November 11, 2014

The bank regulatory assassination of the real economy and of opportunities, is about to get much worse with FSB’s TLAC

The Financial Stability Board announced that: “the basic total loss-absorbing capacity requirement (TLAC) would be in the range of 16-20 percent of a bank’s risk weighted assets.”

That means that when lending to for instance one of the AAAristocracy who carries a risk weight of 20%, the bank will need to hold 4% in TLAC.

But, when lending to a small business, which carries a risk weight of 100%, then the bank will need to hold 20% in TLAC.

This will of course mean that banks will lend too much to “the infallible” at too low interest rates; and will stop lending to small businesses and other “risky”, unless at extremely high relative compensatory interest rates.

And that means in effect the regulatory assassination of the real economy will worsen.

Mark Carney, the FSB chair, holds that this will help to avoid the need for taxpayers to pay out in the case of any bailout. Perhaps, but way before taxpayers pay, perhaps inflation willing they even never will pay, others are paying.

Mark Carney mentions the subsidy in that “the public purse backstops these banks” Indeed…so let him answer us… who gets the most of that subsidy… “the infallible” or “the risky”?

In case of the need for a bailout, that which most often happens when some huge exposures to something perceived as absolutely safe turn risky, why should those perceived as “the risky” have had to pay for the cost of 20 percent of TLAC while “the infallible” only pay 4 percent of it?

And the worse cost of all, to be paid primarily by the future generations of unemployed, are all the opportunities that will never be realized because of lack of bank credit. And that will of course only increase inequalities.

I must say it… Damn these bank regulators who clearly only care about the short term health of banks, and do not give one iota about the real economy.

How can bank regulators deny their children the risk-taking by banks that benefitted them?

PS. And of course, the zero risk weighted infallible sovereigns are the biggest beneficiaries of the public purse backstop of banks subsidy, because, in their case, the required TLAC is zero! How can our bank regulators be so shameless?