July 22, 2016
Sir, Philip Stephens writes about “Events that map a path to global disorder” July 22. He does not include the distortions in the allocation of bank credit to the real economy produced by those mindless risk-weighted capital requirements for banks.
By allowing banks to hold less capital against what is perceived safe than against what is perceived risky, banks can leverage more their equity, and the support they receive from the society, with the “safe” than with the “risky”. And that means banks expect higher risk adjusted returns on what’s “safe” than on what’s “risky. And that means banks will lend too easily to what’s safe and too little to what’s “risky”
And so the “safe-havens” like sovereigns, AAArisktocracy and houses will sooner or later become overpopulated and risky.
And so the “risky-bays”, like SMEs and entrepreneurs, will be less explored and, in order to compensate for the discrimination, will have to pay more for credit, which makes these riskier yet.
And so today billions in bank credit will be awarded in too favorable terms to those who do not deserve it, and thousands of SMEs and entrepreneurs will see their applications refused.
And so the real economy is mostly fed with carbs that makes it obese, and does not receive enough proteins to remain muscular.
And that brings on much more poverty than some of that to which Stephens refers to, like a Trump presidency or Brexit.
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” They sure did!
But yet no one denounces regulators offering to make our banks safer with their meddling as being incompetent and dangerous populists.