Friday, July 01, 2016
Supposedly to make our banks safer, in 1988, with the Basel Accord, Basel I, the Basel Committee for the purpose of setting the capital requirements for banks, declared the risk weight of the “safe” sovereign to be zero percent, and that of “risky” not-rated citizens, We the People, to be 100 percent.
That meant banks needed to hold much less or no capital at all, when lending to the sovereign than when lending to citizens; which meant banks could leverage their equity and the support they received from society (taxpayers) much more when lending to the sovereign than when lending to citizens; which meant banks would earn higher risk adjusted returns on equity when lending to sovereigns than when lending to citizens; and which meant banks would favor more and more lending to the sovereign over lending to the citizen. And the SMEs and the entrepreneurs basically here represent the “not-rated citizens”.
There could be some discussion on whether lending to sovereigns represent less risk than lending to SMEs and entrepreneurs. I do not believe so. Banks do not create dangerous not diversified excessive exposures to SMEs and entrepreneurs; and, at the end of the day, the sovereign derives all its strength from its citizens.
But what cannot be discussed is that implicit in these regulations, is the belief that government bureaucrats use bank credit more efficiently than SMEs and entrepreneurs, and that is pure and unabridged dumb runaway statist ideology to me.
For a starter, without this kind of regulatory subsidy, the Greek sovereign would not have been able to obtain so much credit.
And then, without this kind of regulatory tax on private initiative, Greece will never be able to work itself out of its current predicament.
And the world keeps mum on this!