May 20, 2017

Dear Undercover Economist, in the case of banks, much more than deregulation it was/is ​very ​bad miss-regulation

Sir, Tim Harford writes: “As the world economy grows, one might expect markets to become more like the perfectly competitive textbook model, not less. Deregulation should allow more competition; globalisation should expose established players to pressure from overseas; transparent prices should make it harder for fat cats to maintain their position.” “This is the age of the Microsoft economy” May 19.

“Deregulation”? No way Jose! In the case of bank regulation it is missregulation. The globalised risk weighted capital requirements for banks favor directly the access to bank credit of the “fat cats” and so makes any on the ground competition harder.

Sir, it amazes me why this is so hard to understand, even for an undercover economist.

If you have $100.000 to invest, whether you or a financial advisor takes the decisions, you will most probably end up with a portfolio with some larger exposures to assets perceived in the market as safer, earning lower rates, and some smaller exposures to other assets that because these are perceived as risky, will earn you higher rates. And your portfolio will hopefully provide you with a risk-adjusted return that is acceptable to you.

But not once will you consider the $ invested into safe assets to be any different from the $ invested into risky assets… if you lose anyone of these it will hurt all the same.

Bank regulators decided that for banks, that was not to be. They split the banks’ capital into different $, allowing for different leverages, based on the perceived risk of those assets as such, meaning not on their risk for the bank system.

To top it up they came up with such a loony thing as to assign a 20% risk-weight to the so dangerous AAA rated and one of 150% to the so innocuous below BB- rated.

Of course that has distorted the allocation of bank credit in favor of what is perceived, safer, usually the past and present.

Of course that has hindered competition by making it harder for the riskier, usually the future, like SMEs to access bank credit (and who therefore often having to sell out their dreams to any huge safe incumbent).

Sir, Harford finalizes with: “In the very long run a superstar economy could become a technological utopia, where nobody needs to work for a living. That would require quite a realignment in our economic system”. Indeed that is why I have been arguing for quite some while that we need decent and worthy unemployments… something for which most likely a Universal Basic Income is required.