Why cannot Martin Wolf understand the distortions the risk-weighting of bank assets produces in the real economy?

Sir, of course Martin Wolf is right when he writes “Britain must fix its banks – not its monetary policy”, June 7, I have been telling him that for years. And he is also quite correct stating that banks have become far too accustomed to the rewards of a business model based in minimal equity and support of taxpayers”, But when he limits his discussion of risk-weighing describing it as a “way of pretending assets are safer than they are”, it shows that economist Wolf has not yet understood the extent of the distortions capital requirements based on risk-weights cause.

Risk-weighting implies that banks are allowed to leverage their equity more with some assets than others, and since return on equity is their natural objective, then of course some assets, those perceived as safe, will be artificially favored by the banks, and other, those perceived as risky, artificially disfavored. And that leads to a very inefficient resource allocation in the real economy… and that will certainly prove more expensive long-term for the economy than whether banks are safe of not. And that I have been explaining to Wolf in hundreds of letters.

Yes, capitalize banks, a lot, by means of incentives or by brute force, but, most of all, we must stop bank regulators, or other bureaucrats, from acting, with immense hubris, like the risk-managers of the world.

PS. The final report of the Independent Commission on Banking, on which Martin Wolf  informs us he served, suggests keeping the concept of risk-weighting and says not a word about the distortions this produces

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.