Bank regulators have clearly violated that holy social intergenerational contract Edmund Burke wrote about.

Sir, Marin Wolf writing that while “UK has messed up policy in five significant respects: growth; ageing; risk-sharing; housing; and redistribution.” argues that the focus on intergenerational equity is not helpful” “The focus on intergenerational inequity is a delusion” May 18.

In that I do not agree.

For the umpteenth time: The risk weighted capital requirements for banks, that which allow banks to leverage more and thereby earn higher expected risk adjusted returns on equity when financing what’s perceives as safe, like the present economy, houses and sovereigns; over what’s perceived as risky, like the riskier future and the entrepreneurs, is a direct violation of that very core of minimum intergenerational equity that should guide our actions.

And not only will our young pay dearly for it. Those young currently living in the basements of their parents' houses will one day shout out: “Now it's our turn to live upstairs, you move down to the basement!” And way too many of those elder who possess assets, like houses and shares will, when they really need, find it very hard to convert these into the main-street purchase capacity they hoped for.

I pray it will not come to that, but it is useful for everyone to look at Venezuela where their young are now all fleeing to find better opportunities abroad, while most of the elder are stuck in a society that is rotting. And from boom to bust can happen so fast.

@PerKurowski

Help! Our so serious looking bank regulating technocrats are guided by childish romantic illusions. That’s dangerous.

Sir, Arthur Beesley and Alex Barker quotes Frans Timmermans, vice-president of the European Commission with: “Politics is always a balance between the head and the heart. In European politics we’ve sort of forgotten about the heart for too long, just thinking with the head. Then you end up in the underbelly, apparently, in some of our member states.” “Timmermans urges EU ‘not to punish Brits’”, February 3.

For EU politics that could be correct, though I really don’t know, and besides there are always more or less intelligent heads. But, in the case of regulations where only heads should be at work, there I am 100% sure, at least in the case of bank regulators, that only hearts reign.

That is because anyone who thinks that what is ex-ante perceived as risky, is ex post more dangerous than what is perceived as safe, is a naïve romantic full of illusions. The smart heads, like Voltaire did, would say “May God defend me from my friends, I can defend myself from my enemies”

Now for those who like EU have embraced the Basel Committee’s principles, this means for instance that a bank is allowed to hold less capital (equity) when financing the purchase of a house, than when lending to a SME or an entrepreneur.

That means a bank can leverage its equity more when financing the purchase of a house than when lending to a SME or an entrepreneur.

That de facto means a bank can earn a higher expected risk-adjusted return on equity when financing the purchase of a house, than when lending to a SME or an entrepreneur.

Consequentially that means 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 that is not extraordinarily dangerous for the future of EU, what is? Sir why don’t you suggest Timmermans that if he has some 100% head-applying technocrats available, then he should urgently have them to take over current bank regulations. 

@PerKurowski