Saturday, April 18, 2015

My proposal for this Earth Day 2015

Stop using purposeless, dangerous, silly and unjust credit-risk weighted capital (equity) requirements for banks, those which allow banks to earn higher risk adjusted returns on equity when lending to those perceived as safe than when lending to "the risky", like the SMEs and the entrepreneurs.

Purposeless: because major bank crises never ever result from excessive exposures to what is perceived as “risky” but always from excessive exposures to what was erroneously perceived as “absolutely safe”. 

Dangerous: because that completely distorts the allocation of bank credit to the real economy.

Silly: because why on earth should we taxpayers lend our support to banks if their only goal is to act as safe mattresses to stash away money in. Better to build a super-safe storage facility then.

Unjust and contrary to financial inclusion as they impede fair access to bank credit of "the risky", thereby killing opportunities and increasing the inequalities.

I clearly prefer when regulators do not distort, because that can have serious unexpected consequences, but, if they absolutely "must", then at least have them do so with a good purpose in mind, like planet-earth sustainability, job generation and poverty reduction weighted equity requirements for banks. Why not capital requirements for banks based on SDGs and MDGs weights? Why not have SDGs and MDGs rating agencies?

That way our banks will earn their highest risk adjusted returns on equity when financing what is deemed useful for the society.

That way it makes sense for us taxpayers to lend our banks the support they need, in order for these to take the astute risks we need for the world to move forward in a sustainable way generating jobs and poverty reduction.

Who shall you tell about this proposal? All bank regulators starting by the Basel Committee for Banking Supervision and the Financial Stability Board; and to multinational entities such as the UN, IMF, and World Bank.

If they do not listen to you, at least force them to explain their support for the current mind-boggling  stupid portfolio invariant credit-risk weighted equity requirements.

But, under no circumstances allow bank regulators to distort on their own. They need crystal clear government instructions from the governments before doing so... so that everyone can be held accountable.