The SEC Regulatory Accountability Act is even more needed for the case of Fed / FDIC bank regulations

The SEC Regulatory Accountability Act, sponsored by Financial Services Committee member Rep. Ann Wagner (R-MO), passed 243-184.

Jeb Hensarling (R-TX), the Chairman of the Financial Services Committee explained it: 

“Ill-advised laws like the Dodd-Frank Act empower unelected, unaccountable bureaucrats to callously hand down crushing regulations without adequately considering what impact those regulations have on jobs…The true cost of Washington red tape includes the jobs not created, the small businesses not started and the dreams of our children not fulfilled.”

Now under the bill, before issuing a regulation the SEC will be required to:

identify the nature and source of the problem its proposed regulation is meant to address;

utilize the SEC’s Chief Economist to assess the costs and benefits of a proposed regulation to ensure the benefits justify the costs;

identify and assess available alternatives; and

ensure that any regulations are consistent and written in plain language.

Further, the legislation requires the SEC to engage in a retrospective review of its regulations every five years and conduct post-adoption impact assessments of major rules.

What great news! Not a moment too soon. Now the Financial Services Committee needs to, as fast as possible, issue a similar bill with respect to the regulations applied by the Fed and FDIC to the banks… because in their case they never even defined the purpose of banks before regulating these.

The current risk weighted capital requirements for banks are totally senseless.

Not only has regulators no business regulating based on perceived risks already cleared for by banks, as they should primarily require some capital reserves to face uncertainties, but these regulations also cause banks to no longer finance the “riskier” future but mainly refinance the “safer” present and past, at great costs for the real economy and for future generations.

Here are some questions I have not been able to have regulators to answer; perhaps the Financial Service Committee needs not to go on a hunger strike to manage that.

Here is a youtube presentation by Congressman Jeb Hensarling

Jeb Hensarling asks: How we can make the economy work for working people? Here’s my answer:

Jeb Hensarling, the chairman of the Financial Services Committee asks: How we can make the economy work for working people

Here’s my answer:

Get rid of the risk-weighted capital requirements for banks!

These only distort the allocation of bank credit to the real economy.

These only help finance the “safe” basements where jobless kids can live with their parents but not the “risky” new job creation they would need to afford to become parents too. 

These stop banks from financing the risky future and make these only refinance the "safer" past and present.

Where would America, the Home of the Brave, have been if its banks had been subjected all the time to this type of regulatory risk aversion?

“A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

The risk weighting has de facto decreed inequality

God make us daring!

Besides it is all for nothing. Bank crisis are caused by unexpected events, criminal behavior and excessive exposures to what was ex ante perceived as very safe when placed on the banks’ balance sheets, but that ex post turned out to be very risky. Never ever are bank crisis the result from excessive exposures to what was ex ante perceived as risky. “May God defend me from my friends, I can defend myself from my enemies” Voltaire

Now, if you are rightly concerned that getting rid of the risk weighting would initially create such bank capital shortages that it would put a serious squeeze on credit; then grandfather the current capital requirements for all their current assets, and apply a fixed percentage, like for instance 8%, on all new assets… including public debt, since a 0% risk weight for the Sovereign and 100% for We the People seems to me, I beg your pardon, an insult to your Founding Fathers.

Finally, if regulators absolutely must distort, so as to think they earn their salaries, may I suggest they use job-creation and environmental-sustainability ratings instead of credit ratings, which are anyhow already cleared for by banks.

Six easy questions that bank regulators should answer

Here some questions that need to be asked urgently at the Financial Services Committee 

What do you believe is the purpose of banks? Should it not have something to do with what like John A Shedd opined: “A ship in harbor is safe, but that is not what ships are for” 

If it includes to allocate credit efficiently to the real economy, why then do you distort that with risk weighted capital requirements for banks?

Voltaire said “May God defend me from my friends. I can defend myself from my enemies”. And so why do you base your capital requirements on what the bank perceives and not on what it has less chance to perceive?

Why do you give the AAA–AA rated a risk weight of 20% and the below BB- rated one of 150%? Do you really believe bankers could create excessive dangerous exposures to what ex ante was perceived as below BB-rated?

Why must the bank in my state hold more capital when lending to a local SME or entrepreneur, than when lending to, for instance, the German government?

By the way, is not the risk weights of Sovereign = 0% and We the People = 100%, an outrageous example of a runaway statism?

Why do you want to impose risk aversion in the Home of the Brave?