October 05, 2012

Poor small businesses and entrepreneurs of Europe who need access to bank credit in competitive terms

Sir, Martin Wolf writes that in Europe, bank assets in 2010 were 350 percent of GDP and holds that “Liikanen is at least a step forward for EU banks”, October 5. I totally disagree. 

When the banking sector is so important, it is even more important to make sure that there are no distortions in how it assigns its resources, and so, wasting precious time taking steps forward, without even mentioning the huge regulatory distortion which exists, less acting on it, is just as wrong as it can be. 

Wolf now agrees with “the skepticism on risk-weighting”, and now holds that “much higher un-weighted equity requirements are needed”. Though late, that is good. Unfortunately Wolf argues his support based on “given the experience of its limitations”, which means that had the crisis not erupted he would find no fault in a regulatory framework that is so fundamentally wrong.

Regulations with capital requirements which allow banks to leverage their equity 60 times and more with assets considered ex-ante as not risky, earning higher returns on equity, but only 12 times for normal banking assets like loans to small businesses and entrepreneurs because these are officially ex-ante considered “risky”, even though these assets have never ever caused a crisis, amounts to an unbelievable distortion of the economy. 

I read, in Wikipedia, that Martin Wolf was influenced by Friedrich Hayek’s “The road to serfdom”. Sadly it looks like he was not influenced enough so as to understand that allowing petty bank regulating bureaucrats, play risk managers for the world by assigning risk-weights, places us precisely on that road. 

In the foreword of “The road to serfdom” Hayek explains that he writes the book which will negatively affect his own personal life, “out of duty”, because the majority of economists have…been silenced by their official positions, and that in consequence public opinion on…problems is to an alarming extent guided by amateurs and cranks, by people who have an axe to grind or a pet panacea to sell. 

Well out of the same sense of duty, and of course also with personal sacrifices, I will endure in criticizing what I consider to be absolutely crazy bank regulations. Just to think how much more in interest rates to pay or lesser access to bank credit, the small European businesses and entrepreneurs will have to suffer, only because of these regulations, precisely when we most need them to create jobs, makes me cry. 

Please, for the time being, at least while European bank capital is rebuilt, half at least the capital requirements for banks when lending to the “risky”. That will never represent a risk superior than having the European banks lending excessively to what is officially perceived as “absolutely safe”.