The small businesses are unfairly discriminated against by the regulators
Sir, Richard Milne in “The cogs are clogged” February 16 writes about the difficulties of the smaller enterprises to secure the funding they need but fails to even mention the regulatory discrimination they are exposed to.
One of the banks’ historical responsibilities has been to nurture the small businesses until they’re big enough to enter the capital markets, but that ended when the regulators, acting entirely on their own, decided that the most important role for the banks was to avoid taking risks and to that effect set up a system of capital requirements dependent the risk of defaults as perceived by the credit rating agencies.
In effect a bank when doing business with one of those entities that because of an AAA rating should not even need the assistance of the banks must put up only 1.6 percent in equity while, when doing precisely what it is supposed to do, helping the small businesses, it is required to have 8 percent in equity.
At this moment, when all the faulty AAA ratings ate up all the capital of the banks, those small businesses are discriminated more than ever, by this regulatory double whammy of not only having to pay for the additional risk premium the market ordinarily charges, but also having to pay the costs of the higher bank equity requirements.
That this issue of unjustifiable risk-discrimination is not among the first things currently discussed when considering financial regulatory reform is truly mindboggling to me.
One of the banks’ historical responsibilities has been to nurture the small businesses until they’re big enough to enter the capital markets, but that ended when the regulators, acting entirely on their own, decided that the most important role for the banks was to avoid taking risks and to that effect set up a system of capital requirements dependent the risk of defaults as perceived by the credit rating agencies.
In effect a bank when doing business with one of those entities that because of an AAA rating should not even need the assistance of the banks must put up only 1.6 percent in equity while, when doing precisely what it is supposed to do, helping the small businesses, it is required to have 8 percent in equity.
At this moment, when all the faulty AAA ratings ate up all the capital of the banks, those small businesses are discriminated more than ever, by this regulatory double whammy of not only having to pay for the additional risk premium the market ordinarily charges, but also having to pay the costs of the higher bank equity requirements.
That this issue of unjustifiable risk-discrimination is not among the first things currently discussed when considering financial regulatory reform is truly mindboggling to me.
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