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By Tea with FT (Reporter)
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Because of risk-weighted capital requirements, banks can turn out riskier when engaging in regulatory “risk-shedding”

Thursday, December 1, 2016 19:31
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Sir, with respect to British banks you write: “risk-shedding would decrease the cost of capital, if the markets could be made to believe in it” “British banks’ capital is only half of the problem” December 1.
Why is it so hard for you to understand the differences between ex ante perceived risks and ex post real risks?
Currently, the lower the ex-ante perceived risk is, the lower capital banks are required to hold, so the more they can leverage their equity, so in reality the higher can the ex post real risk be.
When banks got rid of loans to SMEs and acquired AAA rated securities, they were just shedding risks following their regulators instructions.
So why on earth should markets believe that risk shedding for regulatory purposes would make banks safer? Have markets not been recently very much deceived by the regulators? One of these days a small shareholder might sue the regulators for having willfully deceived him, by promoting the use of capital to risk weighted asset ratios instead of the usual capital to asset ratios.
PS. And of course British banks’ capital is even less than half of the problem. The real problem is that bank credit, because of the risk weighting, is not allocated efficiently to the real economy.


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