May 01, 2015

What distortion causes Martin Wolf’s silence about the distortions produced by the different bank equity requirements?

Sir, Martin Wolf writes: “The rising price of housing… also distorts the financial system: 70 per cent of bank loans outstanding (after netting out lending within the financial sector) are to individuals secured on property. The financial system is now totally addicted to high house prices”, “Bribes and evasions on housing and the deficit” May 1.

Why does not Martin Wolf ask one of his many banker friends how much equity regulators require his bank to hold when financing secured with property as compared to when financing a SME?

And then Wolf should call one of his finance professors friends and ask what those different equity requirements do for the risk-adjusted returns on bank equity when lending for the purchase of a somebody’s home, as compared to with the lending for the creation of a job, so that someone could pay his mortgage and the utilities of his home.

Wolf keeps mentioning “distortions”, but no matter how much I remind him, he refuses to refer to that really monstrous distortion produced by different bank equity requirements based on perceived credit risks. What journalistic distortion causes his silence?

Again, for the umpteenth time, regulators have based their bank equity requirements, those that are to cover for unexpected losses, on the perceived possibilities of any expected losses… now how loony is not that?