April 06, 2016

The Basel Committee’s risk weighted capital requirements for banks decreed the ‘new mediocre’, and boosted inequality

Sir you write: “Christine Lagarde, the IMF managing director, has warned that the recovery remains too slow and fragile — and that the world risks being trapped in a “new mediocre” of persistent low growth, with damaging effects on the social and political fabric of many countries.” “The high cost of settling for the ‘new mediocre’” April 6.

If asked: “Is risk-taking essential to the economy?” most experts and all wise men would say “Absolutely!”

And yet regulators de facto ordered banks to stay away from whatever that is ex ante perceived as risky. Because that is what happens when you allow banks to earn higher expected risk-adjusted earnings on what is “safe” than on what is “risky”. Because that is what happens when you allow banks to leverage equity more with what is “safe” than with what is risky.

A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926 

This week William Coen, the Secretary General of the Basel Committee, said in a speech: “We have spent several years developing a framework to make sure that banks' capital and liquidity buffers are strong enough to keep the system safe and sound.” And that describes precisely the problem; they have only cared about the condition of the banks, and not one iota about the fundamental social purpose of banks, which is that of allocating credit efficiently to the real economy.

As is banks will dangerously overpopulate safe havens and leave many promising but “risky” bays unexplored. As is banks no longer finance the riskier future, they just refinance the, for the very short time being, safer past.

And of course, negating the “risky”, like SMEs and entrepreneurs, fair access to the opportunity of bank credit can only boost inequality.

Sir, I cannot understand your, IMF’s, World Bank’s, economists’ and so many others’ silence on this issue. As I see it you should all be ashamed.

One day soon, your sadly unemployed children and grandchildren, will hold you accountable for it.

And don’t tell me I did not warn you. I have sent you way over 2,000 letters on the dangers of arbitrarily imposing distorting risk aversion on our banks, during more than a decade. 

@PerKurowski ©