Let us tell the story of the Basel Committee’s risk weighted capital requirements for banks this way:

This happened during a meeting of the Basel Committee for Banking Supervision

Q. Colleagues, how on earth can we stop banks from failing? 

A. Well they must avoid taking risks?

Q. Absolutely! But how do we stop them from taking risks?

A. Perhaps by giving them great incentives to make their profits where it is safe?

Q. Sounds great! Any idea how?

A. Well we could allow them to leverage their capital much more when lending to what is safe than when lending to what is risky.

Q. How would that help?

A. Well then the banks could obtain higher risk adjusted rates of return when lending to what is safe than when lending to what is risky.

Q. But, could that not distort the allocation of credit to the real economy?

A. Oh that is not our problem. We're just here to make banks safe. 

Q. But, what if something perceived as safe turns out to be risky?

A. Don’t be so negative. We'll deal with that later if it ever happens.

Q. But could not someone argue we're introducing a regulatory discrimination against The Risky?

A. Who cares? The sovereigns will be more than happy if we give it a zero percent risk weighting. The banks, making their best profits on what is safe, will only have their wettest wet dreams realized. And, the risky, the SMEs and entrepreneurs, they have no voice… hey they are not even invited to the World Economic Forum at Davos… there we only meet the AAArisktocracy.

Q. Dear colleague, you have convinced all of us… let us go for it. By the way, what's your name?

A. Chauncey Gardiner, Sir

Mario Draghi and his colleagues might all just be Chauncey Gardiners too :-( 

Why do not Wall Street Journal’s reporters pose THE QUESTION at WEF in Davos 2016?

I refer to Wall Street’s World Economic Forum “Outlook 2016”, January 20, 2016.

Like for instance when Lingling Wei and John Hilsenrath write “Global Economy Loses Steam” The Wall Street Journal, January 20, 2016.

How on earth could not the Global Economy lose steam with regulators who, in an effort to make banks safer, have decided banks should be allowed to earn much higher risk adjusted returns on equity when lending to what is ex ante perceived or deemed to be safe, like to “infallible sovereigns”, AAArisktocracy or housing, than when lending to “risky” SMEs and entrepreneurs. That is the direct result of the risk weighted capital requirements.

“The future is here. It just needs a big push”, writes Christopher Mims. Indeed but why not start by removing the hurdles? As is, with this regulatory credit risk aversion, banks are no longer financing the riskier future they are only refinancing the safer past.

And all that distortion for no good reason, since major bank crisis never result from excessive exposures to something ex ante perceived as risky, but always from too big exposure to what has turned out to be erroneously perceived as safe.

What a shame that, with so many good journalists present in Davos, no one makes THE QUESTION

PS. Another version of THE QUESTION

@PerKurowski ©