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Different Bank Capital Requirements for Different Assets Are Worse Than Too Little or Too Much Bank Capital.

Friday, August 31, 2018 11:04

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Sir, Lex opines “Debates over bank capital resemble tennis rallies… On one side of the net you have the big global banks. They say they have plenty of capital and that forcing them to operate with more is a restraint on trade. Pow! On the other side are the regulators, who say more capital is better because you never know what losses you may have to absorb. Thwack!”

“Bank capital: silly old buffer” August 31

But there are some few, like me, who argue that much worse than there being much or little capital, is that there are different capital requirements for banks, based on the perceived risk of assets. Riskier, more capital – safer, less capital. In tennis terms it would be like judges allowing those highest ranked to be able to play with the best tennis rackets, and the last ranked to play with ping-pong rackets. And of course that distorted the allocation of bank credit.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”?

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Source: http://teawithft.blogspot.com/2018/08/different-bank-capital-requirements-for.html

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