Some are unfortunately the “Too Small To Be Invited To Basel Or Davos Banks”

Sir, Tracy Alloway reports on that “New rules hit small US banks ‘hardest’” February 9. She is right, but this has been since the imposition of credit-risk-weighted equity requirements, because:

Small banks, compared to big, attend proportionally much more the borrowing needs of clients who are perceived as “risky”, like local small businesses and entrepreneurs.

Small banks, compared to big, find it more difficult to engage in that financial sophistication, whether real or pseudo, used to dress up balance sheets as safer.

And therefore small banks, compared to big, must usually hold proportionally more equity, which makes it more difficult for these to produce competitive returns for their shareholders.

The small banks and their “risky” clients are never invited to discuss their problems with the Basel Committee or the Financial Stability Board…they are too small to be able to adequately feed the ego of regulators.

Small banks are never invited to Davos, as neither are their small “risky” clients.

Most certainly Martin Wolf did not explain to Edmund Phelps how bank regulations are stacked against small banks and their clients.

Sir, Martin Wolf’s lunch with Edmund Phelps ends with Phelps saying “I would like to see the American economy go back to small banks rooted in communities where the banks know something about the local start-ups” "A romantic economist?" June 14.

Unfortunately Professor Phelps, that is impossible, because regulators have structured modern banking around the concept that those who are primarily to know the clients of the banks are not the bankers, but some credit rating agencies. And if by any chance the small bank would try to get to know his local client, and decided to trust him with a loan, then it would be required to hold much more capital since the Basel Committee seemingly believes that anything small and local has to be very risky.

Sir, most certainly Martin Wolf did not explain anything of this to Phelps, since he clearly thinks that this is of absolutely no importance.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.