April 27, 2016

The Basel risk-weight for grand government projects is 0%; for an SME’s incremental development 100%

Sir, John Kay writes “A high proportion of the mooted benefits of grand projects could be obtained by incremental development at a fraction of the estimated cost of the world-beating schemes” “Grand projects are worthless if they do not work” April 27.

Yes but the Basel Committee, in order to make banks safer, decided to use risk weighted capita requirements. And when determining these they set the risk weight for “grand projects” carried out by government to zero percent, while that of any “incremental development” carried out by an SME was set to be 100 percent. So guess who has easier access to bank credit?

Considering FT’s total silence on this subject most, or perhaps all in FT, seem to think this is a smart way of making banks safer. I don’t. Since it impedes the best allocation of bank credit to the real economy, I think it is utterly stupid and unsafe, even for the banks.

@PerKurowski ©