Current risk weighted capital requirements are de facto regressive regulatory taxes imposed on the access to bank credit.

When interviewed by Dave Rubin, Don Boudreaux, defending a flat tax states:

“When you tax all income earning activities the same, then the relative prices of different types of labor services stay the same. With progressive taxes you create greater distortion in the economy and that makes us all a bit less wealthy than we would otherwise be”

Why is never a flat capital requirement for banks defended with the same impetus as a flat tax on income?

As is the risk weighted capital requirements for banks, which even though some leverage ratio has been imposed still operate on the margin, impose de facto different taxes on the access to bank credit.

To make it worse though in the case of taxes on income these are currently progressive, in the sense that they most affect those who are already by being perceived as risky have less and more expensive access to bank credit, these regulatory taxes are regressive.

PS. Why did Classical Liberals or Libertarians not speak up when, in 1988, with the Basel Accord, Basel I, the regulators risk weighted the sovereign with 0% and the citizens with 100%?

Fight for the American dream giving opportunities to everyone, but not by using a bank in my backyard

I refer to a great report produced by a AEI/Brookings Working Group titled “Opportunity, responsibility and security: A consensus plan for reducing poverty and restoring the American Dream”

With respect to Opportunity it states: “The concept of ‘opportunity’ draws nearly universal support among Americans, and it’s the core concept of the American Dream. We endorse Truslow Adams’ definition of opportunity as the state of affairs when “each man and each woman shall be able to attain to the fullest stature of which they are capable,” regardless of offer opportunity, in this sense, to all its residents… Progressives generally believe that government should be more active and can be more effective than do conservatives. But this difference shouldn’t obscure the fact that nearly all Americans would prefer to live in a society in which opportunities for self- advancement are more widely available, especially to those at the bottom of the income distribution, than is now the case. 

I have no objections, but, from what I have seen, both conservatives and progressives have ignored how regulators affected the opportunities of The Risky to access bank credit.

Regulators, with their credit risk weighted capital (equity) requirements, allow banks to earn much higher risk adjusted returns on assets perceived as safe, than on assets perceived as risky. And that of course distorts the allocation of bank credit in favor of The Safe, those already favored by banks with lower interests and larger loans, and against The Risky, those already punished by banks with higher interests and smaller loans. And that, by impeding The Risky the opportunity of fair access to bank credit, is of course great driver of inequality.

Why is that so ignored by all who write against increased inequality and in favor of opportunities? Could it be a symptom of let’s fight against inequality, and let’s give everyone opportunities, but never ever with the bank in my backyard doing that?

Tax the bank-baskets on the number of eggs they carry!

To tweak and refine the current bank regulatory systems, for instance by further professionalizing the credit rating agencies, in order to get us to foolishly trust them even more, will just increase the systemic risks of a global failure.

The best and safest way is to follow the prudent tradition of not putting all your eggs in the same basket and to that effect create a progressive tax on the size of the banks. The larger the bank, the more it will hurt if it fails, so the more it should have to pay in insurance premiums.

Marx prophesied “a progressive diminution in the number of the capitalist magnates” and the best way I know of fighting Marxism is to stop this prophecy from becoming a reality.