July 14, 2014

Basel’s risk-weighted capital requirements for banks, is a macro-imprudential tool which blows financial bubbles.

Sir, I refer to Wolfgang Münchau’s “What central banks should do with bubbles” July 14.

My answer would be for central banks to make sure that if they must blow, when they blow, it is not for them to take over the role of the markets by directing their winds to where they, in the short term, perceive it to be safer.

We know that financial bubbles never ever inflate with air perceived as risky, but always with air that pays more than what its perceived absolute-safety would seem to validate. In this respect the best bubble inflator ever, must be the current capital requirements for banks which allow banks to earn higher risk adjusted returns on equity on what is perceived as absolutely safe.

Holy mo! What a dangerous macro-prudential tool that is.

Münchau also references bank´s “antisocial and unethical behavior” and so I would also like to ask the following:

What if the capital requirements for banks discriminated against gays, the sick, women or black persons? Would that not be deemed as an “antisocial and unethical behavior”? 

Of course! And all hell would brake lose!

And so why is it that regulators can discriminate in favor of the infallible those who are already favored by being perceived as that, and against “the risky” those who are already being discriminated against by being perceived risky… and nobody cares.