July 11, 2015

Europe, with your current bank regulations, the Marshall plan would not have happened, or would not have delivered.

Sir, Gillian Tett writes: “But the worse things become in Europe, the more we need crazy ideas. And not just because we need to laugh, but because jokes reveal what politicians are not discussing: the cognitive and cultural leap that must occur in Europe if the eurozone project is to fly” “An economist’s Club Med Marshall plan” July 11.

When I hold that what is really dangerous for banks, is not what is perceived as risky but what is perceived as safe, and therefore current requirements, more-perceived-risk-more-capital, less-risk-less-capital for banks, are 180 degrees wrong… many laugh but, unfortunately, the cognitive and cultural leap required to really understand its significance, seems way too big.

Can you imagine the US approving a Marshall plan to a Europe that allowed banks to have less capital, meaning to earn higher risk adjusted returns on equity, when lending to the public sector and financing houses than when lending to its private sector? And, if the US had not understood the implications of such regulations and had still approved the plan, can you imagine Europe delivering the same results?

Here is my “crazy” idea for Europe (and for the rest). Throw out the Basel Committee’s credit-risk based regulations and allow banks to hold slightly less capital based on job-creation-potential ratings (and environmental-sustainability-ratings). That way banks could earn higher risk adjusted returns on equity when doing something Europe would like them and need them to do.