October 02, 2012

Andrew Tyrie and the Parliamentary Commission on Banking Standards should start with the capital requirements for banks

Sir, Andrew Tyrie, the chairman of the Parliamentary Commission on Banking Standards, in “A mandate to tackle the deep-rooted failures of our banks” October 2, states that “banks are not serving the real economy”. 

Indeed, and, if the commission really wants to get to the most important root of why is that, it needs to look into how current capital requirements for banks distort the economic efficient resource allocation role of the banks. These capital requirements discriminate hugely in favor of banks lending to the “not risky” and against those perceived ex ante as “risky”, like the small businesses and entrepreneurs… and that is of course not how you really can serve the real economy. 

The only thing those regulations do serve is to instill some overly concerned regulatory nannies with a false sense of security; false because never ever has a major bank crisis resulted from excessive exposure to those perceived as “risky” (consult with Mark Twain), these have always resulted from excessive exposures to what was ex ante erroneously considered as “absolutely-not-risky”.