The regulators’ search for financial stability has distorted the allocation of bank credit to the real economy.

Sir, you hold “G20 governments would do well to recognize that financial instability can rapidly translate into trouble for the real economy.” “Central banks alone cannot conjure growth” February 20

Sir, you should know by now the regulators’ search for financial stability, has already created much trouble for real economy.

You quote Zhou Xiaochuan, governor of the People’s Bank of China, with “The central bank is neither God nor a magician who can turn uncertainties into certainties.”

The correct reply to that would be: So why then do central banks, as regulators, act like God or magicians arrogantly imposing their besserwisser founded credit risk weighted capital requirements for banks?

If you allow banks to leverage more their equity (and the support they receive from society/taxpayers) with assets ex ante perceived as safe, than with assets perceived as risky; then what is perceived or deemed to be “safe” will produce higher risk adjusted returns on equity than what is “risky”.

And anyone who does not understand how that distorts the allocation of bank credit on Main Street, has never walked on Main Street; has never seen how difficult it is for SMEs and entrepreneurs to access bank credit even without the regulators making that harder for them.

And if you do not understand how useless such distortion is, because major bank crises never ever result from excessive exposures to something ex ante perceived as risky, then you have not read financial history.

Who authorized bank regulators to decide on the allocation of bank credit to the real economy?

Or is it really so bad that banks regulators are not even aware of that they distort the allocation of bank credit to the real economy?

PS. In 1999 in an Op-Ed I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

@PerKurowski ©