrealistic piece of legislation. 

Though the United States in June 2004 formally committed to implementing the Basel II bank regulations; and though the SEC in April 2004 delegated supervision decisions to the Basel Committee, surrealistically, there is not one single mention of these regulations, or of the Basel Committee for Banking Supervision, in all 848 pages of the Dodd-Frank Act. And this though the Act makes reference to foreign organizations like the Extractive Industry Transparency Review (EITI). It would seem like someone somewhere, has been playing some dirty tricks on someone.

PS. (Dated later) And it does not mention the fact that risk-weighted capital requirements for banks, in the home of the brave, does seem to be quite un-American. What do you mean regulators about discriminating against "the risky", those who are already being discriminated by the banks because they are perceived as risky?

The fact that the distortions in the allocation of bank credit caused by the risk-weighted capital requirements had not been understood, much less accepted, made it impossible for the Dodd-Frank Act to really serve its purpose... in many ways... by opening discussions on so many other fronts and thereby distracting the attention from what most urgently matters, only made it worse.

PS. Homeland Security. Bad regulations could be used as a lethal weapon of terrorism

PS. The complaint I presented to the Consumer Financial Protection Bureau

PS. In essence the Dodd-Frank Act did absolutely nothing to correct the most fundamental mistake in current bad regulations. It did not even recognize it!