September 15, 2010

Do not subsidize small and medium-sized enterprises, eliminate the regulations that tax them.

Sir Martin Wolf in “Basel: the mouse that did not roar” September 15, out of the blue writes “to the extent that the public wants a specific form of risk taking subsidized – lending to small and medium-sized enterprise, for example – it should do so directly. Agree! But why does he then approve of the regulatory subsidies given out in terms of discriminatory lower capital requirements to those perceived as having a lower risk?

The capital requirements established in Basel II have been quite sufficient to cover the risks of the small and medium-sized enterprise, what it failed to cover for was for all falsely perceived as being a low risk.

The small business on top of the higher interest rates they need to pays because they are intrinsically riskier must currently pay an additional margin, a regulatory tax, about two percent per year, only to make up for the differences in capital requirement produced when regulators apply to them risk-weights of 100% while letting other slip by with only 20% or, in the case of Sovereign governments rated triple-A, zero percent.