Don’t you understand how utterly immoral and dumb current bank regulatory discrimination is?

Suppose a busybody ministry of economy came up with the idea that in order to strengthen the competitiveness of the nation’s private sector, and make really sure the firms employed the best and brightest, they were going to give special tax incentives for hiring students with grades over a specified level. 

What would happen?

All those who had not achieved that great level of grades would scream bloody murder and accuse the ministry for discriminating against them, for something which they were already being discriminated in the job market. And if by any chance the ministry would still be able to impose its nutty and odiously discriminatory plan… you would automatically begin to see some inexplicable inflation in the level of grades.

And that is basically what the risk-weighted capital requirements for banks concocted by the Basel Committee for Banking Supervision do:

First: These capital requirements odiously discriminate, for a second time, against those who because of being perceived as risky already get smaller loans and pay higher interest rates.

Second: Borrowers have always wanted to be perceived as safer than what they are… but now the lenders dangerously have a vested in sharing that interest in too... so the credit rating agencies will be pressured for better ratings from both sides.  

Third but foremost: By allowing banks to earn higher risk-adjusted returns on equity when lending to “the safe” these capital requirements distort the allocation of bank credit to the real economy

And fourth: It all serves absolutely no purpose, since never ever do bank crises result from excessive exposures to what is perceived as risky, but always from excessive exposures to something erroneously ex ante perceived as absolutely safe.