October 22, 2009

Temporarily, we need lower bank capital requirements for the old “high risk”

Sir in your “Testing times for bank regulators” October 22 you argue that “rather than having regulators carve up institution and police an arbitrary border between ‘safe’ and ‘unsafe’ activities, setting higher capital requirements allows the banks to find their own way through”. With that, may I say at long last, you are addressing the worst fault in the current Basel bank regulations, namely the fact that regulators have totally arbitrarily mingled with risk.

Now, on the way to higher capital requirements we must not forget that there are many borrowers that already pay the price of higher capital requirements and these, even though they might be the most important borrowers in terms of recovering from this crisis, will, as bank equity is scarce and expensive, now run a serious risk to be crowded out by all those other operations that previously enjoyed very low capital requirements.

Therefore, and even if it sounds a bit shocking, we need to temporarily lower the capital requirements for all which, perceived as riskier, already has higher capital requirements. In other words, while making adjustments for that “low risk” that turned out risky do not kill those high-risk who are not at fault and whose energy we now need more than ever.