August 04, 2016

Bank regulators should not discriminate in favor of the “safer” past and present, and against the “riskier” future.

Sir, Mariana Mazzucato writes: “On the finance side, the problem is not quantity but quality: industrial and innovation policies require long-term, strategic finance, while the UK continues to reward short-term finance. The few attempts at building sources of patient public finance have been neglected” “A strong industrial strategy has many benefits” August 4.

What already exists, the past and present, is generally perceived as safer than what is planned to exist, the future.

And so when regulators decide that what is ex ante perceived as safe requires banks to hold less capital than what is perceived as risky, they allow banks to leverage their equity, and the support of society (taxpayers), much more with the past and present than with the future.

And since regulators have also decreed the sovereign to be infallible, and set the risk weigh for it at 0%, while the risk weight for an ordinary SME or entrepreneur is 100%, regulators similarly allow banks to leverage more when lending to the government than when lending to the private sector.

I have no objection to governments trying to do some of the pro-investment efforts that Mazzucato writes about in her article but, before that, and much more important for the long term, we need for the current regulatory distortions of the allocation of bank credit to the real economy to disappear.

What would the interest rate of public debt be if all hidden regulatory subsidies of it are removed? I have no idea, but perhaps then “the successful Green Investment Bank” might not be that successful.

@PerKurowski ©