Lex, explain why you consider a straight leverage ratio inferior to a risk-weighted assets ratio?

Current capital requirements for banks based on perceived risks using risk-weights allow banks to leverage more the risk adjusted margins when lending to “The Infallible” than when lending to “The Risky”; which means making a higher expected return on assets when lending to “The Infallible” than when lending to “The Risky”; which means that “The Infallible”, those already favored by markets and banks will be even more favored, while “The Risky”, those already discriminated against by banks and markets, precisely because they are perceived as “risky”, will be even more discriminated against.

And that of course creates the danger of excessive exposures to those of “The Infallible” who do not turn out to be really infallible, precisely those who have caused all major bank crises in history, as of course “The Risky” have never ever done that; in this case aggravated by the fact that bank then will have extremely little capital.

And that of course impedes the banks completely to perform their social function of helping us to allocate economic resources as efficiently as possible.

And so LEX, please explain to us why, in your column of February 27, you consider a straight leverage ratio inferior to a risk-weighted assets ratio?

And if you absolutely want to risk-weighed, because you cannot refrain from interfering, then why would not the capital requirements for banks for exposures to “The Infallible” be slightly higher than for exposures to “The Risky”, as all empirical data suggests?