April 07, 2015

New Delhi might need some quality-of-air-weighted equity requirements for banks

Sir, you know I am convinced that the pillar of current bank regulations, namely credit-risk weighted equity requirements for banks is extremely stupid, as regulators clear for risks already cleared for by the banks. And so the consequences of that can only be too much credit at too lenient terms to what is perceived as safe, and too little credit at too harsh terms to what is perceived as risky.

If instead those equity requirements cleared for instance for the potential of job creation and or the sustainability of planet earth then we would also distort, but at least we would have injected some purpose to that distortion.

And so when I read Amy Kazmin´s “New Delhi Notebook: Politicians pass the polluted buck while air quality worsens” March 7, I immediately think of recommending the Indian authorities the following:

Set up an environmental rating agency, and allow banks to hold less equity against any loans that have a good environmental rating. That way the banks can leverage more that type of loans and get a higher risk-adjusted return on their equity for a good purpose. Let us never forget that what the bank really leverages is not only its own equity but also the implicit and explicit supports the taxpayers and society in general grants them; and so it is not outrageous to ask for that support to serve a better purpose than only a quite dangerous risk aversion.