January 17, 2017

Do risk weighted capital requirements for banks promote or kill the animal spirits Lawrence Summers think important?

Sir, Lawrence Summers writes: “Animal spirits are as fickle as they are important”, “A bitter comedown from Trump’s sugar high” January 17.

Question: Does Professor Summers believe that the pillar of our bank regulations since 1988, the risk weighted capital requirements for banks, promotes or kills those animal spirits he thinks important?

As for me I have no doubts it kills it! Giving banks extra incentives to go in pursuit of the safe and abandon the risky just means that what’s decreed, concocted or perceived as safe, will get too much bank credit, at too low interests, while that which is perceived as risky, like SMEs and entrepreneurs, will get too little or in too expensive terms.

If there is any animal spirit left in the banks after that, then surely it is not those of lions but those of hyenas.

P.S. Professor Summers, you who know so much, would you on behalf of bank regulators dare advance some answers to the following questions?