March 09, 2015

The most urgent financial sector reform in Europe is getting rid of its dangerous credit-risk-adverse bank regulations

Sir, Wolfgang Münchau describes the immense problems low interest rates cause the pension fund industry, and we can only hope that is no news to those supporting low interest rates “Real danger lies in Mitteleuropa’s financial sector” March 9.

But then Münchau states: “Low interest rates are, of course, not the cause of this slow moving wreck. The cause is, of course, the train” and goes on to proclaim: “If there is anything in Europe that requires urgent reform, it is not the Greek product market, but the German and Austrian financial sector… if Germany continues with its policy of forcing a deflationary adjustment in the eurozone and running large saving surpluses with an unreformed financial sector at home, we should prepare for the next big financial crisis”.

I am curious, what financial sector reform does Münchau refer to? Is he not aligned with Basel III?

Sir, for more than a decade I have known for sure that what no economy can afford, in order to remain sturdy, is someone giving its banks special incentives to lend to those perceived as safe and to stay away from those perceived as risky; something which the Basel Committee has foolishly done by means of credit-risk weighted equity requirements.

For reasons that escape me, Münchau and most other at FT have decided to ignore that argument.

So if there is one urgent financial sector reform pending in Europe (and other places) that is getting rid of current bank regulators and their senseless aversion of credit risk.

But sadly it just looks only to get worse as its insurance sector is now also being threatened with similar mistaken regulations, Solvency II.