Saturday, April 20, 2013

If bank regulators cannot refrain themselves from meddling, why do they not at least meddle in a more useful way?

Current capital requirements of the banks are based on the information provided in credit ratings, something that makes no sense because bankers and markets have already seen that information and considered it when they set their interest rates, decide how much to lend or invest, and under what terms. 

Therefore I often ask: “Bank regulators why do you use credit ratings in your capital requirements and not something like job creation potential ratings, or environmentally friendly ratings?” 

I am sure that if banks were allowed to hold a bit less capital... and therefore be allowed to leverage their equity more... and therefore be able to obtain a higher risk-adjusted return on equity… whenever lending or investing in something especially good from a job creation or sustainability point of view, then the banks would be performing better for the whole society. 

As is, the banks are only performing better for those who possess good credit ratings, for “The Infallible” leaving all “The Risky” out in the cold.