Reckless (and dumb) bank regulators, with their distortions, are a drag on the economy

Sir, I refer to Anat Admati and Martin Hellwigs letter “A reckless banking industry is a drag on the economy” September 10.

What an unfortunate title. The drag on the economy that banks are causing now, has nothing to do with them being reckless, and all to do with reckless risk-adverse regulators who de facto decided, with their credit risk weighted capital requirements, that banks should not lend to the risky, even at the risk of lending too much to the infallible.

And of course banks need to hold more capital, meaning more equity, as Admati and Hellwig suggest. Were the regulation of banks to be left to the market, with the market paying the consequences of bank failures, it would be very hard to imagine bank equity leverages more than 10 to 1. Compare that with the allowed 62.5 to 1 leverage when lending to Greece authorized by this generation of loony regulators.

And of course banks need to hold more equity, but, let us not ignore the fact that the journey from undercapitalized banks to well capitalized banks is a journey full of dangers to the real economy. Just for a starter, before requiring banks to hold more capital, we need to eliminate the credit-risk weighing of capital, since otherwise the distortions will become even more intense.

Finally with respect to all those fines paid by banks… I just wished the judges had not been so masochistic as to ask for those fines to be paid in cash, against equity, but had asked these to be paid instead in voting shares, priced at current market values.