Where would the Home of the Brave be, if all its immigrants had been met by risk-adverse bank regulations?

In his Washington Post May 27 op-ed, “Subsidizing America’s most important product," George F. Will referred to “Joseph Schumpeter an immigrant from Austria” whose theory was that “the principal drivers of social dynamism are… innovators — inventors of new things and companies” and added that “The common denominator [of it] is the restless, risk-taking spirit of a talented few.”The de facto spirit of the risk weighted bank capital requirements in the United States can currently be summarized in the following way: 

“We regulators allow you banks to leverage your capital a lot, and therefore earn high risk adjusted returns on equity, with what’s safe, e.g., Treasuries and residential mortgages. But, as a quid pro quo, you need to stay away from what’s risky, e.g., small businesses and entrepreneurs”

So, let me ask: Where would the Home of the Brave be if all its immigrants had been met by such regulatory risk adverseness?

PS. Not the first time I have asked myself that question.

PS. John Kenneth Galbraith wrote: “For the new parts of the country [USA’s West] … there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business... [jobs created]. “Money: Whence it came where it went” 1975

PS. And at the World Bank I argued time and time again: “There’s a clear need for an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth.”

PS. God make us daring!

PS. And, to top it up, in The Land of the Free, that risk aversion came hand in hand with outright statism

Mr Hiroshi Nakaso, you are wrong! You and your colleagues, so irresponsibly, changed the nature of our banks.

Mr Hiroshi Nakaso, Deputy Governor of the Bank of Japan gave on March 21, 2016 a speech titled “Challenges toward financial stability and the policy frontier – unconventional monetary policy, macro-prudence, and financial institutions’ low profitability” 

In it he said: “Joseph Alois Schumpeter, in his seminal “The Theory of Economic Development” stresses the important role played by the “banker”, as well as that of the “entrepreneur”. The banker profits from her ability to identify those entrepreneurs who develop truly innovative undertakings that are high-quality startups, and from generating information that leads to improved corporate performance. Schumpeter expects that such profit motives of the banker backed up by her exceptional ability to pick winners would bring about a more efficient reallocation of risks in the macro economy and lead to an endogenous rise in the economic growth rate.

This role of the banker- promoting the creative destruction through financial intermediation – has not changed since the time of Schumpeter.”

You are so wrong Mr Nakaso! You and your colleagues have changed the role of the banker.

With your risk weighted capital requirements for banks, which allow banks to leverage more their equity with what is perceived safe than with what is perceived risky; and thereby be able to obtain higher expected risk-adjusted returns on equity when financing what’s “safe” than when financing what’s “risky”, have certainly changed the role of the banker.

Nowadays his role, as you and you colleagues have seen it fit, is simply to avoid taking credit risks.

If you do not believe me look at the following authorized bank equity leverages in Basel II. (The risk weights in Basel III remains the same)

When lending to prime sovereigns, the sky is the limit. 

When lending to the AAArisktocracy 62.5 times to 1.

When financing residential housing 35.7 times to 1

And when lending to risky unrated SMEs and entreprenuers, only 12.5 times to 1

And that Mr Nakaso, is why banks do not any longer finance the riskier future, they just refinance the, for the very short time being, safer past.

The next generations will hold you and your colleagues accountable for this regulatory atrocity.