The main causes the so objectionable risk-weighted bank capital requirements are not objected.
A brief summary:
No understanding about what immense hubris “experts” are capable of, like believing they can weigh bank capital requirements for perceived credit risks… and then mostly ignoring misperceived risks and unexpected events e.g., pandemic war.
No understanding of how allowing banks to leverage their capital differently with different assets, will make it easier/harder for banks to obtain the desired risk adjusted returns on equity; something which distorts the allocation of credit.
No knowledge about conditional probabilities; which therefore helps to believe those excessive exposures that could become truly dangerous to bank systems, are built up with assets perceived as risky.
Not understanding that risk-taking is the oxygen of all development.
Consequentially:
No understanding of their pro-cyclicality. When risks are perceived low, credit ratings are high, banks can hold little capital, buy back stock, pay much dividends and bonuses, and so, when times worsen, or something unexpected like a pandemic or a war occurs, banks will stand there naked, precisely when it would be the hardest for them to raise new capital, precisely when we need them the most
No understanding of that since the capital requirements are lower for lending to the “safe” government than to the risky citizens, this implies bureaucrats/politicians know better what to do with (taxpayer’s) credit than e.g., small businesses and entrepreneurs. (Of course, they could also be agreeing with that for pure ideological considerations.)
No understanding of what capital requirements being lower for “safe” residential mortgages than for loans to risky small businesses and entrepreneurs, implies to the possibilities of generating the jobs/incomes needed to service mortgages and pay living costs.
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