Regulatory risk aversion exposes our Western civilization to the risk of a “Mom, dad, you move down to the basement!”

Claire Jones writes on Alexandru saying: “Out of every 10 of my friends, only one works. It’s not a good situation for my generation,” Alex says. He and many of his friends still live at home with their parents. “When I talk to them about the past it sounds better. They all had a job and the opportunity to have a family.” “Temporary fortunes” July 6.

And Ms Bellieni “lives with her young child and husband, who also does many temporary jobs, in a property that belongs to his parents. “Otherwise we couldn’t make it”

Banks are allowed to hold much less capital when financing houses than when financing SMEs and entrepreneurs, as regulators think the former is much safer for the bank than the latter. As a result banks can earn much higher risk adjusted returns on their equity financing houses than financing “the risky”.

But since SMEs and entrepreneurs are job creators par excellence, could these regulations create an excess of basements in which the unemployed or underemployed young can live with their parents, and a substantial lack of jobs?

Mario Draghi, the Chair of the Financial Stability Board and his ECB officials clearly do not see this as a problem, hey they might not even see it as a distortion. That could be since like overly worried nannies they are totally focused on avoiding bank crises, and do not care one iota about how banks do their job in the in-betweens.

Sir, the younger generations, squeezed by this anti Western civilization value of risk aversion, and an increased loss of jobs to robots and automation, could at some point become sufficiently enraged so as to say… “Mom and dad, you move down to the basement, it is our turn to live upstairs!”

Note: Not the first time: 2009: "Please free us from imprudent risk-aversion and give us some prudent risk-taking"

@PerKurowski

Portugal might need everything to be perceived as risky, so as to stop the regulatory distortions of bank credit

Sir, Peter Wise mentions a “crucial ruling by Canadian rating agency DBRS next month on Portugal’s only investment-grade credit rating.” “IMF fears Portugal recovery is running out of steam” September 23. 

Again, with bank regulations that directly discriminate against the access to bank credit of SMEs and entrepreneurs, only on account of them being perceived as risky, as if those perceptions were not already considered by the banks, there is no way any other type of stimulus is going to be sustainable, and the economy not run out of steam.

If Portugal cannot free itself from these regulations, perhaps the best think that could happen to it is for everything to be downgraded and seen as equally risky.

That would at least allow for some more efficient allocation of bank credit to the real economy. That could give Portugal a chance to work itself out of that hole in which, as I see it, the Basel Committee on Banking supervision, with its senseless risk weighted capital requirements for banks, has helped to dig. 

How sad IMF refuses to understand how current bank regulations distort.

@PerKurowski ©

The labour pains of Europe are made worse, and permanent, by the risk-weighted capital requirements for banks.

Sir, I refer to Sarah Gordon´s, Claire Jones´ and Peter Wise´s report on the eurozone unemployment “Labor pains” July 7.

I just wish those three would take perhaps an hour or so to sit down and discuss among themselves which of the following two Europe they would prefer, if worried about the future job perspectives of their children or grandchildren.

One, like today´s, where regulators thinking this will bring stability to the banking sector allow banks to hold less capital against what is perceived as safe than against what is ex ante perceived as risky, or one, where banks must maintain the same capital (a leverage ratio), against any asset?

In today´s Europe banks therefore earn much higher risk adjusted returns on equity when lending to the infallible sovereigns, the housing sector or a member of the AAAristocracy, than when lending to “risky” medium and small businesses, entrepreneurs and start-ups. In the hypothetical Europe, in fact the Europe that used to be some decades ago, there is no such discrimination or distortion, though of course banks would as always consider the perceived credit risks in order to set interest rates, size of exposures and their other terms.

And I argue that banks in today´s Europe, as a consequence cannot finance “the risky”, those which represents so much of Europe´s potential future, but are forced to dedicate themselves mostly, or even exclusively, to re-finance the safer past… and that simply means that a new generation of jobs will never have a chance to see the light.

Please, when deciding, do not forget that most safety and prosperity of today is the result of the risk-taking of yesterday. God make us daring! Are you really going to exploit the past for your own benefit and refuse your children their future?

And I also hold that the current bank capital risk-weight distortions are, at the end of the day, absolutely useless even from the perspective of bringing stability to the banks. Because the only thing it guarantees, is that the absolutely safe will get too much credit in too lenient terms and therefore, sooner or later, ex-post, turn into absolutely risky.

And history is 100% on my side. Never ever has there been a major bank crisis caused by excessive bank exposures to what was ex-ante perceived as “risky”, these have always been caused, no exceptions by excessive exposures to what was perceived as absolutely safe but that ex-post turn out not to be.

PS. I believe FT and its journalists should be weary of the fact that there is not a chance in hell that the European Commission will order Google to eliminate the links to all the letters I have sent to all of you on the subject of the distortions caused by risk-weighted capital requirements for banks, and so you will have to live with the fact that for whatever reasons, these might indeed be very petty, you have decided to ignore my arguments.