October 06, 2017

The risk-weighted capital requirements, using Martin Wolf terminology, sound like voodoo Corbynomics.

Sir, Martin Wolf explaining, “Why has European social democracy been such a success?, [mentions the ] “government… must recognize the crucial role of incentives in shaping human behavior… [and] it must understand that the private sector, foreign as well as domestic, must play a leading role in the economy.” “The calamitous consequences of Corbynomics”, October 6.

I fully agree with that, but what I then cannot understand, is how Wolf is so utterly indifferent to the distortions produced by the risk weighted capital requirements for banks.

First, by allowing banks to leverage differently different assets, these create irresistible incentives for banks to finance what is perceived, decreed or concocted as safe; and to stay away from financing what is perceived as risky, like unrated SMEs.

Then by assigning a 0% risk weight to the sovereign it clearly states, loud and clear, that the government and its spending bureaucrats have the right to especially favorable bank credit, presumably because they allocate resources more efficiently than the private sector.

Sir, in Wolf terminology, that sure sounds like pure voodoo Corbynomics to me.

PS. The following link takes you to a litmus test all aspiring central bankers and bank regulators should take.