We urgently need one judge hauling a bank regulator to his court, in order to ask him one very simple question

Sir, Chris Giles writes that Raghuram Rajan, the head of the Indian central bank said he was a supporter of stimulus policies to “balance things out” in short periods when households or companies are proving excessively cautious with their spending, but eight years after the financial crisis he said we now “have to ask ourselves is that the real problem”. “Underlying performance suffers from loose policies, says India governor” May 16. About time!

Sir, as you know, for a long time I have held that any stimulus policy is really wasted as long as the risk-weighted capital requirements for banks impede bank credit to flow efficiently to the real economy. Those regulations are just another stimulus for bank lending to “The Safe”, and that is not the kind of stimulus the next generations need.

Those regulations odiously discriminate against the access to bank credit of those perceived as “The Risky” like SMEs and entrepreneurs.

And I would love to haul any of the big name bank regulators, like Draghi, Greenspan, Bernanke, Ingves, Carney or many other, in front of a judge to have him, under oath answering the following question:

Mr. Regulator, current risk weighted capital requirements for banks indicate a risk weight of 150% for what is rated below BB- and of only 20% for what is rated AAA to AA. Do you sincerely believe that what is rated below BB- and that one would therefore presume is not an attractive asset for a bank, to be so much riskier for the banking system than those rated AAA to AA?

If the regulator answers “Yes”, the judge should ask for a detailed explanation.

If the regulator, being under oath, truthfully responds “No”, then the judge should ask: Does that not indicate that there is something fundamentally wrong with the credit risk weighting?

And then persons like me, who for over a decade have not been able to extract an answer from the regulators, would at least have something to work with.

In the case of India, such trial evidence could help us to remind Raghuram Rajan that risk-taking is the oxygen of any development. And of that if some developed countries seem to have had enough of development, and do not want to risk climbing further up their ladder, this does not mean that a developing country should copycat such dumb credit risk aversion.

@PerKurowski ©