Our banks are one of the most fundamental drivers of our economy and therefore of our wellbeing. In a world with so many risks and so many needs, who authorized the bank regulator to fixate solely on the perceived risk of default of borrowers when setting the capital requirements for banks? Why, for example, were the capital requirements not set based on environmental sustainability or job creation?
Besides, if our regulator was so concerned with the safety of the banks, would it not then have been more logical to set the capital requirements based by the risks of default that were not perceived? Had they done so, the banks would have had capital when the officially empowered risk sentries, the credit rating agencies, fell asleep on their job and which, since they are only humans, was bound to happen, sooner or later.
Since banks were already considering the perceived risks when for instance setting the interest rates the borrowers had to pay, the regulators forced the banks to consider the risk perceptions twice, loading the dices. The result was a bank stampede in pursuit of immensely risk-adjusted returns on minimum equity, when lending or investing in triple-A rated private and sovereigns, which caused the crisis; and, because of the higher capital requirements, to abandon the lending to small businesses and entrepreneurs, which now makes it all so much harder to get out of this crisis.
And all that is just a natural consequence of the bank regulator not having defined the purpose of our banks. In other words, it acts like a road regulator fixated on the quality of the road without caring an iota about where it comes from, where it goes and who and how many will travel on it. Before allowing our regulator to regulate our banks it must tell us what it believes to be the purpose of our banks, and of course, we must approve of it. If that is not possible, then we would certainly be better off without any bank regulations, so as to avoid the risk these are captured and set to work against what should be the purpose of our banks.
