July 11, 2014

Draghi’s “Whatever it takes” does not include admitting risk-weighted capital requirements for banks cause distortions

Sir, Ralph Atkins reports on “businesses unable to tap capital markets – which includes job-creating small and medium sized enterprises”, “Crisis drags on for small European companies” July 11.

Not only do small companies have to face the fact that their loan requests are small and so the credit analysis is much more expensive per euro borrowed compared to those larger who can afford a credit rating but, to top it up, regulators also ask banks to hold much much more capital against these than against safer companies.

And this regulatory fact is not even mentioned by Atkins… it is frankly embarrassing.

And ECB hopes “targeted longer term refinancing operations”, or Tltros, which will inject liquidity in banks will help to solve this problem. That is embarrassing too, since what banks most lack is not funds but capital.

Clearly ECB’s Mario Draghi’s “whatever it takes” does not include admitting that the risk-weighted capital requirement for banks odiously discriminates against the possibility of “the risky” for a fair access to bank credit… by dangerously favoring the access to bank credit of those who are already favored by being perceived as “absolutely safe”

PS. Q: Why did interest rates on sovereign periphery debt tumble? A: Much because banks do not need to hold capital against it.