September 10, 2014

Neither Martin Wolf’s nor Mario Draghi’s ”whatever it takes” includes what is most urgent for Europe

Sir, Martin Wolf holds that ”Europe has to do whatever it takes” September 10, and that is indeed correct.

But Wolf’s “whatever it takes”, just like Mario Draghi’s, does not include what is the most urgent for Europe.

And that is getting rid of the distortions that the credit risk-weighted capital requirements produce in the allocation of bank credit. And that might have to include temporarily reducing the capital requirements for banks on exposures to what is perceived as risky.

For instance Christopher Thomas in “Power of Draghi ABS plan questioned” quotes various analysts for instance saying: “banks are already awash with liquidity… they hardly need more money… ABS supply… can only come through capital relief that makes it more profitable for banks to lend to small businesses in the first place without then having to hold lots of capital against those loans”

The day Europe begins to think of capital requirements for banks in terms of risks to Europe, to its economy and to the creation of jobs for its young, well that will be the day it will begin seeing light again, and fully understand what its bank regulators did wrong.

I understand Draghi’s reluctance, since that would require him to admit he was profoundly mistaken while being the chairman of the Financial Stability Board.

But, Martin Wolf’s?

PS.Basel II and III risk weighted capital requirements are a regulatory nightmare.