November 20, 2013

Regulation ordering brutish and silly risk avoidance by banks, only guarantees a sluggish future.

Sir, when you allow banks to hold much much less capital when lending to The Infallible than when lending to The Risky, this allows banks to earn much higher risk adjusted expected returns on equity when lending to the former than when lending to the latter.

And so those actors who we find on the margins of the real economy and who we most need to have access to bank credit, namely medium and small businesses, entrepreneurs and start ups, will get the least of it. And since the future is built upon risk taking and not upon risk avoidance that is the most important cause for “Why the future looks sluggish”. 

That does of course not diminish some of the other explanations put forward by Martin Wolf on November 20. When Wolf correctly writes that we need to “facilitate capital flows to emerging and developing countries” he shows he has failed to understand that there are many emerging opportunities waiting to be developed in developed countries, only because of these bank regulations.

Sir, when Wolf concludes “It will be better to risk mistakes than accept the costs of an impoverished future” he shows some indications of being on the right track but, in his world, he clearly prefers the public sector to take risks, for instance with “a surge in public investments”, before banks doing so.

And I do not. I firmly believe in the banks being the prime agents appointed by society in order to, with reasoned audacity, take the needed risks on its behalf.

But in order for our bankers to take risks on The Risky, we must of course get rid of regulation which de facto prohibits them to do so.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he has already understood it all… at least so he thinks.