Friday, November 18, 2016

Europe beware, to reward banks for less risky business models is way too risky and no way to build a future.

I now read that Valdis Dombrovskis, the EU’s financial-services chief said it’s important to make sure the rules continue to “reward banks with less risky business models” “Bank Regulators Face Santiago Showdown on Capital Overhaul” Bloomberg, November 17.

NO! That is precisely what is wrong with current risk weighted capital requirements for banks. It guarantees that safe-havens will become dangerously overpopulated against little bank equity; and that for the economy more productive though riskier bays, like SMEs, will remain equally dangerously unexplored.

It guarantees the building of many basements for jobless youth to stay with their parents and not the financing of the job creation that could allow those kids the possibility to afford being parents too.

It hinders the financing of the riskier future in order to refinance the “safer” present and past.

Risk-taking is the oxygen of all development. Where would Europe be if these regulations had been with us since banks' inception more than 600 years ago?

If banks cannot afford to immediately adjust their capital to larger capital requirements and so therefore credit to the economy would be affected, grandfather the current requirements for all existing assets, but then see to that all new bank assets are freed from the distortions the risk weighted capital requirements produce.

Should regulators stop banks from using their own risk models to set the capital requirements? Of course they should! That whole notion is about as silly as it gets. It is like allowing children to decide on the nutrition value of ice cream, chocolate cake, broccoli and spinach.

Any risk manager that has any idea of what he is doing, begins by identifying clearly the risks that one cannot afford not to take. The risk that banks take allocating credit as efficiently as possible to the real economy, is such a risk.

PS. Besides it would be so useful if regulators just looked at what has caused all major bank crisis in history; namely unexpected events, criminal behaviour and excessive exposures to what was ex ante perceived as very safe when placed on the banks’ balance sheets but that ex post turned out to be very risky. Never ever have bank crises resulted from excessive exposures to what was perceived as risky. Therefore the current Basel risk weights of 20% for AAA rated and 150% for the below BB- rated is as loony as it gets.

PS. And if regulators absolutely must distort, so as to feel they earn their salaries, may I suggest they use job-creation and environmental-sustainability ratings, instead of credit ratings that are anyhow cleared for by bankers.

PS. And frankly, is not 0% risk weight for the sovereign and 100% for We the People too statist, even for Europe?