A much-needed and much overdue conference

John A. Shedd, in his 1928 “Salt from my attic” wrote: “A ship in harbor is safe, but that is not what ships are for”. 

Does that not apply to banks too?In his autobiography “Keeping at it”, penned together with Christine Harper in 2018, Paul Volcker, the Chair of the Federal Reserve from August 1979 to August 1987, with respect to the credit risk weighted bank capital requirements approved in 1988 and which are known as Basel I, valiantly confessed:

“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages… The American ‘overall leverage’ approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities."

Allowing banks to leverage much more with Treasuries and residential mortgages, which means it is easier for them to obtain satisfactory returns on equity with these assets, made it of course much harder for the “risky” e.g., small businesses and entrepreneurs to compete for credit. They now get less credit or pay higher interest rates than in absence of these regulations. Direct results? More government debt, higher house prices and less private sector jobs/incomes.

The harsh truth is that with the risk-weighting, the Fed decreed the less creditworthy to also be less worthy of credit, and that banks financing or refinancing the “safer” present would have priority over their financing the riskier future. 

An even harsher truth is that, in terms of financial stability, it’s all for nothing… even counterproductive. All the excessive exposures that could lead to major systemic bank crises, have always been built-up with what’s perceived as safe, never ever with what’s perceived as risky.

Who is going to pay by far the most for all the consequences? Our children and grandchildren.

“Where would America, the Home of the Brave be, if the credit risk averse bank regulations had not been introduced?”, is that not a question that merits a conference transmitted live on prime time? 

Why has it not taken place yet? Thirty-three years of silence clearly evidences this is not a red or blue issue and, sadly, violet is so out of fashion.

Why does your paper/organization sponsor such a conference?