Sunday, March 3, 2013

The regulators force “risky” borrowers to pay the banks a kicker for them lending to the “safe”

I can perhaps understand paying widows and orphans a kicker when they invest in something “absolutely safe” and which earns them a very low return, but, to pay that kicker to a bank, that really sounds outrageous. 

And this what regulators actually do when they allow banks to leverage much more their equity for exposures to assets deemed “absolutely safe”, like the AAAristocracy or solvent sovereigns, than what they can leverage “risky assets”, like medium and small businesses and entrepreneurs. 

And the worst is that the kicker is not paid by the government. No! It is paid by those perceived as “The Risky”, by means of interest rates higher than ordinary and by getting bank loans smaller than ordinary. 

Really, that banks are regulated to earn much higher risk-adjusted returns on equity for “safe” than for “risky” is just plain crazy distortion.

And that this is not even an issue, never ceases to surprise me.