November 05, 2009

The regulator should regulate not discriminate

Sir Dirk Bezemer in “Lending must support the real economy” November 5, points in the right direction, but yet fails in connecting all the dots. When a bank lends to the really real economies, the unrated or BB+ and below rated clients, it is required to have 8 percent equity, while, when lending to or investing in anything related to an AAA rating, then the bank gets off the hook with only 1.6 percent in capital. This signifies a de facto subsidy to those who least need the support and, in relative terms, a tax on those who most in need of support. Therein resides the fundamental equivocation of the current bank regulations designed by the Basel Committee.

While the banks are having to rebuild their capitals to make up for all those “no risk” AAA rated operations that went gone wrong the real economy, we have to see to that the really real economy is not crowded out from access to bank credits. In this respect I am doing what I can to pro-bono lobbying in favour of temporarily reducing the capital requirements for banks, when lending to unrated clients or to BB+ and below rated clients, to 4 percent; and that later, once out of the woods of this crisis, when capital requirements are further strengthened, the capital requirements are the same for all type of access. A regulator is there to regulate and not to discriminate.