February 03, 2017
Sir, Augustus Fukushima writes: “Britain must invest aggressively. Key sectors such as transport, education, and manufacturing suffer from chronic under-investment. The government must not relegate itself to the back seat by assuming a purely regulatory role but must instead lead investment” “Brexit Britain must go on the offensive to prosper” February 3.
Oh if only government had assumed a proper purely regulatory role. But, with their risk weighted capital requirements for banks they distorted the allocation of bank credit to the real economy.
First, with a risk weight of 0% for the sovereign and one of 100% for the citizens they guaranteed the government a too favorable access to bank credit.
Then, with for instance a 35% risk weight for financing houses and a 100% risk weight for SMEs and entrepreneurs; they allowed banks to leverage more their equity with loans to house buyers than with loans to SMEs or entrepreneurs; which de facto means banks earn higher expected risk-adjusted returns on equity on loans to house buyers than on loans to SMEs or entrepreneurs; which results in that banks will much prefer financing the “safe” basements in which kids without jobs can live with their parents, than the “risky” SMEs or entrepreneurs that could help the kids get the jobs they need to be able to afford buying a house and become parents too.
If Britain wants to prosper, it needs to get rid of this dangerously loony and useless bank regulation. Useless? Of course, as Voltaire would have put it if a regulator: “May God defend our banks from what they perceive as safe, from what they perceive as risky they can defend themselves.”
PS. FT’s Future of Britain Project would be much well served by asking the regulators some questions as those in the link below. But we can’t have that can we?