Regulators instructed banks to compete with small savers and insurance companies for whatever was perceived as safe.
Sir, Michael Mackenzie writes “the concern that investors will extend their embrace of riskier assets and of private markets that are far less liquid and transparent, in an effort to boost returns over time.” “Contrarians gain confidence amid fog of future predictions” September 7.
Of course, how can it not be? Small savers and insurance companies face huge new competition for what’s perceived as safe as a consequence of regulators, with risk weighted capital requirements, telling banks to stay away from what’s perceived as “risky”, and to maximize their risk adjusted returns on equity with what’s perceived, or decreed, or concocted, as “safe”.
Out went the savvy loan officers, in came the equity minimizing financial engineers.
So what’s the threat now? A new crisis resulting from excessive exposures to “the safe”, like some 0% risk weighted Eurozone sovereigns deciding it cannot pay back debt that is not denominated in its own printable currency, or regulators waking up to the fact that what is really dangerous to our bank systems is that which bankers might perceive as safe.
Sir, when in 1988 bank regulators assigned America’s public debt a 0.00% risk weight, its debt was about $2.6 trillion, now it is around $22 trillion and still has a 0.00% risk weight. When do you think it should increase to 0.01%?
@PerKurowski
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