Sunday, April 13, 2014

Why do the Basel Committee, the Financial Stability Board and the IMF not understand what any normal parent does?

If children were rewarded with ice cream for eating cookies, and punished with spinach for eating broccoli, chances are too many kids would turn out to be obese… and almost anyone would understand and know that.

And so why does the Basel Committee, the Financial Stability Board and the IMF not understand that, if you reward bankers with allowing them to hold less capital when lending to “the infallible”, so that they can earn higher risk adjusted returns on equity; and punish the bankers with having to hold more capital when lending to “the risky”, to make it harder for the banks to earn sufficiently high risk-adjusted return on equity, then banks will lend much too much to “the safe” and much too little to “the risky”… and a crisis in the banking system and in the real economy will ensue.