Systemic distortion of bank credit allocation, is worse than risks with “global systemically important banks”

In November 1999 I concluded and Op-Ed with: “Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

And in May 2003, then as an Executive Director of the World Bank, addressing many regulators at a workshop, I argued: “Knowing that ‘the larger they are, the harder they fall’, if I were regulator, I would be thinking about a progressive tax on size.”

And so Sir, of course I agree with John Gapper in that “Regulators are right to cut the biggest banks down to size” January 8.

But that said, why is it that even though Gapper clearly understand the meaning (and cost) of higher capital requirements for banks, he seemingly cannot understand what different capital requirements for different bank borrowers mean.

The “risky”, because their borrowings generate higher capital requirements for banks than the “safe”, are being negated fair access to bank credit.

More important than increasing the capital requirements for those banks like JPMorgan that because of their size pose a “global” systemic risk, it is much more important to get rid of the risk–weighted capital requirements which constitute, not just a risk, but an existent systemic distortion that impedes the efficient allocation of bank credit.