Jeb Hensarling asks: How we can make the economy work for working people? Here’s my answer:

Jeb Hensarling, the chairman of the Financial Services Committee asks: How we can make the economy work for working people

Here’s my answer:

Get rid of the risk-weighted capital requirements for banks!

These only distort the allocation of bank credit to the real economy.

These only help finance the “safe” basements where jobless kids can live with their parents but not the “risky” new job creation they would need to afford to become parents too. 

These stop banks from financing the risky future and make these only refinance the "safer" past and present.

Where would America, the Home of the Brave, have been if its banks had been subjected all the time to this type of regulatory risk aversion?

“A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

The risk weighting has de facto decreed inequality

God make us daring!

Besides it is all for nothing. Bank crisis are caused by unexpected events, criminal behavior and excessive exposures to what was ex ante perceived as very safe when placed on the banks’ balance sheets, but that ex post turned out to be very risky. Never ever are bank crisis the result from excessive exposures to what was ex ante perceived as risky. “May God defend me from my friends, I can defend myself from my enemies” Voltaire

Now, if you are rightly concerned that getting rid of the risk weighting would initially create such bank capital shortages that it would put a serious squeeze on credit; then grandfather the current capital requirements for all their current assets, and apply a fixed percentage, like for instance 8%, on all new assets… including public debt, since a 0% risk weight for the Sovereign and 100% for We the People seems to me, I beg your pardon, an insult to your Founding Fathers.

Finally, if regulators absolutely must distort, so as to think they earn their salaries, may I suggest they use job-creation and environmental-sustainability ratings instead of credit ratings, which are anyhow already cleared for by banks.

Europe beware, to reward banks for less risky business models is way too risky and no way to build a future.

I now read that Valdis Dombrovskis, the EU’s financial-services chief said it’s important to make sure the rules continue to “reward banks with less risky business models” “Bank Regulators Face Santiago Showdown on Capital Overhaul” Bloomberg, November 17.

NO! That is precisely what is wrong with current risk weighted capital requirements for banks. It guarantees that safe-havens will become dangerously overpopulated against little bank equity; and that for the economy more productive though riskier bays, like SMEs, will remain equally dangerously unexplored.

It guarantees the building of many basements for jobless youth to stay with their parents and not the financing of the job creation that could allow those kids the possibility to afford being parents too.

It hinders the financing of the riskier future in order to refinance the “safer” present and past.

Risk-taking is the oxygen of all development. Where would Europe be if these regulations had been with us since banks' inception more than 600 years ago?

If banks cannot afford to immediately adjust their capital to larger capital requirements and so therefore credit to the economy would be affected, grandfather the current requirements for all existing assets, but then see to that all new bank assets are freed from the distortions the risk weighted capital requirements produce.

Should regulators stop banks from using their own risk models to set the capital requirements? Of course they should! That whole notion is about as silly as it gets. It is like allowing children to decide on the nutrition value of ice cream, chocolate cake, broccoli and spinach.

Any risk manager that has any idea of what he is doing, begins by identifying clearly the risks that one cannot afford not to take. The risk that banks take allocating credit as efficiently as possible to the real economy, is such a risk.

“A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

God make us daring!

Free us from imprudent risk aversion!

PS. Besides it would be so useful if regulators just looked at what has caused all major bank crisis in history; namely unexpected events, criminal behaviour and excessive exposures to what was ex ante perceived as very safe when placed on the banks’ balance sheets but that ex post turned out to be very risky. Never ever have bank crises resulted from excessive exposures to what was perceived as risky. Therefore the current Basel risk weights of 20% for AAA rated and 150% for the below BB- rated is as loony as it gets.

PS. And if regulators absolutely must distort, so as to feel they earn their salaries, may I suggest they use job-creation and environmental-sustainability ratings, instead of credit ratings that are anyhow cleared for by bankers.

PS. And frankly, is not 0% risk weight for the sovereign and 100% for We the People too statist, even for Europe?

Six easy questions that bank regulators should answer

Here some questions that need to be asked urgently at the Financial Services Committee 

What do you believe is the purpose of banks? Should it not have something to do with what like John A Shedd opined: “A ship in harbor is safe, but that is not what ships are for” 

If it includes to allocate credit efficiently to the real economy, why then do you distort that with risk weighted capital requirements for banks?

Voltaire said “May God defend me from my friends. I can defend myself from my enemies”. And so why do you base your capital requirements on what the bank perceives and not on what it has less chance to perceive?

Why do you give the AAA–AA rated a risk weight of 20% and the below BB- rated one of 150%? Do you really believe bankers could create excessive dangerous exposures to what ex ante was perceived as below BB-rated?

Why must the bank in my state hold more capital when lending to a local SME or entrepreneur, than when lending to, for instance, the German government?

By the way, is not the risk weights of Sovereign = 0% and We the People = 100%, an outrageous example of a runaway statism?

Why do you want to impose risk aversion in the Home of the Brave?