Loony risk-weighted capital requirements block entrepreneurs’ access to fair credit.
Sir, Eric Schmidt writes“Right now, the UK, the EU and the US share a growing problem: we are experiencing a market failure in the way we support entrepreneurs.” “Our narrow view of entrepreneurs squanders talent”, November 28.
Absolutely! But some market failures are government produced.
If a bank lends to someone wanting to buy a house, something perceived as safe, the regulators allow it to hold much less capital that if it lends to an entrepreneur, something perceived as risky.
So if a bank lends to someone wanting to buy a house, something “safe”, it will be able to leverage its capital much more than it can do if it lends to an entrepreneur, something
So if a bank lends to someone wanting to buy a house, something “safe”, it will be able earn much higher expected risk adjusted returns on its equity than it can do if it lends to an entrepreneur, something “risky”.
But was it always this way? Of course not! This happened when bank regulators introduced the risk weighted capital requirements for banks. That which is based on that truly loony concept that what bankers perceive as risky, is more dangerous to our bank system than that what bankers perceive as safe.
Since then millions of credit requests have been either negated or if approved, have had to support a higher than needed interest rate.
Schmidt also writes about the need to “drop the tunnel vision promoted by many academic and professional specialisations”.
Absolutely! I have often argued that had there been:
a plumber or a nurse disturbing the regulators’ group-think with an innocent question like “what has caused big bank crises in the past?”
or a professional that had taken a course in conditional probabilities,
or someone (incorrectly) quoting Mark Twain with “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”,
or a golfer asking “why would you assign more handicap strokes to good players taking these away from lousy players like me?”,
then the 2008 crisis would not have happened… and Lehman Brothers would still be alive and kicking.
@PerKurowski
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