August 04, 2015

Bank credit: In tough times there are no benefits derived from making it harder for the tough to get going.

Sir, I refer to Kadhim Shubber’s and Gavin Jackson’s report on that “Moody’s warns on lending crackdown” August 4.

Clearly the “risky” part of the economy, like SMEs, entrepreneurs and “highly indebted companies” are, as a consequence of tightening bank capital requirements, having to struggle more than others to obtain access to credit, precisely at the exact moment when we most need them to have fair access to it.

And the tightening of bank capital requirements, which lead to bank credit austerity, are usually most called for by those who oppose government spending austerity. Just read through the articles of most of your columnists over the year and you will find requests for higher capital requirements for banks going hand in hand with similar pleads of less government austerity. The most plausible explanation for that… is that it is all the result of an unconscious or conscious pro-government political agenda.

I repeat what I have argued many times over the years. Before we raise capital requirements we need to get rid of the distortionary implications of the risk weights. Let’s reduce the capital requirements like to 5 percent on all assets and then build it up over a decade to around a more reasonable 10-15 percent.

In tough times there are no benefits derived from making it harder for the tough to get going.

Also I am absolutely convinced that if banks are not distorted, bankers, pursuing maximizing the returns on bank equity, are much more able to allocate credit efficiently than government bureaucrats.

But, if bank regulators absolutely must distort, in order to show us they earn their salaries, then at least let us ask them to distort in favor of something more productive than keeping banks from failing. 

For instance let them authorize slightly lower capital requirements based on job-creation and earth sustainability ratings… so that banks earn slightly higher risk adjusted returns on equity funding what we believe should be funded, and not like now, earning much higher risk adjusted returns on equity when funding what is ex ante perceived as safe… like AAA rated securities were… like Greece was.