February 03, 2015

Getting rid of regulatory distortions also hurts, and also creates risks, but is something that must be done.

Sir, I refer to Henny Sender´s “Reasons to disbelieve the Federal Reserve’s cheery message” February 3.

It states that “Basel-prescribed leverage ratios have changed the economics of funding, raising the cost of finance for dealers” which is affecting the liquidity they provided the market; “one Fed survey suggests that in the past 18 months the [repo] market has contracted by 25 per cent”.

And Sender argues that though that makes the system safer… it also means that the fall can be much greater when [market] sentiment turns negative.

But the question that also needs to be made is… what good is it to assist the repo market by means of allowing banks to hold less equity, compared to for instance assisting in the same way, the access to bank credit of small businesses and entrepreneurs?

Of course taking away distortions always create risks, but keeping the distortions, like the credit risk weighted bank equity requirements are still kept, will in the log run end up being the most costly alternative.

Take away all the financing of shares repurchase and surely the financing of private enterprise has also dropped dramatically… and that financing, being much lower on the food chain than financing the repo market, is therefore much more important to the real economy.

PS. Something does not read right. It is higher leverages, not lower ones, which are more often associated with greater falls when market sentiment changes.