March 20, 2015

Britain, Martin Wolf, how can you walk tall with banks who have been instructed to behave as wimps?

Martin Wolf holds that “Britain can only walk tall if productivity is reignited” March 20.

To “walk tall” means to be brave and self-assured. Sincerely how on earth can Martin Wolf believe that Britain could walk tall or regain productivity with wimpy regulators who tell banks to go an make their highest risk adjusted returns on equity with assets perceived as safe and to stay away from assets perceived as risky?

Wolf refers rightly to problems inherited by the financial crisis but still phrases it as a consequence of a widely shared “overconfidence in finance”… which shows he still does not get it.

When you impose credit-risk-weighted equity requirements on banks it is clearly not a sign of confidence but a sign of a lack of confidence. You are in essence telling the banks “We do not trust you to assign to the credit risk you perceive sufficient importance to clear for these in the size of your exposures and with the risk-premiums you charge… so we are also going to clear those credit risks for you in your equity.”

And Wolf also keep on referring to the need of less fiscal austerity, especially as “government is able to borrow at sub-zero real rates of interest” blithely ignoring that with the Basel Accord of 1988 banks were allowed to lend central governments against zero equity while, when lending to the private sector they needed to hold 8 percent of it.

Thus government borrowing costs became subsidized in a very nontransparent way… and the cost of that subsidy is paid by the lower productivity that results from the misallocation of bank credit.

But what do you mean Kurowski with banks not taking risks, have you not seen the disaster they caused?

Indeed I have, and all their problems were caused by excessive exposures to what was perceived as safe, by bankers and regulators alike, and could be held against very little equity. That to me is more a sign of excessive risk-aversion than of excessive risk-taking.