February 08, 2016

“A free lunch?” That depends a lot on who is doing the cooking. The Basel Committee’s lunch is both expensive and bad

Sir, Lawrence Summers writes: “The strengthening of regulation reduces the incidence of financial crises, thus improving economic performance while promoting fairness by helping consumers.” “No free lunches but plenty of cheap ones” February 8.

That could happen, but please let us not confuse strengthening with dumbing.

Right now the pillar of bank regulations is the risk weighted capital requirements for banks; more ex ante perceived risk more capital – less ex ante perceived risk less capital.

That, by making the access to SMEs and entrepreneurs, “the risky”, more difficult than the one for “the safe”, sovereigns and AAArisktocracy, hardly promotes fairness, it actually promotes inequality, and neither does it help consumers in need of job opportunities.

But let us also not ignore that major bank crisis never result from excessive exposure to something that was ex ante perceived as risky, but always from excessive exposure to something ex ante perceived as safe but that ex post turned out to be very risky. And, in this respect, these regulations, allowing for too little capital when real shit hits the fan, also increase the severity of the really big financial crises.

“No free lunches?” Well as we can see that would also very much depend on who is doing the cooking, and of who are having lunch. Currently our bank regulators are serving us both a very expensive and lousy lunch. 

@PerKurowski ©