August 25, 2017

Free our economies from risk weighted bank capital requirements; foremost from the 0% risk-weighting of sovereigns

Sir, you write about the “US Federal Reserve and the European Central Bank, facing the relatively pleasant task of withdrawing stimulus after years of good economic growth.” “The Fed ponders the fractious politics of debt” August 25.

Sir, may I ask you, do you really think the economic growth we have seen could be qualified as good considering the immense stimulus given through QEs and low interests? If the growth had really been consistent with the amount of stimulus given we wouldn’t have these qualms about reducing central banks’ “swollen balance sheets”, would we?

And then you favour Janet Yellen and Mario Draghi with, “ECB and the Fed are fortunate in being headed by two competent policymakers”. I do not agree with your assessment. Both of them, when it comes to regulating banks, which is something they do, are simply clueless.

First: Basel II, for the purpose of capital requirements for banks, assigned a risk weight of 20% to what is rated AAA and one of 150% to what is rated below BB-. That clearly assumes that the ex ante perceptions about risks are not cleared for in any way, and that these would therefore be indicative of the ex post risks. That is plain stupid and those unable to understand that are not qualified to regulate our banks.

Second: Sovereign debts have been zero risk weighted while unrated citizens have been assigned a risk weight of 100%. That is unauthorized regulatory back door statism that subsidizes governments’ access to credit, and which is paid for by taxing, for instance SMEs and entrepreneurs, with in relative terms much less and much more expensive access to bank credit.

Third: Those who cannot understand that the risk-weighted capital requirements hinders the efficient allocation of credit to the real economy; and therefore its distortions wastes much if not all of any stimulus, should not have anything to do with QEs.

Fourth: Those who to the “swollen balance sheet built up by quantitative easing”, refuse to add the sovereign debt and the reserves held in central banks that are a direct function of preferential risk weighting, do not understand the magnitude of the difficulties we are facing.

Sir, day by day our banks, thanks to regulators, are dangerously overpopulating more and more whatever perceived, decreed or concocted safe havens there are. Equally dangerous for our real economies, they keep on underexploring the risky bays that could contain the real factors that could help us to a better future, or at least not a much worse one.

Sir, your steadfast silence on these regulatory failures seems to evidence complicity.