March 28, 2013

To temporarily lower the capital requirements for all banks on “risky” assets, as a first step, goes in a better direction.

Sir you write “it is deeply problematic that Basel capital rules permit the use of bank´s own models to risk-weight assets, in effect making profit consideration relevant to what risk model banks chose to use”, “A timid step in the right direction”, March 28.

Yes that is indeed a problem, but the real big problem is that the rules determine capital requirements based on perceived risks, which makes profit considerations, meaning return on equity, dependent on risk perceptions which are already cleared for by other means. This, allowing the banks to earn more much when lending to the “safe”, than when lending to the risky is what creates the distortion which causes the banks to lend less or more expensive to the “risky” small businesses or entrepreneurs.

And, before eliminating that distortion, the more pressures you put on banks to increase their capital, the more you will discriminate against the “risky”, meaning against those our real economies most need to get going.

You hold that “regulators must deliver on the promise to stop banks from meeting the capital ratio by shrinking the loan book” but, what about the not lending to the “risky”?

You agree with that new banks should be given a pass on the toughest rules… because they start out with “fresh balances”, but, in fact, those who might be in most need of it are the old messed up banks, so as to help them to, in a healthy way, to better diversify into “risky” assets.

It is amazing how hard it is for the Financial Times to understand and digest the implications that those assets that cause major bank crisis, are always found among those assets which have been perceived as absolutely safe, and never ever among assets perceived as “risky”.

At this moment Sir, I have no doubt that to temporarily lower the capital requirements for all banks on “risky” assets, is a much better direction for a first step.