New Delhi might need some quality-of-air-weighted equity requirements for banks

Sir, you know I am convinced that the pillar of current bank regulations, namely credit-risk weighted equity requirements for banks is extremely stupid, as regulators clear for risks already cleared for by the banks. And so the consequences of that can only be too much credit at too lenient terms to what is perceived as safe, and too little credit at too harsh terms to what is perceived as risky.

If instead those equity requirements cleared for instance for the potential of job creation and or the sustainability of planet earth then we would also distort, but at least we would have injected some purpose to that distortion.

And so when I read Amy Kazmin´s “New Delhi Notebook: Politicians pass the polluted buck while air quality worsens” March 7, I immediately think of recommending the Indian authorities the following:

Set up an environmental rating agency, and allow banks to hold less equity against any loans that have a good environmental rating. That way the banks can leverage more that type of loans and get a higher risk-adjusted return on their equity for a good purpose. Let us never forget that what the bank really leverages is not only its own equity but also the implicit and explicit supports the taxpayers and society in general grants them; and so it is not outrageous to ask for that support to serve a better purpose than only a quite dangerous risk aversion.

@PerKurowski

Governments, stop holding the regulatory gun against equity strapped banks, and give the real economy a chance

Sir, Martin Wolf holds that “the Eurozone may fail, not because of irresponsible profligacy but rather because of pathological frugality”, “Bolder steps from Europe’s central bankers”, January 21.

And with “frugality” Wolf basically means governments, in this case especially Germany, not taking advantage of extraordinary low rates, “virtually free money”, to pump up their economies by means of fiscal deficits.

If Wolf and I had a project made viable by someone offering some extraordinarily generous financing terms, we would take the loans and go ahead, without the slightest remorse of us, the small fish, taking advantage of the huge market.

But when governments, in much by their own doings finds extraordinarily advantageous financial conditions on its borrowings, it should never forget that much of those advantages fall on the back of large groups of its own constituencies… who will now for years be collecting insufficient interests on their savings.

If Wolf were 30 year old, how much would he want his broker to allocate to the financing of German infrastructure at 1.1 percent for 30 years?

Currently regulators require banks to hold much more equity when lending to small business and entrepreneurs than when lending to sovereigns. That is like the governments holding the gun on equity strapped banks, telling them “give us, not them, the money!”

Why is it so hard for Wolf to understand that the whole banking system has effectively been sequestered by means of the: “You banks, I the government will support you, but only if you support me”.

Why not allow banks to finance what without the regulatory distortions would be financed, and have the governments wait until the citizens have made their pretax earnings to tax them… instead of taxing them in advance… in such a non-transparent way?