June 21, 2013

More blah, blah, blah about the safety of banks… but what about the safety of the real economy?

A sturdy healthy real economy will produce mostly safe banks no matter how little capital these have, while a weak and distorted real economy will produce unsafe banks no matter how much capital these have.

Sir, Martin Wolf, in “Reform of British banking needs to go further” June 21 mentions “distorted incentives distort risk-taking”, but this only from the perspective of the distortion produced in the banks, and among bankers, and not about the distortions produced in the real economy.

Allowing banks to leverage more and therefore be able to obtain a higher return on equity, just because something is officially perceived as “absolutely safe”, is about the most stupid way to serve the credit needs of the real economy. That means that what is perceived as “risky” will have to pay even higher interest rates and become even more risky than what it would without regulations; and that what is perceived as “absolutely safe”, will have access to even lower rates and more credit than what it should, and therefore might also become risky with time.

It is a problem that the typical borrowers of the real economy are never invited to discuss bank regulations, only bankers, some journalists, and some of the AAAristocracy are.

In the USA there is the Equal Credit Opportunity Act, also known as Regulation B, but, unfortunately, it would seem that their regulators do not care one iota about violating it.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.