April 22, 2015

Capital, as in bank credit, is not “deregulated to a sensible degree”. It is clearly insensibly misregulated.

Sir, I refer to your “UK’s weak productivity invites a bolder response” April 22.

If a corporate borrower, who for instance has a credit rating of A, becomes downgraded one notch to BBB+, the expected losses naturally go up. But the bank equity requirements, which are to cover for unexpected losses, these also go up; in Basel II from 4 to 8 percent, and that is not natural.

The reason for this double whammy, that in a downturn hits the bank’s capacity to give credit, has to do with the fact that Basel regulations derives the estimation of unexpected losses, from the probabilities of default, in other words from the expected losses.

And of course, as I have told you, not joking more than a 1.000 times, the existence of different bank equity requirements based on different credit risk perceptions, also makes it impossible for banks to allocate credit efficiently to the real economy.

And so much of the fall in productive potential that you attribute to “the economy suffered a shock of demand”, is instead the result of these crazy bank regulations that direct the flows of bank credit to what’s “safe” and away from what’s “risky”. And in consequence your opinion that “capital” is “deregulated to a sensible degree” is just laughable. These are clearly very insensibly misregulated.