Have the risk weights used in current bank regulations really been approved by the US Congress, in accordance to the Constitution?
Note: When reading about “bank capital requirements”, know that you are reading about “bank equity requirements” or about “bank shareholders’ skin-in-the game requirements”
The confession that shall not be heard
“Assets for which bank capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker
New foreword, January 2021: For about 600 years banks allocated credit based on risk adjusted interest rates. After risk weighted capital requirements were introduced, 1988 Basel I, they began allocating it based on risk adjusted returns on equity.
Lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs
Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.
Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.
Lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.
Those bank capital requirements, de facto ruled that those less creditworthy were even less worthy of credit, and that those more creditworthy were even more worthy of credit.
Can this really be in accordance with the U.S. Constitution? Is it not a Shadow-Insurrection?
Original post May 2013:
As a Venezuelan I regretfully know much too much about the violations of a Constitution, but I cannot say that I know much about the Constitution of the United States.
For instance, the Constitution of the United States of America, in Section 8 states, “The Congress shall have the power to…fix the Standard of Weights and Measures.”
And I know that bank regulators, by setting risk weights determine how much capital (equity) banks need to hold against different assets... which means that banks will be able to obtain different risk adjusted returns on equity for different assets.
And so I ask, did the United States Congress really approve those risk weights? I say this because I find that concept to be anathema to “The Home of the Brave”.
And I also ask because the US Constitution, in its section 9 states: “No Title of Nobility shall be granted by the United States”… and that seems precisely what the US might have allowed by allowing regulatory preferences, much lower risk weights, on loans to the Sovereign (the Monarch) and to an AAAristocracy... or more precisely an AAArisktocracy.
And clearer yet the Constitution, in Section.8. states: "The Congress shall have the power to borrow Money on the credit of the United States". I am absolutely sure the Founding Fathers did not mean that United States’ Treasury should have the power to borrow money based on bank regulation favors.
And what are those risk weights? The sovereign, meaning the Federal Government, meaning bureaucrats/politicians deciding on the use of bank credit, were assigned a 0% weight, the “AAArisktocracy” one of 20%, and We The People, we were sentenced to have a 100% risk weight.
But what do these risk weights really signify? The answer is quite straightforward. Those with low risk weights will have even more access at even easier terms to bank credit, than what the natural order of banking would give them. And so those with higher risk weights will, consequentially, have less even access to bank credit and have to pay even more for it, than what the natural order of banking would give them.
And so, in words of Mark Twain, this means that bankers are even much more prone than usual to lend out the umbrella when the sun shines, and to take it back when it rains.
And the tragic consequences for the US are many:
It increases the inequality gap between The Infallible and the Risky
It stops bank from financing the future and make them mostly refinance the past.
And in the case of the sovereign, it translates into an effective subsidy of the interest rates paid by the Government, and so everyone is flying blind, not knowing what the real not subsidized risk free rate would be.
And at the end of the day this piece of regulation guarantee excessive bank exposures to what’s ex ante perceived, decreed or concocted as safe, but which might turn out risky, and when that happens are held against especially little capital, and so will result in especially severe bank crises.
And the list goes on...
For a starter: Shall the credit of the USA be helped by the Fed with its Quantitative Easing (QEs)?
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