August 10, 2015

Current capital requirements for banks are based on perceived credit risk… and on nothing more. That’s short-termism!

Sir, I refer to Lawrence Summers writing about “mandates or incentives to change business decision-making. The goal is for companies and shareholders to operate with longer horizons” and other ways to avoid short-termism, and risk aversion “Corporate long-termism is no panacea — but it is a start” August 10.

Again for the umpteenth time, there is nothing around the world that drives the allocation of financial resources based on short-termism, and avoidance of credit risk, as much as the risk weighted capital requirements for banks. These allow banks to earn higher risk adjusted rates of return on what is perceived as safe than on what is perceived as risky, without absolutely any other type of consideration.

Eliminating the distortions in credit allocation produced by those capital requirements should have the highest priority. Unfortunately that would require regulatory technocrats and similar to accept they are responsible for mindboggling mistakes… and we can’t have that… can we Mr. Summers?