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No “regulatory arbitrage” distorts more than regulators’ dumb and arbitrary risk weighted capital requirements for banks

Monday, October 10, 2016 2:45
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Sir, Lawrence Summers writes: “The focus of international economic co-operation more generally needs to shift from opportunities for capital to better outcomes for labour. [That] will require substantially enhanced cooperation with respect to what might be thought of the as the dark side of capital mobility — money laundering, regulatory arbitrage, and tax avoidance and evasion.” “Voters sour on traditional economic policy” October 10.
No! The darkest side of capital mobility is how the Basel Committee’s risk weighted capital requirements for banks is distorting the allocation of bank credit to the real economy. Compared to that the damages caused by “money laundering, regulatory arbitrage, and tax avoidance and evasion” are peanuts.
And Summers also holds that “Recessions come intermittently and unpredictably. Containing them generally requires 5 percentage points of rate cutting”
That might apply to normal recessions, but when these have resulted from insane bank regulations, no rate cutting will help in a sustainable way, unless you get rid of the distortions.
It is also amazing to see how experts can lose contact with their inner common sense and, for instance, come to believe that the very risky below BB- rated assets are more dangerous to the banking systems than the AAA rated ones.
By the way there is nothing “traditional” about such regulatory stupidity… it just tracks back to 1988, Basel I.
PS. Here again is an aide memoire that explains some of the regulatory monstrosities.
@PerKurowski ©

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