September 03, 2015

The credit-risk weighted capital requirements for banks should never even have been on the table as an alternative.

Sir, Dominic Rossi writes “Negative real interest rates on bank deposits cannot be the road to prosperity, yet the promise of low nominal returns on traded securities looks risky… It is only by investing in innovation that we can escape this otherwise humdrum nominal world”, “Don’t look for escape routes when the third deflationary wave hits” September 3.

And I just ask: Are current credit-risk weighted capital requirements for banks helpful or not when it comes to allowing fair access to bank credit to finance innovations? Or is it only borrowers with high credit ratings who should be allowed to innovate?

The global deflationary wave that is hitting our economies is very much caused by the retrenchment of bank credit to whatever is perceived as risky, caused by the risk weighted capital requirements being applied to scarcer bank equity.

It is amazing to read how many claiming for less government austerity are simultaneously ignoring or even claiming for more bank credit austerity. 

If we want to get out of this we must realize that since risk taking is the oxygen of any development, we must get rid of that loony risk aversion of regulators that hides behind the risk-weights. God make us daring!