May 10, 2016

Just thinking of all growth opportunities that have irreversibly been lost the last 12 years, makes you want to cry.

Sir, the regulatory credit-risk aversion that is present in the current risk weighted capital requirements for bank started back in 1988 with Basel I, but it really took on huge force with Basel II of June 2004, when even the private sector was split up into different risk baskets.

The risk weighing allowed banks to leverage more with assets perceived, decreed or concocted as safe than with “risky” assets. And so bankers were able to realize their wet dreams of making their largest risk-adjusted returns on equity on the safe, which therefore allowed them to be able to abandon the “risky”

Now, 12 years later, we should cry for all those opportunities of SMEs and entrepreneurs gaining access to credit, and helping move our economies forward, that have irreversibly been lost. Damn the Basel Committee and its regulations! Now our banks do not finance the risky future but only refinance the safer past. Now we are sitting here waiting for the next safe-haven to become dangerously overpopulated.

But what makes me want to cry the most is that the regulatory blocking of initiatives that would be opening up new activities and job opportunities for our youth is not even been discussed.

And to top it up, had all the credit opportunities that would normally have been awarded been awarded, banks would not be any riskier, because lending to the “risky” is not the stuff major bank crises are made off. If you know how connect dots, try doing so between what banks were allowed to hold against little capital, because it was “safe”, and what caused the 2007-08 crisis.

Yes, short-term bank returns on equity, as a consequence of not allowing banks to leverage so much with “safe” assets would have suffered but, long-term, even banks stand to benefit from a strong economy.

Stephen Foley, writing about a conference at the Milken Institute tells of “concerns [about] the US public pension funds… in an era of weaker demand, anaemic business investment and low growth, yet the average fund is still forecasting a 7.6 per cent annual return on investment portfolios, basically the same returns as the past 25 years.” And, as if lack of expertise was the problem: “Vicki Fuller, chief investment officer of the New York State Common Retirement Fund, said public funds tended not to have the expertise to pick good private equity investments.” “Financial elite hum a sunny tune as signs of disruption gather” May 10.

A financial elite that does not understand the destructive distortion in the allocation of bank credit to the real economy the credit risk weighing produces, is sincerely not a financial elite to write home about.

@PerKurowski ©