Bailouts, which could carry significant costs to taxpayers, to be justified, must have a great purpose.
Note: I’m simultaneously sending out this type of "J'accuse" letter to Financial Times, Washington Post, New York Times, Wall Street Journal, The Globe and Mail, and The Economist.
SVB was holding a high number of Treasury and other government bonds — amounting to more than half of its assets. When will one dare ask regulators: How much capital/equity/skin-in-the game, were SVB's shareholders required to hold against that?
Bailouts, which could carry significant costs to taxpayers, to be justified, must have a great purpose.
We do not need “tougher” rules for our banks, we need better rules. Risk weighted bank capital/equity requirements based on what’s perceived as risky being more dangerous to bank systems than what’s perceived as risky, make absolutely no sense.
Not only, by feeding the creation of excessive exposures to what’s “safe”, these put the dangers to bank systems on steroids but also, by distorting the allocation of credit, make it much harder for the economy to reach its true potential.
By incentivizing banks to refinance much more the "safer present" than to finance the "riskier future" it effectively imposes a reverse mortgage on the economy that will be very costly for future generations.
Additionally, by de-facto declaring the more creditworthy more worthy of credit, and as a consequence the less creditworthy to be less worthy of credit, they hinder equality of opportunities.
And since banks are one if not the most important channel to transmit central banks’ monetary policies, these regulations impede those to work as expected. Just think about how these distort the risk-free interest rate.
To top it up, with decreed risk weights of 0% governments – 100% citizens, as if bureaucrats/apparatchiks know better what to do with credit, for which repayment they’re not personally responsible for than e.g., small businesses, that’s communism or fascism, that has empowered a Bureaucracy Autocracy.
And I could go on and on.
Therefore, assisting the banks in need during a conversion from risk weighted bank equity requirements to solely a strong leverage ratio, 10% equity against all assets, has a great purpose. Especially if it stimulates and democratizes new bank equity.
A Chilean styled bailout could do. Zero bonuses, dividends and buy-backs, until the bank’s shareholders have 10% of equity in it against all assets, and until all the financial assistance provided has been repaid with some interest.
In short: The world needs to rescue its banks from the hands of equity minimizing / leverage maximizing creative financial engineers, much empowered by regulators, and return these to old style “know your client” bank loan officers. Welcome back George Banks.
PS. I might not be a PhD, and I have never been a regulator, but I'm not a newcomer to these issues.
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