June 15, 2012

On the current banking reform plans, I feel more like crying.

Sir, First question: What is worse, a general systemic bank crisis that destroys the economy, whether inside or outside a ring-fence, or that taxpayers need to pay for some of the losses of that crisis? Clearly the occurrence of the systemic crisis is the worst since the latter is just a consequence, and the taxpayer would still have to pay in so many other ways. 

Second question: What caused and is causing the current crisis, bad lending and investments by the banks, or too little bank equity. Obviously the first, since if all bank lending and investment yielded a positive return for the bank, in theory there would not even be a need for bank equity. 

Third question: What really caused the current crisis, excessive lending to what was officially perceived as not risky, or excessive lending to what was officially perceived as risky? Clearly the first, because the bank exposures to what ex ante is perceived as risky, are of course, as usual, very small. 

Fourth question: What does Martin Wolf believe caused the excessive exposures to what was ex ante officially deemed as not risky, and that he believes has now been solved so much that he gives “Two cheers for Britain´s banking reform plan” June 15? I don´t know, but if asked he would probably give me a rundown of all macroeconomic structural imbalances. See also next post "Mr. Wolf think he´s understood the problem with risk-weighted bank capital. He has not!"

But I do know that what caused the banks to indulge excessively in “safe” exposures was the fact that when doing so banks were allowed to have much less capital, meaning much more leverage, meaning much more return on bank equity, than when lending to or investing in the already scary risky. 

And since we have yet to hear the regulatory authorities even acknowledging the problem with that silly bank capital discrimination based on perceived risks which have already been discriminated for before, when setting interest rates and deciding on the amounts, I find no reason to cheer, much the contrary I feel like crying. (Especially since I have explained this to Mr. Wolf in about a hundred letters, and he was also a member of the Independent Commission on Banking)