Until Europe trashes risk-weighted capital requirements for banks, ECB’s QE liquidity will not go where it should.

Sir, Alberto Gallo writes: “Against the ECB’s [QE] bazooka lies an wall of obstacles. The first is an impaired banking system, muddling through €1tn of bad loans with balance sheets still three times as large as the eurozone economy. The second problem is a lack of corporate investment, despite lower interest rates. The third is shallow capital markets, a “bottleneck against ECB liquidity trickling down to small and medium-sized businesses, responsible for 80 per cent of job creation.” “More QE on its own will not unblock the eurozone bottleneck” December 7.

Gallo suggests: “There are three ways to make QE work. One is to boost monetary stimulus with public investment. Governments have little fiscal ammunition for large-scale stimulus. A credible co-ordinated plan could provide the right signal to kick-start private investment, coupled with QE.” 

No! Since Gallo works for RBS, which must be interested in leveraging its equity as much as possible, especially with what is perceived as “safe”, he does not want to see, or does not dare to disclose the most important obstacle for getting liquidity to the SMEs… those he calls “responsible for 80 per cent of job creation.”

I will repeat it again, for over the thousand time, to see if FT finally dares to wake up. The biggest obstacle, is the risk-weighted capital requirements for banks, those that cause banks to earn much less risk adjusted returns on equity when lending to “The Risky” than when lending to “The Safe”.

It is as easy as that! The problem is that ECB’s Mario Draghi, as the former chair of the Financial Stability Board, does not want it to be known that he shares in the responsibility for the biggest cock up in regulatory history.

@PerKurowski ©