November 03, 2015

Stop bank regulators from distorting bank credit allocation to the real economy, based on their anxiety de jour.

Sir, Barney Jopson and Gregory Meyer report, “The Fed wants to use capital charges to discourage banks from risky activities involving hazardous materials that could threaten their survival in the event of a catastrophe… like costly disasters such as tanker spills or gas pipeline explosions.” “Banks face capital call for commodity disaster costs”, November 4.

With their credit risk weighted capital requirements for banks regulators already discourage banks from lending to those perceived as risky, like SMEs and entrepreneurs, now they also want to discourage lending to what could produce a gas spill or a gas explosion. Where will all this risk aversion end?

When will they realize that something perceived risky like handling hazardous materials is by definition much less risky to the banking system than something that has an AAA credit rating?

Banks should of course hold capital against unexpected losses but regulators should of course also have the intellectual capacity to understand that the really dangerous unexpected, has much greater potential to appear among what is perceived as safe, than among what is perceived as risky.

Please let us have an 8 to 10 percent capital requirement on all bank assets based on that regulators simply do not know what they do, instead of having them to distort the allocation of bank credit based on their anxiety de jour.

@PerKurowski ©