July 12, 2013

A dense bank regulatory feedback loop infected western world’s economies with a dangerous risk aversion

Sir, Gillian Tett writes “Dense feedback loops have heightened risk of contagion” July 12.

And I ask could there possibly be any dense feedback loop that could cause contagion more than stupid bank regulations?

When nations decide they are going to live on yesterday´s risk taking, and avoid the risk taking they would need for a tomorrow, they are simply treating themselves as cash-cows, and they can only go down, down, down.

And this is precisely what happens when regulators do as they now do, which is to allow banks to hold much less capital when lending to “The Infallible” (many of the “risky” of yesterday) than when lending to “The Risky” (potentially the “infallible” of tomorrow); and that means banks will earn much higher expected risk-adjusted returns on equity when lending to The Infallible, the sovereigns and the AAAristocracy, than when lending to The Risky, the small and medium businesses and entrepreneurs.

And you can imagine what that does to the access to bank credit of The Risky.

And of course, helping too much what is perceived as infallible, and which is therefore already sufficiently attractive, will only put it at risk of turning into something extremely risky.

As I see it, the Basel Committee for Banking Supervision, is committing high treason against the economies of the western civilization, and which have obviously become what they are thanks to a lot of risk-taking by their banks.