June 13, 2015

Its quite peculiar how regulators believe that banks want to pursue risky assets and shy away from the safe?

Sir, Robin Wigglesworth writes: “The very fact that the industry is fretting over illiquidity lessens the chances of any debacles, and it is already exploring various solutions to the challenge.” “The great liquidity fright and how the market will adapt”, July 13.

I agree that should be the case, but that is not how current bank regulators are seeing it.

If the risk of an asset is perceived as high, then the regulators seem to consider this presents a special attractiveness for banks, and therefore they must impose higher capital requirements for holding these assets. If on the contrary an asset is perceived as safe, then regulators believe these assets become unattractive to banks, and they therefore impose very low capital requirements for holding these assets.

Strange reasoning eh? It is like if Mark Twain had said that bankers love to lend you the umbrella when it rains and not when the sun shines.