You in Davos, anyone, tell us: How risky to the banking system can a borrower perceived as risky really be?

Regulators require banks to have much more equity against assets perceived as risky, than against assets perceived as safe.

I am totally opposed to that because banks, being able to leverage more, will make higher risk-adjusted returns on when lending to the safe than when lending to the risky. And that causes a dangerous distortion in the allocation of bank credit to the real economy.

But all that is obviously based on that regulators think that those perceived as risky, from a credit point of view, are much more risky to banks than those perceived as safe.

Why? How risky can a borrower perceived as risky really be? Is not the opposite true? That what really poses dangers to the banking system is what is ex ante perceived as absolutely safe, but that ex post might turn out to be very risky?

The risk of any asset to the banking system is a function of the length of the road it can travel from being safe to being risky... and that road is obviously much longer for what is perceived as absolutely safe than for what is perceived as risky.

In the same vein, the purpose of banks can be said to be a function of the length of the road a borrower has to travel from risky to absolute safe... and that road is obviously much longer for what is perceived as risky than for what is perceived as quite safe.

Friends, in Davos you might see some very famous bank regulators walking around. Please do not be intimidated by them. They do not know what they are doing... and if they do, so much the worse.