Obama, Republican and Democratic candidates, you should be very concerned with the mindset of your bank regulators.

The pillar of regulations designed to keep the banking system safe, is the risk weighted capital requirements for banks. 

These, with Basel II, set the risk weight for ‘highly speculative’ below BB- rated assets to be 150%, while the corresponding risk weight, for ‘prime’ AAA rated assets, was set at 20%. 

For a basic requirement of 8%, that meant banks needed to hold 12% in capital against ‘highly speculative’ below BB- rated assets, while only 1.6 percent for ‘prime’ AAA rated assets. 

That meant banks could leverage their equity, and all the support they receive from society, 8.3 times to 1 when holding highly speculative’ below BB- rated assets; and a mind-boggling 62.5 times to 1 with ‘prime’ AAA rated assets. 

That of course distorts the allocation of bank credit to the real economy and, by favoring the access to bank credit for "The Safe", odiously discriminates against that of "The Risky", like SMEs and entrepreneurs. 

As is that has banks earning higher risk adjusted returns on what is perceived as safe than on what is perceived as risky, which means banks no longer finance sufficiently the riskier future but mostly stick to refinancing the safer past. ,

And by negating The Risky their fair access to productive bank credit opportunities, inequality can only increase.

But, what I really cannot understand is: How come mature men (and women) can believe that what is rated below BB-, meaning is perceived as ‘highly speculative’, and therefore very risky, can be more dangerous to the banking system, than what is rated AAA, meaning ‘prime’, and therefore perceived as absolutely safe?

No! There has to be something fundamentally wrong with the current mindset of the bank regulators.

Such crazy risk aversion to perceived credit risk should, in The Home of the Brave, be deemed unconstitutional.

Optimism? No! Use of credit risk weighted capital requirements for banks reflects a severe pessimism about the future

Had banks not held excessive financial exposures related to AAA rated securities backed with mortgages to the subprime sector, or to loans to sovereigns like Greece, the greatest bank crisis of our times would not have happened… and there can be no doubt about that.

Those excessive financial exposures, to assets that were ex ante perceived or deemed as safe, should have been an expected consequence of allowing banks to earn much much higher risk adjusted returns on equity on these assets, than what they could earn for instance on “risky” loans to SMEs and entrepreneurs.

That resulted from regulators allowing banks to hold much much less capital (equity) against “The Safe” than against “The Risky”; by which banks could leverage their equity many many times more with supposedly safe assets than with supposedly risky ones.

And the cost of the greatest bank crisis of our times is still underestimated and is still growing, because it does not include the cost of all those growth opportunities the world, as a consequence, missed and misses by not lending to “risky” SMEs and entrepreneurs.

Favoring with regulations what’s safe over what’s risky, something that also promotes inequality can only be the result of a deeply ingrained risk adverse pessimism. Therefore, while these faulty regulations are still in place, referring to a feeling of optimism about the future is a contradiction in terms.

The economy is, by going for the “safe” carbohydrates, growing obese. A muscular growth requires the intake of “risky” proteins.

Banks are no longer financing the riskier future they are just refinancing the safer past.

How come the Home of the Brave (and Europe) that became what it is because of its willingness to take risks, has accepted this senseless regulatory risk aversion?

Bank capital should cover unexpected losses but what is perceived as safe, has always a greater potential of delivering these than what is perceived as risky and therefore avoided.

How come those most guilty for the greatest bank crisis of our times have not been named, much less held accountable?

I have a very specific question for President Obama on his State of the Unions address.

President Obama in his State of the Union Address — Remarks As Prepared for Delivery states:

“Will we accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?”

And which makes me ask: Are we supposed to keep bank regulations who so much favors the infallible sovereigns’ and the AAArisktocracy’ access to bank credit, when compared to that of the “risky” small businesses’ and entrepreneurs’?

To me it is amazing to see how much regulatory aversion against “the risky” exists in the home of the brave.

http://subprimeregulations.blogspot.com/2010/04/please-explain.html

http://subprimeregulations.blogspot.com/2013/11/have-risk-weights-of-current-bank.html

http://subprimeregulations.blogspot.com/2012/07/complaint-i-presented-to-consumer.html

“The Risky” those discriminated against by banks, and by regulators, need to have a voice at the Fed

I read that the State banking associations and several other groups sent a letter to President Obama on Tuesday urging the president to nominate a community banker to serve on the Federal Reserve Board of Governors. 

In doing so they write: We offer our request and recommendation in view of our shared desire for economic growth that reaches to all parts of our nation, and in the recognition that community banks are fundamental to achieving that growth.” 

And I entirely support such motion.

But, that said, if we are talking about the need of having a voice at the Fed, then no one needs it more at this injunction, than the medium and small businesses, the entrepreneurs and the start ups.

For a starter this is what they would say:

“We are punished by bankers with smaller loans, higher interest rates and harsher terms because we are perceived as risky from a creditor point of view. And that we understand... that’s life. 

But why must you regulators have to make it even harder for us to get loans at competitive rates by requiring the banks to hold more capital when lending to us than when lending to those of the AAAristocracy? 

We fully understand you must require banks to hold capital, and this primarily to be able to confront unexpected losses. But why would you think that we, we who represent higher expected losses, also represent the risk of higher unexpected losses? Is it not the other way round? Has history not proven sufficiently that the AAAristocracy is the most dangerous source of that kind of unexpected losses that can really shake the system?”

Democrats and Republicans… for the sake of America, agree at least on eliminating bank regulations which discriminate against "The Risky” and in favor of "The Infallible"

The access to bank credit has been rigged against those perceived as "risky", like small businesses and entrepreneurs, by means of requiring banks to hold much higher capital when lending to them compared with what the banks need to hold when lending to those perceived as “not risky”. 

This, in a country that became what it is, thanks to risk-taking, and which also likes to refer to itself proudly as “the land of the brave”, is a direct affront to the American courage and spirit of entrepreneurship.

This, is what most neutralizes the impact of fiscal and QEs stimulus, and which most stands in the way of job creation.

Why cannot Democrats and Republicans set aside their differences for one second, and agree on eliminating any bank regulations which discriminate against those perceived as “risky”? 

Would they do so, there would be no reason to concern themselves with a heightened risk in the financial sector, since never ever has a major bank crisis resulted from excessive exposure to those perceived as “risky” (consult your Mark Twain), these have always resulted from excessive exposures to what was ex ante erroneously considered as “absolutely-not-risky”.

Republicans could sell it to their side, correctly, as an elimination of regulatory distortions that impede the markets to efficiently allocate economic resources. 

Democrats could sell it to his side, also correctly, as an elimination of a discrimination against the “risky-not-haves” and in favor of the “not-risky-haves” which drives increased inequality.

Both parties need to understand that discriminating against "The Risky" and in favor of "The Infallible" is about as Un-American it gets... in fact it is outright immoral!

http://perkurowski.blogspot.com/2008/08/discrimination-based-on-financial.html