Why does the world ignore regulations that totally disrupt the allocation of bank credit?
Sir, I refer to Martin Wolf’s “Shocks from war in Ukraine are many-sided. - The conflict is a multiplier of disruption in an already disrupted world” FT April 27.
The concentration of human fallible regulatory power in the Basel Committee has, since 1988, resulted in bank capital requirements mostly based on that what’s perceived as risky e.g., loans to small businesses and entrepreneurs, is more dangerous to our bank systems than what’s perceived or decreed as safe e.g., government debt and residential mortgages; and not on misperceived risks or unexpected events, like a pandemic or a war.
What can go wrong? I tell you Sir.
When times are good and perceived risks low, these pro-cyclical capital requirements allow banks to hold little capital, pay big dividends & bonuses, do stock buybacks; and so, when times get rough, banks stand there naked, just when we need them the most.
And of course, meanwhile, these capital requirements, by much favoring the refinancing of the safer present over the financing of the riskier future, have much disrupted the allocation of credit
Why has the world for decades ignored this amazing regulatory mistake?
Sir, perhaps you could ask Martin Wolf to explain that to us.
PS. Two tweets today on bank regulators’ credit risk weighted bank capital requirements.
What kind of banks do we want?
Banks who allocate credit based on risk adjusted interest rates?
Or banks who allocate credit based on risk adjusted returns on the equity that besserwisser regulators have decreed should be held against that specific asset?
Bank events' matrix
What’s perceived risky turns out safe
What’s perceived risky turns out risky
What’s perceived safe turns out safe
What’s perceived safe turns out risky
Which quadrangle is really dangerous?
Covered by current capital requirements?
NO!
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