March 06, 2013

In banking, margins paid by big “infallible” guys are worth much more than those paid by little “risky” guys

Sir, Luke Johnson writes “Margins give the little guys a chance” March 6. That might be, but absolutely not when accessing bank credit.

Because of the capital requirements for banks based on perceived risks, the risk and cost adjusted margins paid to the bank by the little guys, “The Risky”, Luke’s entrepreneurs, are worth much less than those same margins paid by the big guys “The Infallible”, simply because the banks are authorized to leverage the latter many times more.

This distortion has castrated our banks. Our current bank regulators completely ignored the fact that our economies became prosperous, not by silly risk-avoidance, but by intelligent risk taking.

And as result our economies are ingesting more of what is perceived as “safe”, carbs and fats, while dangerously ignoring to take sufficient “risks”, that protein which helps it to grow muscles and become sturdy, and our economies are becoming obese and flabby.