The confession of a regulatory hit man… one that shall not be heard.
Paul Volcker, in his autography “Keeping at it”, penned together with Christine Harper in 2018, wrote: “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."
What does that mean? It means exactly, no way around it, that if banks needed to hold as much capital against government securities and residential mortgages than what they were required to hold against e.g., loans to small businesses and entrepreneurs, banks would either hold less governments securities or residential mortgages or require higher interest rates on that… which also translates into banks holding more loans to small businesses and entrepreneurs at lower interest rates.
Volcker referred therein to 1988 Basel I regulations’ risk weighted bank capital requirements, but that remains totally applicable to Basel II and Basel III.
Thirty-three years without free-market set interest rates in the Western world, and I believe not one single Nobel Prize in Economic Sciences winner, or reputable or disreputable PhD anywhere, or distinguished journalist, has referred to this. Could it be that risk weights 0% government, 40% residential mortgages have created such a strong alliance between statists/communists and home owners, that the 100% risk weighted citizens stand no chance.
With banks giving too much credit at too low rates to what’s perceived or decreed as safe, where do you think this will all end? Have a guess.
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