November 19, 2014

The Parable of the Talents and the self inflicted curse of excessive regulatory risk aversion.

Sir, we live in a world where those who are perceived as “risky” from a credit point of view; those who always include small businesses and entrepreneurs; those who with their dynamism help to seed the future of an economy, are negated fair access to bank credit. And that is done by means of regressive and distorting bank regulations that allow banks to hold much less capital, meaning equity, against assets perceived as absolutely safe.

And tragically, that is not deemed to be a problem, like we can for instance see when reading Martin Wolf’s “The curse of weak global demand” of November 18. In it, as usual, this central problem is not even mentioned

Of course the world has many problems but since risk-taking is the oxygen of any development, one of the most serious one is the self-inflicted curse of excessive regulatory risk aversion.

I was recently reminded of “The Parable of the Talents”, Matthew 25:14-30 and we would all be well served if regulators read it and understood it. We the taxpayers are underwriting many of the risks in banking, “the Talents”, which we hand over to regulators to manage, and we do not do that just in order for banks to obtain higher returns on equity or to only lend to those perceived as absolutely safe. We do that so that banks can allocate credit efficiently, and daringly, to the real economy.