The deafening silence of universities on The Basel Committee Distortion is scary.

Sir, I refer to John Kay’s “Angry economics students are naïve- and mostly right” May 21.

When John Kay invests his capital he looks at risk and returns when deciding what to do. How would it impact his decisions if suddenly the government told him “Citizen Kay, if you invest in what is perceived ex ante as “absolutely safe”, I will pay you additionally a couple of hundred basis points.”? Would he also think that subsidy carries no cost?

Allowing banks to hold less capital when lending to “the safe” than when lending to “the risky” causes banks to earn much higher risk-adjusted returns on equity when lending to “the safe” than when lending to “the risky”, and this means, no doubt about it, that banks will lend too much to “the safe” and too little to “the risky”.

And so though I am not an angry economic student, I am an economist very angry with our universities for ignoring the distortions caused by the risk-weighted bank capital requirements in the allocation of credit in the real economy. Their deafening silence on this issue makes it so much harder to extract an explanation from the regulators who in my mind are either blind or plain stupid.

That you for instance can obtain an MBA from Harvard, or get a CFA certification, without having been made aware of the existence of The Basel Committee Distortion, and much less of its financial consequences, is truly scary.