July 09, 2015

OECD: Make capital requirements for banks, instead of on credit ratings, depend on job-creation-potential ratings.

Sir, Sarah O’Connor reports that “OECD warns on ‘chronic’ low pay and job insecurity” July 10.

When you have bank regulations that are solely targeted to avoid those perceived credit risk which are basically already cleared for by bankers, by means of risk premiums and size of exposure; and which care not one iota about the effective allocation of bank credit… you will not be able to generate as much jobs as you otherwise could. It is as simple as that.

If you are really desperate for jobs, then offer banks to be able to hold less capital against loans that have a high potential of job creating ratings, so that banks can obtain higher risk-adjusted returns on their equity financing what you wish they finance.

And, by the way, if you want more planet earth sustainability then equally offer banks to be able to hold less capital against loans that have high sustainability ratings.

In short it all has to do with giving banks a purpose different from just silly credit risk avoidance. “Silly”? Yes! Bank capital is to cover for unexpected losses and it is precisely what is considered as absolutely safe from a credit risk perspective that carries the greatest potential of delivering the unexpected.

OECD, has a fundamental and urgent structural reform to do, namely throwing out the credit-risk-weighted capita requirements for banks. That would do much more for the creation of jobs than its worrying and wringing hands. 

PS. And perhaps OECD needs to start thinking about worthy and decent unemployments too.