And I have in thousands of letters argued that one of the major problems we face, are the current misconstrued risk weighted capital requirements for banks, those which allow their equity, and the societal support received, to be leveraged much more with what is perceived as safe than with what is perceived as risky.
Though these regulations allowed banks to earn very high risk adjusted returns on equity for quite some time, it caused banks to dangerously overpopulate “safe” havens, like AAA rated securities backed with mortgages to the US subprime sector and loans to sovereigns like Greece… thus the 2007-08 crisis.
And as these impede the “risky”, like SMEs and entrepreneurs, to access sufficiently bank credit… thus the weak recovery.
These regulations were the result of putting our banks in the hands of regulators who did not care, and still do not care, one iota about whether banks allocate credit efficiently to the real economy. And that is of course the risk we can least afford our banks to take.
As a result, our banks no longer finance the riskier future, that which feeds the proteins our economies need to remain muscular, but only refinance the safer pasts, that which only provides the proteins that can cause economic obesity.
And Wolf concludes: “Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. Those who reject chauvinist responses must come forward with imaginative and ambitious ideas aimed at re-establishing that balance”
Mr. Wolf, that has to start by recognizing the mistakes, and holding those responsible for these, clearly accountable… “without fear and without favour”.
So dare to speak out! The risk-weighted capital requirements for banks is pure regulatory populism. If allowed to continue it condemns our civilization to that hardship and mediocrity that will surely be exploited by other dangerous populists who thrive on hardship and mediocrity.
PS. On December 31, 2009, wishing all a happy decade, in a letter titled “The monsters that thrive on hardship haunt my dreams” and that was published by FT I wrote: “As to the banking system, there is nothing that could not be solved by asking ourselves the simple question about what our banks are supposed to do for us, because, unfortunately, that is the question our current very poor set of regulators have never asked themselves.” Now, July 2016, that question is still not being asked, much less responded.