Bank regulations and 9-11

It might be because I am a bit too risk-adverse that I have always felt that as long as the Western World remains brave, and willing to take risks, it will survive any threat, no matter how big these are, but, if it becomes coward and risk-adverse, then any minor cold could signify its demise. In this respect, with anguish, I must alert about the damages that the regulators are doing to our banks, the frontline financiers of our risk-takers. 

The banks have always discriminated based on what they perceive as the risk of default, which of course includes the information provided by the credit ratings. That they do by means of: the higher interest rates charged, the lower amounts lent, the shorter length of the loans, more collaterals required, the longer time allotted to investigate the credit worthiness of the borrowers, and of course the bankers´ own personal risk-adverseness... never heard about the banker lending the umbrella when the sun shines and taking it back when it rains? 

Therefore, when the bank regulators, the Basel Committee for Banking Supervision and friends, imposed capital requirements for banks based on the perceived risks of default, which allowed for much lower bank capital when the perceived risk of default was low as to what was required when the perceived risks were high, the regulators added a new, very arbitrary and dangerous, layer of risk adverseness. 

Those capital requirements discrimination signified that the risk-adjusted premiums for lending to what was perceived as not risky could be leveraged on bank capital much more that what the risk-adjusted premiums for lending to those perceived as risky could be. 

The immediate result was to generate a stampede of bank lending to the “not-risky”, like “approved” sovereigns and risk-free AAAs, which created the current crisis … and to provoke a withdrawal from lending to the “risky”, like the job creating small businesses and entrepreneurs, which keeps us from getting out of our current crisis. 

The saddest part of it all is that, more than three years into the crisis, the problem here mentioned is not even discussed and much less a part of the reforms of our bank regulations. Basel III still has the bank regulators acting as risk-adverse global risk managers…in other words diggings us deeper in the hole. 

In these days when we are remembering the horrors of 9-11, we need then to be aware that the bank regulators, unwittingly, are engaging in regulatory terrorism that will weaken the Western World much more than other better known forms of terrorism. 

Risk-taking is the oxygen of any development and movement forward… and, if you don’t move forward you fall…and so what’s it going to be Western World?

Ps. A video that explains a small part of the craziness of our bank regulation in an apolitical red and blue! http://bit.ly/mQIHoi