August 21, 2015

Can productivity growth really happen when banks and bankers are made more adverse to perceived credit risks than usual?

Sir, Gillian Tett refers to Alan Blinder, a former vice-chairman of the Fed stating: “The Fed is clueless about the [low] trend rate of growth of productivity… Just like everyone else”, “The Fed’s productivity predicament” August 21.

As one possible explanation Tett advances “corporate investment has recently been weak”. It sounds plausible, if one accepts that it is corporate investments that produce productivity. But what if the real sources of productivity are all those SMEs and entrepreneurs who do not classify as corporations? If so, then the fact that SMEs and entrepreneurs do not have fair access to bank credit, as a consequence of the credit-risk-weighted capital requirements for banks, could explain a lot.

Or phrased differently… can it really be possible to increase productivity by making banks avoid perceived credit risks more than what banks and bankers usually do?

Seemingly no one is interested in even answering that question… bank regulation technocrats the least.

Fed: You want productivity? Why not capital requirements for banks based on the potential of productivity gain ratings?