July 21, 2015

Until regulators also worry about what’s not on banks’ balance sheets, banks will not serve the economy well.

Sir, Tony Barber writes: Greece’s “economy also cries out for liquidity, bank credit for businesses and investment that will generate jobs, promote growth and alleviate the social crisis.” “Love and hate between Greece and the west” July 20.

And I have to ask: How is that supposed to happen with bank regulations that gives banks incentives based exclusively on avoiding credit risks? Just look at current stress tests concerned solely with the risk of what’s on balance sheets while ignoring all the loans that should be there, had the regulators not distorted everything.

Getting rid of the credit risk based capital requirements for banks is important for Greece… and for the whole western world. But how difficult it is to do that when there are so many vested interest in ignoring the distortions these cause in the allocation of bank credit to the real economy.