Saturday, December 5, 2015

Professors around the world, please, we are urged you teach our bank regulators a good Statistics 101.

Please, professors in statistics, explain to our bank regulators in the Basel Committee and the Financial Stability Board that when you try to make banks safe, you should be interested in what has made banks fail, and not in whether bank clients have failed.

As is, regulators have set higher credit risk weighted capital requirements for banks when lending to those perceived as being risky from a credit point of view; namely to those poor unlucky ones who anyhow have to pay more for credit and get smaller loans. And of course that means that “The Risky” receive even less credit and have to pay even more for it.

While those ex ante perceived as safe, but who are always those who detonate all major bank crises when they suddenly ex post turn out to be risky, their access to bank credit has been subsidized by the fact banks need to hold much less equity when lending to them. And of course that means banks might lend too much and at too low risk premiums to “The Safe”, and that, when disaster strikes, we find our banks standing naked there with little or no capital to cover themselves up with.

In fact, empirically, any statistic research could conclude in out that banks should in fact hold more capital when lending to The Safe than when lending to The Risky.

Professors, as you can see our bank regulators can’t seem to understand that the safer an asset is perceived ex ante, the bigger its potential to deliver ex post those unexpected losses that the bank capital is supposed to help cover. The banks themselves should, of course manage any expected credit losses.

So you see current bank regulators need a good Statistics 101. Can we count on you to lend us a hand? Please?