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%?

To lower the real real-interests in order to stimulate the real economy, take away the too costly subsidies of public debt.

Would any serious economist discuss gas prices at the pump ignoring taxes? No!

Would any serious economist discuss milk prices ignoring various subsidies? No!

Then why have almost all serious economists been discussing low real interest rates on public debt ignoring regulatory subsidies? I have no idea!

In 1988, the Basel Accord, Basel I, for the purpose of setting the capital requirements for banks, decided that the risk weight of the sovereign was 0% and that of We the People 100%. 

That would hence mean that banks would be able to leverage much more their equity, and the value of any explicit or implicit government guarantees they received, with loans to the public sector than with loans to the private sector. 

That would hence mean banks could obtain higher risk-adjusted returns on equity when lending to the public sector than when lending to the private sector.

That would hence mean that the interest rates of bank loans to the public sector included a regulatory subsidy.

That would hence mean that the subsidies for the access to bank credit by the public sector was to be paid by taxing the private sector with more restricted or more expensive access to bank credit.

And that should hence have meant that in order to know the real real-rate on public debt, to the nominal rates, we would have to add the cost of the regulatory taxes paid by the private sector.

That has not been done! All references to the interest rates of public debt have been limited to using the nominal rates. That has led experts like Lawrence Summers, Lord Adair Turner, Martin Wolf and many other, to argue that the public sector should take advantage of extraordinary low rates in order to finance public investments, like in infrastructure.

That is very wrong! If we include the economic cost of restricting the access to bank credit over the decade and around the world, for many millions of SMEs and entrepreneurs, the current real real-interests rates on public debt could in fact be the highest ever.

So, if the Fed, ECB, BoE or any other central bank, really wants to lower the interests in order to stimulate the real economy, then they should begin by asking bank regulators to take away those so very costly subsidies of public debt.

Central bankers might start doing this, in the name of equality, since making it harder than necessary for “the risky” to access bank credit, can only help to increase inequality. 

If bank regulators get too anxious and nervous about this, central bankers can (gently) remind them that there has never ever been a major bank crises caused by excessive exposures to what was ex ante perceived as risky. 

But what if the central banker also wears the hat of bank regulator? Then he has a problem he needs to solve… maybe with the help of some outside counseling assistance?

Mark Carney: Would the Magna Carta include risk-weights like these: King John 0%, AAA-risktocracy 20% and Englishmen 100%?

With the Basel Accord of 1988 (signed one year before the Berlin wall fall) bank regulators assigned a 0% risk weight for loans to the sovereign and 100% to the private sector. Some years later, 2004, with Basel II, they reduced the risk-weight for loans to those in the private sector rated AAA to AA to 20%, and leaving the unrated with their 100%.

That introduced a considerable regulatory subsidy for the bank borrowings of the infallible sovereign (government bureaucrats) and for those of the private sector deemed almost infallible. And that taxed severely the fair access to bank credit, of those deemed as risky, like SMEs and entrepreneurs.

Reading Mark Carney’s interesting: “From Lincoln to Lothbury - Magna Carta and the Bank of England” I felt like asking him what he would think the Magna Carta would have to say about these risk-weights.

If I were a Senator a Congressman or a Governor of a US state, here is what I would ask the Fed and the FDIC.

Why on earth can a state-chartered bank, or any other bank for that matter, operating in my state, be allowed to lend to well-rated corporations elsewhere, or to sovereign governments, holding less equity than when lending to our own local SMEs and entrepreneurs? 

I mean that does not sound right. That sounds like a regulatory tax on my “risky” borrowers, those who already get less credit and pay higher risk premiums, and a regulatory subsidy to strange “safe” borrowers, those who already get larger loans at cheaper rates.

If I were a bank regulator, the last thing I do, would be to regulate against the fair access to bank credit of "the risky" of my own hometown.