The problem with the Nordic model is that bank regulators have tampered with it
I refer to Richard Milne’s “Nordic model starts to creak under pressure” November 21.
Sir, suppose you were a development minister of a country like Sweden that has thrived on entrepreneurship, much of it financed by banks.
And then your bank regulator, Stefan Ingves, tells you that, in order to make the Swedish banks safer, he and his colleagues in the Basel Committee, is now going to allow banks to earn much higher risk-adjusted returns on equity when lending to those perceived as “absolutely safe”, than when lending to those perceived as “risky”.
What would you do? What should you do?
You should of course shout: “No! Over my dead body! Favoring in such a way what seems ex ante to be very safe, means that medium and small businesses, entrepreneurs and start-ups, “the risky”, will no longer have fair access to bank credit… and that is too dangerous… even for the banks.”
Unfortunately, those responsible for the economic development of most countries have not yet understood the consequences of the credit risk weighted capital (meaning equity) requirements for banks.
And so before Sweden remembers that risk-taking is the spark that ignites all development and keeps the economy moving forward, it will be stalling and falling.
And that goes of course for all countries that find themselves under the thumb of senseless bank regulators.
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