Edmund Burke would have required the current bank regulations to be totally reformed
In a letter published by Washington Post 2015 titled “Reverse mortgaging the future” I wrote that the current risk weighted bank capital requirements implied that “we refused those coming after us the risk-taking that brought us here and, in such a way, we baby boomers — or at least our elite — allowed the intergenerational holy bond that Edmund Burke wrote about to be violated.”
Days ago, I began reading the introduction to “Edmund Burke and the Perennial Battle, 1789-1797” written by Daniel B. Klein and Dominic Pino. I got to page 9 and there found Edmund Burke mentioning “four hurdles that an abuse must clear in order to be worthy of reform.”
So here I go.
First. “The object affected by the abuse should be great and important.”
I submit that banks and their allocation of credit to the real economy is of utmost importance.
Second. “The abuse affecting this great object ought to be a great abuse.”
I submit that imposing how much capital/equity/skin in the game banks should hold against different assets will much determine to what/whom, how much and at what interest rates banks are willing to lend.
Third. “It ought to be habitual, and not accidental.
I am sure the risk weighted bank capital requirements concocted by the Basel Committee for Banking Supervision and implemented for more than three decades by bank regulators all around the world meet perfectly both these criteria.
Fourth. “It ought to be utterly incurable in the body as it now stands constituted”.
Regulators who for decades have been unable to even acknowledge, much less discuss the existence of serious problems with their rulings, has sufficiently demonstrated a total incapacity to change and reform on its own.
And to what regulatory abuse am I referring to?
1.- Even though ALL bank crises ever have resulted from the build-up of excessive exposures with assets ex-ante perceived as safe but that ex-post turned out risky, regulators based their risk weighted bank capital requirements on that what’s perceived risky is more dangerous to bank systems than what’s perceived safe.
2.- Banks mostly subject to capital requirements based on perceived credit risks, not on the certainty of misperceived risks or unexpected events, e.g., a pandemic or a war, will stand there naked, just when we surely need them the most.
3.- When outlook seems rosy and risks are perceived low, banks will be allowed to pay large bonuses, large dividends and carry out share buy backs so, when times turn bad, banks will stand there naked, just when we might need them the most, just when it is harder for them to raise capital.
4.- By decreeing risk weights of 0% governments and 100% citizens the regulators indicate their belief bureaucrats know better what to do with (taxpayer’s) credit than e.g., small businesses and entrepreneurs with their own; something which has strongly empowered the Bureaucracy Autocracies around the world
5.- Risk weighted bank capital requirements much favor banks holding “safe” government debt & residential mortgages (demand-carbs-the present) over loans to “risky” businesses (supply-proteins-the future). The result: economic obesity that morphs into stagnation.
6.- Allowing banks to leverage more their capital/equity/skin-in-the-game when financing the safer present than when financing the riskier future, clearly violates that holy intergenerational bond Edmund Burke wrote about.
7.- And so on… and on and on.
PS. Here’s a reference to a more recent violation of that holy intergenerational social contract Edmund Burke spoke about. The response to Covid.
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