My 4 tweets on the access to bank credit war

1. Way too much discussions on whether bank capital requirements should be 4%, 8%, 15%, 20% or whatever, and way to little about the fact that different capital requirements for different assets, dangerously distorts the allocation of bank credit.

2. The risk weights in the risk weighted capital requirements for banks are de facto tariffs on the access to bank credit. Sovereigns 0%, AAA rated 20%, residential mortgages 35%, unrated citizens 100%, below BB- corporates 150%.

3. So why do all those who tear their clothes about trade protectionism, keep silence about the access to bank credit protectionism imposed by “the safe” on “the risky”, and which can have even much more serious implications for the world economy.

4. As is it guarantees especially large bank crises from especially big exposures to what’s perceived as especially safe, against especially little capital.

As is, by favoring credit to the “safer” present over the “riskier” future it guarantees stagnation.

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

PS. It has caused houses to morph from being homes into being investment assets.

PS. More than a trade war it is actually this access to bank credit war that is most likely to bring the euro and then EU down.

PS. 0% risk weights will turn sovereign into spoiled filthy rich brats that will end up defaulting.

PS. Are these reasons not enough cause for impeaching the current bank regulators?

Trade wars will mean new tariffs

There is another tariff war that is being dangerously ignored. 

The July 6 editorial "A splendid little tariff war?" rightly held that "tariffs create all sort of inefficiencies, unintended consequences and uncertainty."

The risk-weighted capital requirements for banks also translate de facto into subsidies and tariffs, which have resulted in a too much-ignored allocation of bank credit war. 

One consequence is that those perceived as risky, such as entrepreneurs, have their access to bank credit made more difficult than usual, and our economy suffers. Another is that by promoting excessive exposures to what is especially dangerous, because it is perceived as safe, against especially little capital, guarantees that when a bank crisis results, it will be especially bad. 

In terms of Mark Twain's supposed saying, these regulations have bankers lending out the umbrella faster than usual when the sun shines and wanting it back faster than usual when it looks like it is going to rain.

Letter published in the Washington Post

Here other of my letters in the Washington Post on this issue:
September 6, 2007: Factors in the Financial Storm
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation

January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe 

December 30, 2018: Affordable homes or investment assets?

Why does IMF never mention that credit-risk-weighted capital requirements for banks, is a potent inequality driver?

I refer to an IMF Staff-Discussion-Note titled “Causes and Consequences of Income Inequality: A Global Perspective”. It includes among other “Factors Driving Higher Income Inequality” the following:

“Financial globalization. Financial globalization can facilitate efficient international allocation of capital and promote international risk sharing. At the same time, increased financial flows, particularly foreign direct investment (FDI) and portfolio flows have been shown to increase income inequality in both advanced and emerging market economies… Financial deregulation and globalization have also been cited as factors underlying the increase in financial wealth, relative skill intensity, and wages in the finance industry, one of the fastest growing sectors in advanced.

Financial deepening. Financial deepening can provide households and firms with greater access to resources to meet their financial needs, such as saving for retirement, investing in education, capitalizing on business opportunities, and confronting shocks. Financial deepening accompanied by more inclusive financial systems can thus lower income inequality, while improving the allocation of resources… Theory, however, suggests that … inequality can increase as those with higher incomes and assets have a disproportionately larger share of access to finance, serving to further increase the skill premium, and potentially the return to capital.”

And again I must ask: Why does IMF insist on keeping mum on that huge financial inequality driver that is the risk-weighted capital requirements for banks?

Society lends bank much support, not only directly, by entrusting it with its deposits, but also indirectly, by offering deposit guarantees that if called upon will be paid by taxpayers.

And the Basel Committee thought it could make banks safer by making the capital requirements for banks to be dependent on perceptions of credit risk… while entirely ignoring that those perceptions of risk were already cleared for, by means of risk premiums and size of exposure.

And so, for instance with Basel II, regulators decided that banks were allowed to leverage the societal support over 60 times to 1 when lending to the AAArisktocracy, namely those rated AAA to AA, but only about 12 times to 1, when lending to unrated SMEs and entrepreneurs. That, which allows banks to earn much higher risk-adjusted returns on equity when lending to “The Safe”, blocks the opportunities of “the risky” to obtain fair access to bank credit. It therefore constitutes a huge driver of inequality.

And since the document refers to “Financial deregulation” I must also ask, for the umpteenth time…what financial deregulation? That where a small number of regulators redirect the allocation of bank credit all over the world… de facto imposing global capital controls? You’ve got to be kidding!

No! The Basel Committee is just a nest of irresponsible populist technocrats, who frankly have no idea of what they are doing. For instance they derive those capital requirements, that they themselves declare should be there to cover for unexpected losses, from the perceptions of expected losses. How loony is not that? Clearly the safer something is perceived, the bigger its potential to deliver truly disastrous unexpected losses.

I have often complained about these regulations on the IMF blog… you can Google it on “blog-imfdirect.imf.org Kurowski”. But I have never received an answer from IMF, seemingly the automatic solidarity among technocrats is very strong.

PS.That regulatory protectionism can both keep our banks safe and allocate credit well, is pure and unabridged technocratic populism