When will regulators understand that it is only in what is ex ante “absolutely safe” that big systemic bank risks reside?

Sir Wolfgang Münchau approximates admitting to a problem of which I have written to him and to so many of FT´s other contributors over the years the years when he writes “Meanwhile, [European] banks want to reduce the amount risky lending so as to reduce the amount of equity they have to raise under new bank regulations” “Europe’s drifters wait but inflation never comes”, June 9.

I say approximate because first, the regulations of higher equity for what is perceived as risky are not that new… they took off in earnest with the approval of Basel II; and secondly, the real reason for which banks now need to raise new capital has really nothing to do with any lending to the “risky”, but with all the previous lending to some who ex ante were though as absolutely safe, and for which they were allowed to hold extremely little capital, but that ex post turned out to be very risky.

The day Münchau gets internalizes that bank lending to those perceived as risky has never been really risky, because of the high risk premiums collected and the usually very low exposures to them, that day he will put begin putting “risky” in quotation marks, and understand that what is really risky, without quotation marks, is what is perceived as absolutely safe… but could not be.

Of course, with the lack of capital and with the same risk-weighted capital requirements the chances for those unfairly considered “risky” for having fair access to bank credit are slimmer than ever.

Before there is a real and open discussion on who was it that authorized regulators to put the very short term stability of banks in the forefront, and distort the allocation of bank credit, and so endanger the medium and long term of Europe’s economy, and its banks, Europe will not get anywhere.

ECB, searching for inflation, while not allowing “risky” small businesses fair access to bank credit, is mindboggling silly.