Current bank regulation, more risk more capital - less risk less capital, is something as fake and dumb as it gets.

1. Even though the most important function of banks is to allocate credit efficiently to the real economy, let’s forget that and concentrate solely on banks becoming super safe mattresses in which we can store our savings.

So let us not worry about banks being able to leverage more their equity and the support we give them on what is perceived as safe than on what is perceived as risky; which obviously means banks will be able to earn higher expected risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky; which obviously means banks will lend too much to what is perceived as safe and too little to what is perceived as risky.

2. Even though that reduces the opportunities of those coming from behind to access bank credit, and therefore basically decrees more inequality, let’s also forget about that.

3. Even though the distortion will cause banks to finance less the risky that our young need in order for them to have jobs and a workable economy, let us forget about that and go for short term safety, we baby-boomers aren’t that young, are we?

4. Even though all banking crisis have resulted from unexpected events, like natural disasters and devaluations, from criminal activity and from excessive exposures to something ex ante perceived as safe but that ex post turned out to be very risky, let us ignore that and require banks to hold more capital when holding assets perceived as risky. 

5. Even though we know that banks will do their utmost to lower their capital requirements so as to obtain higher returns on assets, let us allow the big banks to run their own risk models, as they will love us for that and make our yearly visits to Davos so much more agreeable.

6. Even though it is clear that our economies would never have developed the same had these regulations been in place before, let us ignore that, in order as regulators to feel more tranquil.

7. Even though the distortion will cause banks to finance less the risky SMEs and entrepreneurs that our young need to be financed in order for them to have jobs and a workable economy, let us forget about that and go for short term safety, we baby-boomers aren’t that young, are we?

8. Even though 0% risk weight for the Sovereign and 100% for We the People gives away that we believe government bureaucrats know better how to use bank credit than the private sector, let’s stand firm on it. We are true statists, aren’t we?

9. Even though Greece and AAA rated securities, and the ensuing stagnation, and the ensuing waste of so much stimulus has proved us so very wrong, let us ignore that, since otherwise we could lose our jobs.

10. There is probably not a clearer evidence that current bank regulators have no clue about they are doing that Basel II's risk weights. These assign 20% to the dangerous AAA to AA rated while sticking the so innocuous below BB- rated with 150%.

PS. I have tried for over a decade to get some answers from regulators to some very basic questions, unfortunately in that area the technocrats are seemingly following a strict Zero Contestability policy.

The importance of being ignored… by for instance the Basel Committee, the IMF and the Financial Times

The pillar of current bank regulations is risk weighted capital requirements for banks; or more exactly portfolio invariant credit risk-weighted equity requirements for banks. It signifies banks are allowed to hold much less equity against assets perceived as safe, than against assets perceived as risky.

Though intuitively it might sound extremely correct, it is extremely flawed, primarily for three reasons:

First, it just doesn’t make any sense from the perspective of making the banking system safe, since all major bank crises have resulted from excessive exposure to something perceived as safe but that ex post turned out not to be; and none from excessive exposures to something ex ante perceived as risky.

Second, allowing banks to leverage their equity, and the support the society lends them, differently, depending on perceived credit risk already cleared for by other means, introduces a tremendous distortion in the allocation of bank credit to the real economy.

Third, by discriminating the access to bank credit against those who by being perceived as risky are already naturally discriminated against, it kills equal opportunities and thereby fosters inequality.

I have voiced my furious objections to that regulation, for way over a decade, to no avail.

The indifference with which my arguments have been met, by the Basel Committee, the Financial Stability Board, the IMF, the Fed, the Bank of England and all other institutions related to bank regulations; plus that of medias such as the Financial Times, has undoubtedly been a source of frustration. And worst has it been when I am told that my questioning is obsessive, something which I have never negated, but when I have always felt that the way they have ignored this issue shows even more obsessiveness.

But, little by little, I have started to appreciate the fact that being ignored, has added a much more important aspect to my criticism. Had regulators accepted and corrected for their mistakes immediately, that would have undoubtedly been good. But at the same time that would also perhaps have shed less light on the importance issue of how little contestability and accountability there exists in institutions ruled by a self-appointed technocrats.

And so, when the world wakes up to the horrendous implications of this regulatory risk aversion, it might hopefully also be able to wake up and correct for the horrible regulatory procedures... and for the sort of bias in favor of regulators that many in the media show.

Then perhaps the SMEs and entrepreneurs could get a real hearing about their difficulties to access bank credit in Basel, in Davos or in Washington during the Spring or Annual Meetings of the IMF and the World Bank.