If the US stops distorting the allocation of bank credit to the real economy… does Europe dare to be left behind?

For 6.000 (out of 6.400) traditional US banks those that hold, effectively, zero trading assets or liabilities; no derivative positions other than interest rate swaps and foreign exchange derivatives; and whose total notional value of all their derivatives exposures - including cleared and non-cleared derivatives - is less than $3 billion...

Thomas M. Hoenig, the Vice Chairman of the FDIC is proposing the following:

“A bank should have a ratio of GAAP equity-to-assets of at least 10 percent. The substantial majority of [US] community banks already have equity-to-asset ratios of 10 percent or higher, and the number is in reach for those that do not.”

“Exempting traditional banks from all Basel capital standards and associated capital amount calculations and risk-weighted asset calculations.”

If approved, that would effectively mean the US begins to distance itself from the pillar of Basel Committees bank regulations, the credit-risk-weighted capital requirements.

Since those capital requirements odiously discriminate against the fair access to bank credit of borrowers deemed “risky”; and thereby distorts bank credit allocation, that would mean that most US banks would be able to return to real lending to the real economy.

Does Europe dare to be left behind in such development?

PS. Its about time the US suspended such regulatory discrimination, which should never have been allowed, according to the Equal Credit Opportunity Act (Regulation B)

What would the reactions be if capital requirements for banks discriminated against gays, the sick, women or black people?

Those perceived as risky credit risks do already pay higher interest rates, do get smaller loans and do have to accept harsher terms… and so why on earth would regulators require banks to have much more capital when lending to the risky than when lending to the “safe”, and so that the risky need to accept even higher interest rates, even smaller loans and even harsher terms… and all this when there has been no major bank crises in history that has resulted from excessive exposure to those ex ante perceived as not risky? Are current bank regulators sadists?

De facto, regulators tell banks to lend less or charge higher interests to those suffering the precondition of being perceived as risky

What would the reactions be if capital requirements for banks discriminated against gays?

What would the reactions be if capital requirements for banks discriminated against the sick?

What would the reactions be if capital requirements for banks discriminated against black people?

What would the reactions be if capital requirements for banks discriminated against women?

All hell would break lose!

But, no these only discriminate in favor of the “infallible” and against “the risky”, and so nobody cares.

Not even the Congress of the home of the brave

Not even those in charge of supervising the Equal Credit Opportunity Act

Here is THE QUESTION for Janet Yellen during her US Senate confirmation hearings as Chair of the Federal Reserve

Ms. Janet Yellen

Is it not a fact that, with the sole exceptions of when pure fraud was present, all major bank crises have always resulted from excessive exposures to what was ex ante perceived as “absolutely safe”, and never ever from excessive exposures to what was ex ante perceived as “risky”?

And, if so, can you please explain to us the rationale behind the pillar of current regulations, the risk weighting of the capital requirements, which allow banks to hold much much less capital against what is ex ante perceived as “absolutely safe” than against what is perceived as risky?

Could it not be that in reality it should perhaps be the complete opposite?

Is it correct that in the “home of the brave” we impose this type of bank regulations which discriminate against those perceived as “risky”? And by the way, is such thing really allowed under the Equal Credit Opportunity Act, “Regulation B”?

Finally, do not these regulations created such distortions that it makes it impossible for the banks to allocate credit efficiently in the real economy? 

PS. Oh I almost forgot. I remember the Constitution of the United States of America, in Section 8 states “The Congress shall have the power to…fix the Standard of Weights and Measures.” Can you please refresh our minds as to when we delegate fixing the risk-weights to the Fed?

PS. Oh and I almost also forgot too. The US Constitution in its section 9 states: “No Title of Nobility shall be granted by the United States”. Now, is that not something that de facto happens when we sort of recognize the existence of an AAAristocracy or AAArisktocracy?

The complaint I presented to the Consumer Financial Protection Bureau CFPB

Introduced by means of: https://help.consumerfinance.gov/app/tellyourstory

I refer to the Equal Credit Opportunity Act (Regulation B) in order to present the following complaint: 

Banks consider credit risk information, like that contained in credit ratings, when setting interest rates, amount of loans and other contractual terms… this causes a natural market based discrimination of those perceived as risky. We all know well Mark Twain’s description of a banker: that as the one who lends you the umbrella when the sun shines, and wants it back, urgently, when it looks like it is going to rain. 

But when bank regulators use the same credit risk information, in order to also determine the capital requirements for the banks, then they produce artificial regulatory discrimination in favor (a subsidy) of those already favored by being perceived as not risky, and against (a tax) those already being disfavored by being perceived as risky. And I argue that this regulatory discrimination is contrary to the spirit of the Equal Opportunity for Credit. 

The discrimination occurs in the following way. If a bank is allowed to have less capital when lending to the not risky that signifies he can leverage its equity more and therefore obtain larger returns on equity when lending to the “not-risky”. If a bank is forced to have more capital when lending to the risky that signifies it can leverage less its equity and therefore obtains lesser returns on equity when lending to those perceived as “risky”. To make up for this regulation and present the banks with the same opportunity of returns on their equity, the “risky” need to pay an additional interest rate, and this additional is quite substantial. 

The capital requirement regulations are explained in terms of making the banks safer, but that is not the case, in fact it makes the banks more unsafe. There has never ever been a major bank crisis that has resulted from excessive exposures to what was perceived as risky, think of Mark Twain’s banker, they have all resulted from excessive exposures to what was ex ante considered not risky, but, ex post, turn out to be very risky. And in that respect it allows for excessive leverage buildup precisely in those areas that contain the greatest risk and consequences of bad surprises, namely the lending to what is perceived as “not-risky”. 

Let me just end by commenting on the great contradiction that the discrimination of those perceived as risky, like the small businesses and entrepreneurs, really signifies in “a land of the brave”. 

Please help stop that odious discrimination. To deny those perceived as risky fair access to bank credit, is an act of regulatory violence.

PS. Just in case, the returns on equity I speak of are of course the risk-adjusted ones.

PS. You doubt what I say? Ask regulators these questions.