Dumb regulators are much more dangerous to the real economy than banks

Sir, let alone, without regulations, banks would take on assets based on which of these produces them the highest expected marginal risk and cost adjusted return on equity, as long as that return is over their marginal cost of capital… and that was how bank credit was allocated efficiently in the real economy.

Now they don’t. Now they take on assets based on which produces them the highest expected marginal risk and cost adjusted return on whatever equity they are required to hold for that specific asset, as long as it is over their marginal cost of capital...and that means that different assets are not treated equally by the market clearing mechanism… and that means that bank credit is not allocated efficiently in the real economy.

And that is why Chris Giles is wrong when writing “Britain’s banks are still a danger to the real economy” June 20, and leaving out the dangers of faulty regulations. Truth is that much more dangerous to the real economy than the banks, no matter a Sir Mervin King’s good intentions to “protect the economy from the banks rather than the banks from the economy” are the regulators who do not understand how their regulations distort.

PS. Sir, there are some very good regulators out there (I know of at least two, one in the US and one in the UK) and they are facing the horrendous difficulty of having to explain to their colleagues what is wrong, when the explanation on its own, implies that their colleagues have been lunatics.