January 15, 2014

Kid! If you eat your spinach you must eat your broccoli too.

Sir I refer to Henny Sender’s “Distress appears across Asian funding markets” January 15. In it Sender describes that banks are not in great shape and are too risk adverse to lend to lower rated companies… [aggravated] by regulatory changes which require more capital for anything other than investing in sovereign debt”.

Indeed, but the main constraint to lending to “the risky” is not risk-aversion but the risk adverse capital requirements. It is like telling children who don’t like spinach that if they eat it, they have to eat broccoli too.

And let us be frank… who but communists could believe that a bank system becomes safer by lending to the “infallible sovereign” and not lending to the “risky citizen”?

Of course it is all crazy… and it all derives from the fact that regulators, instead of setting the capital requirements for banks based on “unexpected losses”, as they should, based these on the “expected losses”, those which were already being cleared for by banks by means of interest rates, size of exposure and other terms. 

Recently on a blog when asking why regulators were not asked about this mistake, someone replied“there comes a point where the hypocrisy of the situation becomes so intense that it can no longer be addressed”.

Does that apply to you FT?