Is allowing banks earn the highest risk adjusted returns on equity with what’s “safe” a nudge, a sludge or a grudge?

Sir, Tim Harford writes “Nudge, sludge or grudge, we can change this. And we should start by asking ourselves whether when it comes to news, information and debate, we have made it difficult to do the right thing — and all too easy to stray.” “Nudging and the art of darkness” November 10.

Art of darkness? How and by whom were our bank regulators nudged into believing that stupidity that what bankers perceive as risky is dangerous and that what is perceived by them as safe is safe?

Because as a consequence we got the risk-weighted capital requirements for banks that allow banks to leverage much more with what is perceived as safe than with what is perceived as risky; which means banks will earn higher risk adjusted returns on equity with what’s “safe” than with what’s “risky”; which means banks will, dangerously for the bank system, lend too much against too little capital to what’s safe, and, dangerously for the real economy, lend too little to what is perceived as risky like SMEs and entrepreneurs.

PS. When I try to see what @TimHarford is up to, I am given the message “You are blocked from following @TimHarford and viewing @TimHarford’s tweets”. Does Tim Harford believe it is so easy to get away from my arguments?

PS. What would Templar Grand Master Jacques de Molay burned in 1307 say about a 0% risk-weightof sovereign Phillip IV?

PS. “50 Things That Made the Modern Economy”, and just 1 That is Bringing it Down: Regulatory Risk Aversion 

https://teawithft.blogspot.com/2017/03/ft-is-not-withholding-truths-for-any.html

@PerKurowski

Beware, nudging, like that done by bank regulators, can have very dangerous unexpected consequences

Sir, Tim Harford writes: “Professor Richard Thaler’s catch-all advice: whether you’re a business or a government, if you want people to do something, make it easy.”, “Thaler’s Nobel is a well-deserved nudge for behavioural economics” October 10.

Yes “making it easy” is great advice, but it is only truly helpful if what is made easier is really good for you… otherwise it could be outright dangerous… like nudging someone over a cliff.

Regulators, caring little or nothing for the credit allocation function of banks, foremost wanted these to avoid risks. To that effect they allowed banks to hold less capital against what’s perceived or decreed safe than against what’s perceived risky.

With that regulators allowed banks to easily obtain higher risk-adjusted returns on equity lending to The Safe than when lending to The Risky.

With that regulators dangerously nudged our banks into too much exposure to The Safe and too little to The Risky.

The result was a bank crisis because of excessive exposure to The Safe: sovereigns, AAArisktocracy and mortgages; and economic doldrums because of insufficient credit to The Risky: SMEs and entrepreneurs.

Sir, and so here we are, without most not even knowing about the odious regulatory nudging that was as is being done.

What rules do we have to impose on nudging to make sure it is done right?

https://teawithft.blogspot.com/2008/11/at-least-listen-to-joker-before-giving.html

https://teawithft.blogspot.com/2008/08/how-do-you-nudge-financial-times.html

https://subprimeregulations.blogspot.com/2015/12/professor-richard-thaler-do-not-give.html

@PerKurowski

How do you nudge the Financial Times?

After having tried it and failed miserably I would love to ask Richard Thaler or Cass Sunstein about how to go about to nudge the Financial Times… firmly or gently? Any special tips?