February 23, 2012

Bank regulations are possibly the biggest barrier to break through there is.

Sir, Robin Harding begins his “Barriers to break through”, a title which is very adequate to the theme, mentioning someone who wants to drive a taxi in Milwaukee, but that, in order to do so, has to, on top of the cost of the vehicle, pay $150.000 for the license, February 23. 

In precisely the same vein, though much less transparent, all those who are officially perceived as risky, on top of the higher interest rates they already have to pay banks because of that perception, need also to pay the bank an additional margin so as to produce a similar risk-adjusted equity return as those perceived as not risky. 

This is so because the regulator, stupidly ignoring that those perceived as “risky” have never ever caused a major and systemic bank crisis, only those perceived as absolutely not-risky do that, impose higher capital requirements on banks when they lend to the “risky” than when lending to the “not-risky”. And that, in terms of barriers to break through, is as big as they come.

The sad result is there to see. Banks have huge and dangerous overexposures to triple-A rated securities and infallible sovereigns and, equally or even more dangerous, underexposures to small businesses and entrepreneurs.