On risk-weights for banks when financing houses vs. jobs, regulators do not answer, though stiff upper lips starts to wobble.

Sir, Stefan Ingves and Per Jansson, of Sveriges Riksbank, respond quite strongly against some criticism made by Wolfgang Münchau of the monetary policy in Sweden, “Monetary policy has had positive results in Sweden” July 24. 

In their letter they mention that Sweden has been doing relatively fine in terms of reducing unemployment but that household debt and house prices have increased and “create risks of financial instability with serious macroeconomic consequences”.

Although my mother is from Sweden and lives there, I know little about its monetary policy but, since Stefan Ingves is the current chairman of the Basel Committee, and Münchau now has him on the line, would it not be great to ask him the following?

Mr. Ingves the risk-weights for defining the capital requirements for banks for house mortgages is 15% (I have heard some rumors about an increase to 25%) and the risk-weight for lending to an SME is 100%. Does it really make sense allowing banks to leverage 667% more times when financing houses than when financing the creation of the next generations of jobs… meaning banks can obtain a 667% higher risk adjusted return on their equity when financing houses than when financing the creation of the next generations of jobs? Do you not think this distorts the allocation of bank credit in the economy? 

Since jobs seem more important than houses, and SME’s have never caused a bank crisis, which house financing has certainly done, why not the other way round?

Sir, when I have asked bank regulators from many countries a similar question their usually stiff upper lips have begun to wobble… but I have not been able to extract an answer from them. Perhaps Wolfgang Münchau could have more luck.

PS. Remind them of a Swedish psalm... "God make us daring!"