November 11, 2015

Why does not FT, “without fear”, debate the distortions the credit risk weighted capital requirements for banks cause?

Sir, Martin Wolf writes that if that if “hysteresis” — the impact of past experience on subsequent performances” is the cause for the economy failing to recover its “Possible causes [could] include: the effect of prolonged joblessness on employability; slowdowns in investment; declines in the capacity of the financial sector to support innovation; and a pervasive loss of animal spirits” “In the long shadow of the Great Recession” November 11.

For more than a decade I have tried to explain for Mr. Wolf that, if you allow banks to hold less capital against assets that ex ante are perceived as safe than against assets perceived as risky, you allow banks to make higher expected risk adjusted returns on equity on safe assets than on risky, and that of course will decline the willingness of the financial sector to support innovation and erodes the animal spirit. When banks make the good returns on equity, on for instance financing houses, why on earth should they go an finance what requires them to hold more capital and is therefore harder to achieve good ROEs for?

But Martin Wolf, and FT, has never wanted to accept that as a serious source of distortion in the allocation of bank credit. I have never understood why. I dare him, or FT, or any bank regulator for that matter, to a public debate of that issue… come on, show us some of the “without fear”

Thomas Hoenig the Vice Chairman of FDIC has recently said: “Using simple leverage measures instead of risk-based capital measures eliminates relying on the best guesses of financial regulators to guide decisions.” I pray he is able to convince his colleagues of that. The world has had more than enough of that reverse mortgage regulators imposed and that makes banks finance more the safer past than the riskier future.

When I think of those millions of young people who will never get a chance of jobs that help them fulfill dreams, thanks to these hubristic and outright incapable regulators, I get so sad and mad.

@PerKurowski ©