March 28, 2015

We must deregulate the risk-taking of banks in order to keep the world’s labor markets busy

Sir, you write “labour markets in advanced economies need liberalization… But policy makers should not expect that supply side reforms will create their own demand. Appropriately easy fiscal and monetary policies must be pursued. The engine of jobs creation needs fuel to work.”, “Keeping the world’s labour markets busy” March 28.

But again, steadfastly, you say nothing about how the fuel of bank credit can create jobs, if allowed to flow freely. Since Basel I, about 25 years ago, bank credit has been instructed to flow to where the risk-weights are low and so the allowed leverages of bank equity are high. That means that the access to bank credit for "the risky", like SMEs and entrepreneurs, has unfairly become more and more difficult. Anyone who believes this does not affect job creation needs to go and have a look at reality.

Let me put it this way. Suppose their had been no Basel Committee credit-risk-weighted equity requirements; and suppose someone, to solve Greece’s problems, now suggested:

“We must increase the equity requirements for banks when lending to SMEs and entrepreneurs because they are too risky and so it is better that banks give loans to the public sector, so that plenty of good paying public sector jobs are created.”

Would you, the Troika or anyone else approve of such a plan? I doubt it. But as this is how it is, why are you silent about that? Is it because it takes less courage to qualify a proposal as idiotic than to qualify something dumb done and on which one kept silence as idiotic?

Things are not getting better… our current regulators clearly do not know what they are doing.

In the Basel Committees’ consultative document “Revisions to the Standardised Approach for credit risk” I was shocked seeing that the risk-weights are now proposed to be smaller the larger the private corporation is… as if the larger you are the safer or the better able to use the credit you are. How on earth do we achieve more jobs and less inequality when being opposed by such regulators?