March 08, 2012

More but also much less risk discriminating banking equity is what really serves us better.

Sir, Prof Anat R. Admati and Mr Neil M. Barofsky hold that “More bank equity serves us all better” March 8, and I would have to agree, unless that more bank equity only means more regulatory discrimination based on perceived risks. 

What would happen if regulators required the banks to hold 20 percent in basic equity but still kept the zero risk weight when lending to the infallible sovereigns that translates into a 0 percent capital requirement, or the 20 percent risk weight when lending to triple-A rated borrowers that obliges only 5 percent? The answer is that the lending to the “risky” small business and entrepreneurs that would require the 20 percent in capital would receive its final deathblow. 

When are the experts to ask themselves why regulators have to discriminate their capital requirements based on the risk perceptions that banks have already used to set interest rates, amounts loaned and other terms?