You need not to be an Einstein to know that current bank regulations are procyclical.

Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England spoke on November 15, 2015 about “The outlook for countercyclical macro prudential policy”

He began with: “It is an interesting experiment to think what Einstein might have accomplished had he chosen the world of economics rather than physics. Would he have brought to our world the same brilliant simplicity and achieved the same lasting change in our understanding?”

I have no idea what Einstein would have done in such case but I am absolutely certain about what he would not have done.

He would not have set up pro-cyclical credit risk weighted capital requirements for banks, those which are lower for what is perceived as safe than for what is perceived as risky; those which allow banks to leverage more with what is perceived as safe than what is perceived as risky; those which therefore allow banks to earn higher risk-adjusted returns on what is perceived as safe than on what is perceived as risky; those which therefore in Mark Twain’s supposed words make bankers lend you the umbrella even faster than usual when the sun is out and take it away even faster than usual when it looks like it is going to rain.

When times are rosy and so much can seem safe, then banks need to hold little capital and so when times get bad, and so much seems risky, then banks, on top of their difficulties must also come up with additional capital or shed assets. No Mr Cunliffe Einstein would never have done a stupid thing like that.

Einstein would also have understood that the safer an asset is perceived the larger is its potential to deliver those unexpected losses that bank equity is to serve as a buffer against. To set capital requirements based on the ex ante expected credit losses is as dumb as it gets.

And Einstein would of course, before regulating the banks have asked: “What is the purpose of banks?” And when stress-testing banks, besides looking at what is on their balance sheets, Einstein would also have looked at what is not and perhaps should be.

But come to think of it… you should not be an Einstein to get all this!

With respect to developing countercyclical macro prudential policy Cunliffe expresses “I have some sympathy of the ‘don’t do it at all’ approach.

Yes Mr. Cunlifee. The regulators have done more than enough damage as is. Just eliminate the re-clearing in the capital of the perceived credit risk that has already been cleared for with interest rates and the size of the exposure. Don’t you understand that any risk, even though perfectly perceived, leads to the wrong actions if excessively considered?

Bank of England keeps mum about its shady distortions of the allocation of bank credit to the real economy.

View the episode of the splendid educational video produced by the Bank of England.

There you will see that at no moment does BoE indicates that it, like their colleagues in other places, require banks to hold different amounts of shareholder´s capital against different assets, and therefore allow banks to obtain different returns on equity for different assets, and therefore distort the allocation of bank credit in the real economy… with disastrous medium and long term results, even for the banks.

Why could that be? Does BoE not know it distorts, or does it have a bad conscience about it? Who knows, it does not really matter. The pain for a medium and small businesses, entrepreneur or start-up, "the risky", of  not gaining access to bank credit or having to pay more for it, is the same.