If you want your nation to prosper and become strong, what bank capital (equity) requirements would you prefer?

The current risk weighted ones, which have banks allocating their credit based on risk adjusted return on required equity (ROrE)? 

These imply e.g.:

Bureaucrats knowing better what to do with credit for which repayment they’re not personally responsible, for than small businesses and entrepreneurs.

Financing the purchase of houses with residential mortgages has priority over financing those who can create the jobs, the incomes, by which repay mortgages and service utilities. (Which makes houses become more investment assets than affordable homes)

Or, just one single capital requirement against ALL assets, a leverage ratio, which will have everyone compete for credit with risk adjusted interest rates, and banks allocating their assets based on maximizing their risk adjusted return on one single equity (ROE)?

Or, would you argue: “But, the risk weighted makes our bank system safer”  Sorry, No! It’s just another dangerous Maginot Line

The first nation to kick out Basel Committee regulations and return to one single bank capital requirement against all assets, has the best chance of getting back on the right track. How to transition from here to there? Not easy, but here’s one route.

PS. Why do those who with so much emotions argue against trade protectionism, with such ease ignore to argue against credit allocation protectionism?

A tweet to @imfcapdev April 5 2021

"Excess of carbs e.g., government loans, residential mortgages; insufficient proteins e.g., bank loans to entrepreneurs and lack of exercise e.g., no creative destruction/zombification, causes GDP obesity. Can IMF/WBG develop a Body Mass Index for GDP?"

If you go into that dark forest that looks horrible to you... then we will force you to eat broccoli and spinach.

But if you stay out on the fields where everything looks safe and beautiful... then we will allow you to eat as much chocolate cake and ice cream you want.

Here my dialogues with #AI ChatGPT - OpenAI about current bank capital/equity requirements.

Two questions to America’s economists, and one for its lawyers.

Bear with me.

Let me start with two passages from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

First: “For the new parts of the country [USA’s West] … there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business... [jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.”

Second: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Then, in Steven Solomon's “The Confidence Game” we read:

“On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital…” 

Finally in his autobiography “Keeping at it” of 2018, penned together with Christine Harper, Paul Volcker 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. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011. 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."

Thanks!

So, now let me ask America’s economists two questions:

If since its Founding Fathers’ days America’s banks had been regulated so as to finance much more the government and residential mortgages than loans to its small businesses and entrepreneurs, would America be where it is now? 

Knowing that all those excessive bank exposures that have set on major bank crises were always built-up with what was ex ante perceived as very safe, what true precautionary purpose do these regulations serve?

And one question to America’s lawyers:

The risk weighted bank capital requirements with decreed weights of 0% Federal Government 100% - We the People, do they really conform with what 's wanted in the U.S. Constitution?

Where do I come from? 

At the World Bank “Let us not forget that the other side of the Basel [Committee’s regulatory risk weighted capital requirements] coin might be many, many developing opportunities in credit foregone”

As one of the Christian Western World? God make us daring!

As one having a strong opinion? My letter to the Financial Stability Board.

25 years on the issue. My first Op-Ed ever, began with what this post does.