Sunday, May 25, 2014

Two simple questions on Basel II and III to Stefan Ingves, Mark Carney, Mario Draghi and other bank regulators.

Question 1: Do you really think that risk-weighted capital requirements for banks, which allow banks to earn higher risk-adjusted returns on equity when lending to "the safe" than when lending to "the risky", do not dangerously distort the allocation of bank credit to the real economy?

Question 2: If no bank crisis ever has resulted from excessive bank exposures to what was ex ante perceived as "risky", and these have always resulted from too large exposures to what was ex ante perceived as "absolutely safe", why do you require a bank to hold more capital when lending to "the risky" than when lending to the "absolutely safe"?