October 10, 2011

Stefan Ingves, defends a bank leverage of 33 times to 1. Why?

Brooke Master reported on October 10 that Stefan Ingves, the new chairman of the Basel Committee for Banking Supervision said: “It all boils down to capital ‘the ultimate brake’ If you don’t have enough simple common equity you will run into problems… If one looks at banking systems running into troubles, you almost always find ex-post facto that there was too much leverage”. On that we all agree. 

But then, ipso facto, Ingves says, “I find it hard to argue that you would need to go above leverage of 33 times”… and I, as a tax-payer, as one of the ultimate picker-uppers, or at least as a grandfather to one, must ask, why on earth that high? Why not 12 to 1 for example? 

If Stefan Ingves wants to defend a 33 times bank leverage he is of course in his right, but the least we can do is to ask him to explain the purpose of that. Is it so that banks can help us to create jobs? In that case would it then not be better to reserve that bank lending power for the small businesses or entrepreneurs, instead of wasting it on those perceived ex-ante as having no-risk and who, almost by definition, must be the largest suppliers of those dangerous “unexpected losses” he speaks of?

Or could it just be that the whole purpose of our banking system has been reduced to have banks making profits? If it is so, how vulgar of the regulators.