Congresswoman Maxine Waters… stop rooting for bank regulations that puts inequality on steroids.
Sir, I refer to Ben McLannahan’s and Barney Jopson’s “Republican puts forward alternative to ‘nightmare’ Dodd-Frank” April 27.
Jeb Hensarling, the chairman of the House financial services committee’s Choice Act includes a provision of requiring banks to hold “at least 10 per cent of gross assets, if they want relief from some of the toughest standards on supervision and regulation”
“Congresswoman Maxine Waters, the top Democrat on the committee, told the hearing that the proposals — known as the Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs — would unleash more “risky and predatory” practices on Wall Street.”
Holding 10 percent, against all assets, would eliminate that odious discrimination against the access to the opportunities of bank credit of "the risky", which result from the current risk weighted capital requirements for banks.
John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote:
“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”
Allowing banks to hold less capital against what is perceived as safe than against what is perceived as risky; allows banks to leverage more with what is perceived as safe than with what is perceived as risky; which allows banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived as risky; which means banks will lend more than usual to what is perceived as safe, at even lower rates, which could be very dangerous; and less than usual to what is perceived as risky, unless its done at much higher rates than usual… which unfortunately makes the risky even riskier.
So, as I see it this proposal by Chairman Hensarling should not be applied only to those who want “relief from some of the toughest standards on supervision and regulation” but to all banks.
Of course, I pray that 10% capital requirement applies also to loans to the public sector. As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course pure statism, totally false and absolutely unsustainable.
@PerKurowski
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