October 19, 2015

John McDonnell, here is a question Professor Blanchflower should ask BoE during his review, if he dares

Sir, John McDonnell has asked Professor David Blanchflower, a former member of the MPC, to lead a review of that Bank of England’s mandate. And he has assured Prof Blanchflower that all options are on the table and nothing has been prejudged. “The mandate of the Bank of England is not set in stone” October 19.

Let me, as a long time admirer of Britain’s go-get-it-ness, suggest a question to be included in that review.

Should BoE support bank regulations which, by allowing banks to hold less capital against assets perceived as safe than against assets perceived as risky, allow banks to earn higher risk adjusted returns on equity on what is safe than what is risky? 

That silly risk aversion distorts the allocation of bank credit to the real economy; without providing any additional stability, since, if you look back, bank crises are always made of “safes” going risky, and never ever on risky being risky.

@PerKurowski ©