Who allowed some Homo tímidus ignarus to substitute for the Homo sapiens as bank regulators in the Basel Committee?

Credit risk is the natural risk most cleared for by banks. Not only does it define the size of their exposures, but also, because the riskier they can argue something to be, the higher will the risk premiums they can negotiate for themselves be.

But for timid, faint hearted, sheepish and outright fearful regulators, that was not enough. They had to make sure banks were really scared of credit risk, and so they doubled up on it by designing capital requirements that were also based on the same risk.

And so banks are now allowed to leverage their equity and the support they receive from society more with assets perceived as safe than with assets perceived as risky.

And consequentially banks can earn higher risk-adjusted returns on equity on assets perceived as safe, than on assets perceived as risky.

Someone might opine that if that makes our banks safer, that might not be such a bad idea. Nothing is further from the truth.

First, all major bank crisis have resulted from excessive exposures to something wrongly perceived as safe and never ever from something ex ante correctly perceived as risky. And so banks when the crisis happens are now guaranteed to stand with especially little capital to cover them up with. 

Second, by distorting the allocation of bank credit to the real economy, causing for instance insufficient lending to “risky” SMEs and entrepreneurs, it will weaken the economy; and a weak economy is of course also dangerous to banks.

Risk taking is the oxygen of any development. Risk taking is what brought us the Homo sapiens of the Western Civilization to were we are… and so I must ask: who allowed some Homo timidus to act as bank regulators? 

Without the natural and sturdy risk taking by our banks, our economies are now stalling and falling, and we are all beginning to gasp for oxygen in dangerously overpopulated safe havens.

But perhaps the term Homo tímidus ignarus is more appropriate. Bank capital should foremost help to cover for unexpected losses, so using expected credit risk to determine something unexpected is as dumb as can be; especially since the safer something is perceived to be, the larger is its potential to deliver unexpected losses.

PS. A question to Yuval Noah Harari: How does the willingness of Sapiens to take risks play out in the History of Humankind?

PS. Just in case, my Latin is almost non existent.