August 29, 2016

More than low-growth, central bankers fear having to explain risk-weighted capital requirements for banks

Sir, Sam Fleming, reporting on the meetings at Jackson Hole writes: “Eight years after the crash, major economies including the US are stuck with sub-target inflation, ultra-low rates, and economic growth that remains pedestrian…[central banks] could be trapped in a low growth rut that leaves them hugely vulnerable when the next downturn comes.” “Central bankers fear threat of low-growth rut

And again the distortion in the allocation of bank credit to the real economy that the credit risk weighted capital requirements for banks causes, was not even discussed.

But of course, who would want to discuss the following?

Sir, you risk weigh an AAA to AA rated asset with 20% and a below BB-rated asset with 150%. Do you mean that assets that are perceived as very risky are more dangerous to the banking system than assets perceived as very safe?

Sir, explain how on earth you have gotten away with risk-weighing the Federal Government at 0% while risk weighing “We the People” at100%?

Sir, if a bank can leverage one asset more than another, would it then not expect to earn a higher risk adjusted return on equity with that asset, and would it then not invest more than normally in that asset?

@PerKurowski ©