Does BoE’s core mission not include assuring bank credit is allocated as efficiently as possible to the real economy?

Sir, I refer to the letter written by Andrew Bailey and Sir Jon Cunliffe of the Bank of England titled “Proposals designed to fulfill BoE’s core mission”.

“They write “BoE’s proposals about the appropriate capital requirements for the UK’s banks are the product of two years of careful reflection and stress-testing, and are designed to fulfil our core mission of making the banking system safe and sound.”

But then we read about equity requirements expressed as percentages of “risk-weighted assets” and I must again ask the following:

Is not also part of the core mission of BoE assuring that bank credit is allocated as efficiently as possible to the real economy? I ask this because risk weighted capital requirements, by allowing banks to earn higher risk adjusted returns on equity on assets ex ante perceived as safe than on risky assets, distorts horrendously the allocation of bank credit to the real economy.

And by the way, by distorting that credit allocation they will make the real economy unsound and thereby, sooner or later, also threaten the safety of the banking system.

And by the way, just as an aide memoire, I remind them of that no major bank crisis ever result from what is ex ante perceived as risky, these are always the consequences of excessive exposure to something that ex ante was perceived as safe but that ex post turned out to be risky.

@PerKurowski ©