June 18, 2018

It is the run of banks to what is perceived, decreed or concocted as safe that is scary

Sir, you opine: “If there was ever a moment for bankers to take on too much risk, thereby planting the seeds of a nasty downturn, it is now”, “The unsettling return of bullish investment banks” June 18.

Given current regulation a more exact phrasing of “to take on much risk” would be “to build up risky exposures to assets that are perceived (houses), decreed (sovereigns) or concocted (AAA rated securities) as safe against the least capital possible” 

When you write: “there are other indications of a cyclical top. Assets remain expensive worldwide, and in the US business confidence is at a peak, unemployment is very low and tax cuts have delivered a big fiscal stimulus”… you are describing a world in which the regulators with their risk weighted capital requirements, more than warning the banks are spelling out a go ahead. Their countercyclical capital requirements when leaving in place the distortions of risk weighing are a joke. 

Bank crisis never result from exposures to what is ex ante perceived as risky but only from exposures to something perceived as safe. By allowing those risky sized exposures to build up against especially little capital, the regulators have set bank crises on steroids.

The regulator’s tiny countercyclical capital requirements are, when leaving in place the distortions of risk weighing, just a joke. 

If only banks went for much more of the truly “risky”, like loans to entrepreneurs or SMEs. Those exposures would of course also be hurt in a crisis but, meanwhile, they could at least help our economies to move forward in a more dynamic way. Risk-taking is the oxygen of development. God make us daring!