What would Mark Twain say about our current bank regulations?

Do you remember Mark Twain’s saying about the banker lending you the umbrella when it shines and taking it away when it rains? Well now thanks to bank regulators the banks are also earning immensely higher risk-adjusted returns on their equity lending the umbrella when it shines than when lending it when it rains. How come? 

Currently, if a bank lends to a small business or an entrepreneurs, those deemed officially as “risky” by the regulators, it is required to have about 8 percent in capital, but, if lending to an officially ex-ante deemed not risky, like the triple-As or the infallible sovereigns, the banks needs to hold very much less capital, sometimes even zero. 

Does this make our banks more productive? Of course not! We risk-adverse citizens, have always been grateful for the service our banks provides the society, channeling our savings to those who can generate economic growth, and decent jobs for our grandchildren… which basically means taking risks on small businesses and entrepreneurs, not lending to what is so “not-risky” it can easily raise funds elsewhere. 

Does this make our banks safer? Of course not! No systemic bank crisis has ever occurred because of excessive exposures to what is ex-ante perceived as risky, these, exactly like the current one, have always resulted because of excessive exposure to what was ex-ante perceived as absolutely not risky, and ex-post turned out to be very risky… often because the safe-havens became dangerously overcrowded. 

And so what would Mark Twain say now? Since after this crisis, that threatens the whole Western World, we insist in using the same failed regulators using the same failed regulatory paradigm, he would just elegantly (through a time machine) defer to Albert Einstein’s "we can't solve problems by using the same kind of thinking we used when we created them" and, of course, “insanity is doing the same thing over and over again and expecting different results”.