August 16, 2016
Sir, Mohamed El-Erian writes: “BoE had already gone beyond consensus expectations… by skillfully combining four elements — an interest-rate cut, a reinvigorated and broadened asset purchase program (QE), a special funding scheme for banks, and effective communication” ,“Bank of England bond-buying needs a fiscal helping hand” August 16.
How sad BoE is not skillful enough to understand that a regulatory distortion of the allocation of bank credit to the real economy is blocking the chances to achieve stronger and more sustainable economic growth.
What distortion do I refer to? The risk weighted capital requirements for banks of course. That which allows banks to leverage equity more with assets perceived as safe than with assets perceived as risky; and thereby that which results in banks earning higher expected risk-adjusted returns on equity on assets perceived as safe, than on assets perceived as risky.
As a result too much of BoE’s, and other central banks, and fiscal stimulus, gets to be wasted; by mostly flowing to increase the value of existing assets (stagflation profiteering) and by that way hindering the opportunities of “risky” SMEs and entrepreneurs to gain access to bank credit.
What would happen to UK government borrowings if the sovereign UK, now assigned a zero percent risk weight, had to carry the same risk weight as We the People, 100 percent? To top it up there are many other statist pro-government funding subsidies.
Sir, we have to find a smart way to urgently work our banks out of these regulations, something made difficult by the fact our current bank regulators simply do not know what they are doing. Ask them and you’ll see.
Finally, for someone from a country suffering murdering inflation, Venezuela, it is a real shocker having to read highlighted in FT: “Owning a printing press, the BoE faces no funding constraint”