Paul Volcker and John Reed, our jobless young, more than a safer, need a more functional financial system

I cannot fully agree with Paul Volcker and John Reed about having a 6% cross the board capital requirement “standard alongside a robust system of risk weights” unless there is more clarity about what risk are to be weighted, “A safer financial system is now within our grasp”, December 12.

I say this because the problem with the current risk weighting used is that it weighs that risk of the assets which is already weighted, by means of interest rates, size of exposure, duration and other terms. And so, re-clearing for the same risk in the capital, causes banks to earn much higher risk adjusted returns on equity for assets perceived as “absolutely safe” than for assets perceived as “risky”; and this makes it therefore impossible for banks to allocate bank credit efficiently in the real economy. 

At this moment, when a generation of young people without jobs risk becoming a lost generation, the limited objective of a safer financial system needs urgently to be superseded by the much more comprehensive objective of banks becoming more functional.