October 15, 2013

Mr. Osborne will receive little help from banks with the real economy, thanks to current bank regulators

Sir, Janan Ganesh, in “Britain’s journey from austerity has hardly begun”, October 15, writes that “Cajoling Britain’s animal spirits while shoring up its discipline will test [Osborne’s] dexterity as a national figure”.

Indeed, and he will not find the banks being able to help him out much either, thanks to the regulators. This, because if there is anything that can kill animal spirits so much, are capital requirements for banks which are higher the higher the perception of risk. And, if it is something that can test bank discipline so much, is allowing these to have minimal capital, and be able to earn huge risk-adjusted returns on equity, only on account of something being perceived, ex ante, as “absolutely safe”. What an utterly silly reason… especially when knowing that all major bank crisis have resulted from excessive exposures to what, ex ante, was being perceived as “absolutely safe”