September 18, 2014

Joe Hockey, as an impact assessment, just ask bank regulators some easy questions.

Sir, Jamie Smith, Sam Fleming and Gina Chon report that “The B20, a business lobby group has called on… the Basel Committee to investigate further the side effects of financial regulations”, “G20 split over call to assess impact of financial rules” September 18.

About time! I just hope this B20 also includes a god representation of those borrower who because they are perceived as risky are, by means of credit-risk-weighted capital requirements for banks, being denied fair access to bank credit.

I just came back from Toronto where I saw the play “Our Country's Good” advertised with “Thieves, murderers, prostitute, actors…this is what made Australia”. I sure hope Joe Hockey, Australia’s finance minister, now reflects on what would have become of Australia’s economy if its banks had needed to hold much much more capital (equity) when lending to its own “risky” outcasts, than what they needed to hold when lending to the “absolutely safe”, like to Greece. 

Frankly, before requiring any impact assessments I would be great if Joe Hockey, just asked bank regulators to answer some kindergarten level questions, and did not let go until he had an answer that a kindergartener would understand. Like the following:

Q. Why on earth should a lot of money lent at low interest rates to Mr. Safe be safer, or less risky for the bank, than little money lent at high rates to Mr. Risky?

Q. Is the truth not that the risk of banks have nothing to do with the credit risks of Mr. Safe or Mr. Risky, and all to do with how banks lend to Mr. Safe or Mr. Risky which, as they say in French, is pas la meme chose?

Q. Why on earth would bank regulators expect the bank to keep on lending to Mr. Risky if it cannot leverage its equity as much as it is allowed to do when lending to Mr. Safe?

Q. And if banks only lend to the Mr. Safe of this world and avoid all the Mr. Risky, what might become of the real economy… a safer or a riskier place?

The sad truth is that all current bank regulations have been written without first settling the issue of what is the purpose of banks.

Overly risk adverse regulators ignored that risk-taking is the most fundamental element needed for keeping an economy going forward, without stalling, and falling. “A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926