April 20, 2016

The way sophisticated states regulated their banks, meant that their real economies should lie down and die.

Sir, Jan Techau writes that “to have a functioning state in which nothing gets done” is a “Sophisticated state failure cancer eating away at societies in the west and undermining the liberal world order ”Sophisticated states are failing, so politicians need to take risks” April 20.

Indeed, but sometimes to have a state that does nothing, or at least less, could also be very helpful.

For instance, bank regulations coming out of the Basel Committee, are undermining our economies. Regulators believe that in order to make banks safer, they should hold more capital when lending to The Safe than when lending to The Risky. And that translates into that banks can earn higher expected risk adjusted returns on equity when lending to The Safe than when lending to The Risky.

This is something which completely distorts the allocation of bank credit to the real economy, and stops the banks from financing the riskier future, causing these to only engage in refinancing, the for the short time being safer past.

In other words they instruct our economies to lie down and die.

And to top it up, to speed up the dying, they imposed a mindboggling statism, which is reflected in that they defined the risk weight for the sovereign to be zero percent, while the risk weight for the citizens that give the sovereign its strength, was set at 100 percent.

I swear to you, if banks had not been regulated, the market would for instance never ever allowed European banks to leverage their equity 50 times or more.

@PerKurowski ©