May 06, 2016

Credit risk adverse bank regulations impede monetary stimuli to have a sustainable effect on growth.

Sir, David Folkerts-Landau, when discussing ECB’s “massive programme of purchasing Eurozone sovereign debt”, negative interests and similar writes: “Future students of monetary policy will shake their heads in disbelief… this is not the time for slavishly following a doubtful economic dogma — it is the time for common sense. The longer the ECB persists with unconventional monetary policy, the greater the damage to the European project will be.” “The ECB should change course before it is too late” May 6.

Folkerts-Landau can be sure that future students of bank regulations will shake their heads in even greater disbelief. The distortions produce by unconventionally forcing banks to clear in their capital for credit risk, that risk that is anyhow the most cleared risk by bankers with their risk-premiums and size of exposures, is mindboggling.

It is precisely that distortion that impedes the monetary policy to work.

Bank capital is to be there for unexpected losses, and expected credit losses has nothing to do with the unexpected.

Any risk, if excessively considered, causes the wrong actions, even if perfectly perceived.

@PerKurowski ©