October 11, 2012

The banks are made to jump from one huge pro-cyclicality to another.

Sir, Ben McLannahan reports, “IMF sounds alarm on Japanese lenders”, October 11, and this as a result of “domestic bank holdings of government bonds in the country could rise to a third of their total assets within five years now”.

I do not get it! Is it not what they wanted? They must obviously have understood that this would be only the natural consequence of allowing the banks to hold basically no capital at all against exposures to “The Infallible”, while at the same time requiring them to hold around 8 percent in capital when lending to “The Risky”, like the small businesses and entrepreneurs.

But, I am indeed worried, because it means that precisely at the moment the public sector might be hit by higher borrowing cost, will be precisely the moment they will need to bail out the banks because of their losses on public bonds. 

The article also states “Japan’s interest rates have been kept low in recent years by strong support from the banks”, but that must be a typo. I guess they meant “strong support from the bank regulators”. 

Indeed it would seem like the regulators are intent on having our banks jumping from one huge pro-cyclicality to another.