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?

https://subprimeregulations.blogspot.com/2021/01/and-academia-kept-silence.html

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!

https://youtu.be/TUdKhm6_a8Y

When you hold back banks from financing the riskier future, the pace of disruption and of productivity growth, will both slow.

Sir, I would like to make two brief comments with respect to Tim Harford’s “Disruption sets a less frenetic pace of change” of April 15.

The first is that the ownership of houses as well as the state of the housing market, influences on mobility. When you own a home but your equity in it has disappeared all things get to be more complicated.

The second is that though he mentions Tyler Cowen’s new book The Complacent Class, [which] argues that America has become less adventurous in many ways… he still does not want to understand that the risk weighted capital requirements for banks, more perceived risk more capital – less risk less capital, de facto orders less adventures and much more complacency.

http://subprimeregulations.blogspot.com/2017/03/banks-regulators-and-sovereigns.html

@PerKurowski