June 06, 2018

To make banks safer, stop allowing besserwisser regulators distort the allocation of credit.

Sir, Martin Wolf writes: “147 individual national banking crises occurred between 1970 and 2011. These crises … were colossally expensive, in terms of lost output, increased public debt and, not least, political credibility” “Why the Swiss should vote for ‘Vollgeld’” June 7.

Sir, in the years before those crises, did the economy grow in the same way? No one seems to be interested in the quality of the booms, as they are all too fixated on the damages of the busts. John Kenneth Galbraith, in his “ Money: Whence it came, where it went” (1975) wrote: “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

Wolf writes: “it is often easiest for banks to justify lending more just when they should lend less, because lending creates credit booms and asset-price bubbles, notably in property.” But Wolf, probably being one of those “insiders” Yanis Varoufakis refers to in his “Adults in the room”, refuses to point out how regulators, by allowing banks to leverage much more with “safe” residential mortgages, than for instance with loans to “risky” entrepreneurs, helped feed the property bubble.

The regulators, when interfering with their capital requirements for banks based on the ex ante perceived risks that would usually be cleared for solely by the market, obfuscate market signals, and thereby distort the allocation of bank credit making the economy weaker and the bank system riskier… and there is no way around that! 

PS. Does an ordinary British citizen know, for instance, that their bank regulators allows banks to hold much less capital against loans to Germany than against loans to British entrepreneurs? Sir, don’t you think they have a right to know that? Or is it a case of the risk-weights that shall not be named?