Monday, October 22, 2012

I am not giving up on making the thick as a brick bank regulatory establishment, understand.

By allowing banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”, the regulators allow banks to earn immensely higher risk-adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”.

That is very dangerous because it makes “The Infallible”, those including sovereigns and triple-A rated, so much riskier for banks than what they normally are… remember that it is excessive exposures to “The Infallible” which always been the origin of major bank crises.

That entirely distorts the economic efficient resource allocation banks are supposed to do; for instance by disfavoring more than normal the lending to “The Risky”, the group that includes as members, small businesses and entrepreneurs.

And, that regulatory discrimination in favor of those normally already favored, creates disfavors against those already disfavored, and is therefore also, simply put, odiously immoral.