Bank regulators, please wake up, being more creditworthy, should not mean, as you have decreed, being also deemed more worthy of credit.
Anyone deemed more creditworthy in terms of representing less risk of default will, by definition, get more credit and on better terms (like lower risk adjusted interest rate) than anyone deemed to be less creditworthy.
But if banks are allowed to leverage their equity more with the more creditworthy, and can so easier earn higher risk adjusted returns on equity, that does also imply these borrowers to be more worthy of credit than the less creditworthy… and that’s as wrong and dangerous as can be, for the bank system and for the real economy... and in reality, that's even immoral.
The wealthy are usually creditworthy, but they not more worthy of credit than the “riskier” poor. The risk weighted bank capital requirements, wrongly and immorally, Decreed Inequality.
A government is (at least in the short run) quite often very creditworthy, but it is not more worthy of credit than its citizens, as the risk weighted bank capital requirements so wrongly decree.
A house buyer is often creditworthy, but he is not more worthy of credit than e.g., small businesses and entrepreneurs, as the risk weighted bank capital requirements so wrongly decree.
A house buyer with a larger down-payment, a lower loan to value LTV, is more creditworthy, but he is not more worthy of credit than a riskier house buyer providing a smaller down-payment, a higher LTV, as the risk weighted bank capital requirements so wrongly decree.
A developed nation is (at least in the short run) quite often very creditworthy, but it is not more worthy of credit than riskier developing nations, as the risk weighted bank capital requirements so wrongly decree.
A federal government is (at least in the short run) quite often very creditworthy, but it is not more worthy of credit than riskier local governments, as the risk weighted bank capital requirements so wrongly decree.
An AAA rated corporation is credit creditworthy, but it is not more worthy of credit than a much riskier below BB- rated one, as the risk weighted bank capital requirements so wrongly decree.
And I could go on and on
Posts
