Should not bank regulations meet some minimal ethical standards?

Without any type of bank regulations those perceived as “risky” would pay higher interest rates, have access to smaller loans, and need to accept harsher terms than those perceived as “not-risky”. And that is how it should be, anything else would not make any sense. 

But with the current capital requirements based on ex-ante perceived risk, those officially perceived ex-ante as “risky”, like small businesses and entrepreneurs, need to pay even higher interests, have their access to bank credit even more curtailed, and need to accept even harsher terms, than would be the case without any bank regulations… and that my friend, does not seem ethical to me. 

Nor does it make any sense... since never ever have major bank crisis resulted from excessive bank exposure to what was perceived ex ante as “not- risky”, these have all resulted, no exclusions, from excessive exposure to what was ex-ante perceived as “absolutely not-risky”.

And, of course, these dumb regulations can only help to increase the cliff between the “not-risky-haves” and the “risky-not-haves”

And, of course, these dumb regulations, can only curtail the job creation powers of small businesses and entrepreneurs.

PS. My 2019 letter to the Financial Stability Board

Widows and orphans have been locked out from safe investments

It used to be that the safest investments, the absolutely not-risky, that paid low interests, were reserved for what was known as widows and orphans, those unable to shoulder risk. And banks and other investors took care of the “risky”

Not any longer! With capital requirements for banks that are much lower when banks hold assets deemed as “absolutely not-risky” than when they hold assets deemed as risky, the banks have been induced to earn their return on equity among those perceived as “absolutely not risky”.

You tell me, what return could there be left for a widow and orphan from holding an AAA rated security when banks can hold those same securities against basically no equity of their own at all?

Capice? If not…. perkurowski@gmail.com

The bank regulators are to blame for outlandish bankers' bonuses

Time ago, when banks were banks, a banker needed to be able to carefully analyze the credit risk of his client, and then offer a competitive rate so as not to lose the business. That lead to tight profit margins which needed also to be shared with shareholders, and so there was never really much room for big banker bonuses. 

But then came the regulators and decided that banker did not really have to lend to the “risky” any longer in order to make profits, because since they would be required to hold much less capital when lending to those officially perceived as “not-risky”, the return on equity when doing so, would shoot up, and, to top it up, with less capital, there was of course also less shareholders to have to share those higher margins with. 

And banker bonuses shoot up into the sky, especially for those banker-traders who had not the slightest idea of how to analyze credit risk. 

Do you find that hard to understand?... then let me phrase it as a question. 

Where do you think there is more room for huge banker bonuses, in the lending to the “risky” where banks need to hold 8 percent in capital, or in lending to the “absolutely not-risky” where banks are allowed to hold only 1.6 percent, or less, in capital?

Educating Martin Wolf (and others in dire need of it): Stupid Bank Regulations 101

When banks are allowed to hold less capital against assets perceived ex-ante as “not risky” the regulators are effectively discriminating against banks holding assets ex-ante perceived as “risky”, like loans to small businesses or entrepreneurs. 

And that amounts to a distortion of the market. The direct effects of that distortion is that those perceived as not risky will have an ampler and cheaper access to bank credit than what would have been the case without these regulations, and those perceived as “risky”, will have a scarcer and more expensive access to bank credit that would have been the case without these regulations.

In other words, it signifies a regulatory subsidy to those already benefitted by the market and banks from being perceived as “not risky”, and a regulatory tax on those already being taxed by the market and banks because they are perceived as "risky".

In other words we´ve got ourselves a much ignored class-war carried out under the cover of bank regulations by the "not risky" against the "risky".

And that discrimination against what is perceived as risky, must of course negatively impact the economy and the creation of jobs, which both thrive precisely based on the risk-taking. 

And all for no good purpose at all, because never ever has a major bank crisis resulted from excessive exposures to what was ex ante perceived as risky. 

And all that regulatory nonsense, or even worse than nonsense, is a direct result of not specifying clearly what the purpose of our banks is. Surely it cannot be to survive in an economy where everything else fails.

And, if regulators absolutely must interfere, because it is in their nature, then why don´t they do it with a purpose, and for instance set the capital requirements for banks based on potential-for-jobs-for-youth ratings?

And, if regulators absolutely must interfere, and must to do so based on perceived risks then why not do so based on how bankers react to perceived risk. Although in that case it would seem that the capital requirements for banks should be higher for any asset perceived as “absolutely not-risky” and lower for any asset perceived as “risky”.

Also as is, no one has any idea of what the real market interest rates are. For instance what would be the UK Treasury rate if banks needed to hold as much capital when lending to the UK Treasury, than when lending to a UK citizen? 

Research assignment (choose one of the two) 

1. Make a regression between the major problem assets during the crisis and the low capital requirements for holding those assets, and then explain what inferences can be drawn from the results. 

2. Investigate who could have authorized bank regulators to award subsidies on access to bank credit to the “not-risky” or tax the access to bank credit of the “risky”. Alternatively you could investigate who could have authorized bank regulators to earn more, by means on higher leverage, when lending to the “not-risky” than when lending to the “risky”.

PS. There will be a quiz on this soon 

An unconstitutional odious discrimination!

When a bank lends to the government it is required to hold zero percent in equity; when it lends to a corporation rated AAA by one of three credit rating agencies then they need 1.6 percent; when it holds a residential mortgage 2.8 percent but, when lending to an entrepreneur or a small business that has not been rated, then the bank is required to hold 8 percent in equity. As bank equity is scarce and expensive this amount to an arbitrary discrimination against unrated entrepreneurs and small businesses.

If I was an entrepreneur or a small business in the US I would go to a judge and denounce that I am being discriminated against by the financial regulators, in an unconstitutional way.

I would also take the opportunity to explain to the judge how perfectly stupid this discrimination is considering that it is precisely the entrepreneurs and small businesses those who can create the real fiscally sustainable jobs, as well as the AAAs of tomorrow; and also remind the judge that entrepreneurs and small businesses had nothing to do in creating this crisis.

PS. What would the US Supreme court opine if asked: “Is a regulatory discrimination against The Risky and in favor of The Infallible, not an odious and unconstitutional negative action?”