Europe, having ECB injecting liquidity instead of banks, is indeed a real recipe for disaster or waste.

Sir I refer to Claire Jones’ “Draghi’s go-it-alone style off the menu” November 7.

ECB “has announced that four private sector asset managers will begin buying asset backed securities on its behalf starting this month.”

Why does ECB trust more that will inject liquidity better in Europe’s economy than banks allowed to do so freely without regulatory distortions?

That question reveals the real dilemma. The credit-risk-weighted capital/equity requirements for banks, impede these to allocate credit efficiently and so bureaucrats, whether outsourced or not, who put absolutely no money at risk, have to step in and do the lending.

Europe, that is indeed a real recipe for disaster. In this case it is better for you that ECB sends a small check to each European, for a loan at .1% interest, payable in 20-30 years. Who knows, ECB might even recover more of its money doing so… at least in nominal terms.

PS. Mario Draghi still does what he can to evade his responsibility.

With his track record I would not trust ECB’s Mario Draghi with a firecracker to help the real economy

Sir, you hold “Draghi’s colleagues should pass him the ammunition…outright [huge]purchases [by ECB] of asset backed securities and covered bonds”, and that “Criticism of Draghi’s action is misguided” October 3.

May I remind you that Mario Draghi, for years chair of the Financial Stability Board, is one of those responsible for while requiring banks to hold 8% in capital (equity) when lending a little to an SME, allowed banks to hold huge exposures, against a measly 1.6 percent in capital, only because these were perceived as "absolutely safe".

Sir, a central banker who allows banks to leverage their capital (equity) a mindboggling 62.5 times to 1 when buying AAA rated securities, or when lending to Greece; and who does not understand how risk-weighted capital requirements distorts credit allocations, is a central banker who might know a lot about many central banking issues, and Wall Street, but he sure has no idea about what really makes banks unstable, or about how money moves around on Main Street.

And so, when it comes to getting the real economy going, I would not even trust a firecracker to Draghi. In fact he and some of his bank regulatory colleagues, are some of those most stopping it.

Why would ABS “junk loan bundles” be safer on ECB’s balance sheet than on the banks’?

Sir, Claire Jones and Sam Fleming report that “Draghi in push for ECB toaccept Greek and Cypriot ‘junk’ loan bundles” October 1.

And my question is… would these “junk loan bundles” be safer on ECB’s balance sheet than they are on the banks’? Because, if not, why not ask the Basel Committee to reduce the capital banks are required to hold against these “junk loan bundles” to what regulators allowed banks to hold against these assets when they placed it on the books, back at those good old days no one treated those assets pejoratively as “junk loan bundles”.

I guess the Basel Committee should be open to that plea by the ECB, since it was the Basel Committee which painted the whole banking system in the corner of too high exposures against was previously, ex ante, perceived as “absolutely safe” holding too little capital.

And even if these “junk loan bundles” might end up in something related to ECB… if you could solve it in other ways, meaning allowing banks to use the liquidity they have but that they cannot use because of lack of capital, what’s the rush of getting that “junk” there?

Mario Draghi… you are personally responsible for any ECB liquidity injections in Europe being just wasted away.

Sir, I refer to Stefan Wagstyl’s “ECB presses on with securities plan” September 10.

Mario Draghi, as the former chairman of the Financial Stability Board must be aware that, because of the risk-weighted capital requirements, all those borrowers who have the misfortune of ex ante being perceived as risky from a credit point of view, independently of how important they could be for the European economy, and for European job generation, will not have fair access to bank credit.

And so therefore banks will by means of their credits not be able to allocate any ECB (or fiscal deficit) liquidity injections efficiently to the European economy.

And one of the reasons for why this distortive regulatory lunacy introduced 10 years ago with Basel II survives, is the quite natural but still highly irresponsible reluctance of regulators to admit their mistake.

And that is why, I at least, hold Mario Draghi personally responsible if any ECB liquidity injection in Europe is just wasted away… and this even though he might not care one iota about it, as he sure must be surrounded by so many other who support his ego by daily reaffirming his magnificence.

Neither Martin Wolf’s nor Mario Draghi’s ”whatever it takes” includes what is most urgent for Europe

Sir, Martin Wolf holds that ”Europe has to do whatever it takes” September 10, and that is indeed correct.

But Wolf’s “whatever it takes”, just like Mario Draghi’s, does not include what is the most urgent for Europe.

And that is getting rid of the distortions that the credit risk-weighted capital requirements produce in the allocation of bank credit. And that might have to include temporarily reducing the capital requirements for banks on exposures to what is perceived as risky.

For instance Christopher Thomas in “Power of Draghi ABS plan questioned” quotes various analysts for instance saying: “banks are already awash with liquidity… they hardly need more money… ABS supply… can only come through capital relief that makes it more profitable for banks to lend to small businesses in the first place without then having to hold lots of capital against those loans”

The day Europe begins to think of capital requirements for banks in terms of risks to Europe, to its economy and to the creation of jobs for its young, well that will be the day it will begin seeing light again, and fully understand what its bank regulators did wrong.

I understand Draghi’s reluctance, since that would require him to admit he was profoundly mistaken while being the chairman of the Financial Stability Board.

But, Martin Wolf’s?

PS.Basel II and III risk weighted capital requirements are a regulatory nightmare.

Regulators like FSB’s Draghi, placed heavy weights, on what central bankers like ECB’s Draghi, now want banks to carry.

Sir, I refer to Patrick Jenkin’s “Question hangs over Draghi’s latest salvo on lending” September 8.

In it, with respect to the ECB purchase of asset backed securities, planned in order to free up banks’ balance sheets” so that banks lend more to business, Jenkins writes: “Selling the highest quality, least risky tranches… still leaves the issuing banks with the lower-grade portion of the securitization”.

But though Jenkins refers to the obstacle of rules on capital, he does not make clear that it is precisely those “lower-grade” tranches of the ABSs, and the lending to business, which is by far what is most affected by those capital rules and which, by the way, are not really “post crisis” rules but Basel II rules.

The irony is that Mario Draghi, when during many years the chairman of the Financial Stability Board, supported the very nonsensical credit risk weighted capital requirements for banks; those which now impedes him as chairman of the European Central Bank, to perform his duties. And of course, he does not want anyone now to notice how dumb he has been, since that would lead many to ask, “If so, why on earth was he promoted?” 

What a Shakespearian tragicomedy!

Europe, are you sure Mario Draghi has a clear idea of what he is doing? Scary question eh?

Sir I refer to the latest ECB/Draghi measures “to save the eurozone from economic stagnation, as reported and commented on in several ways in FT on September 5.

In the Short View James MacKintosh writes “they should… perhaps encourage mortgage and business lending”. Mortgage lending, yes, business lending, NO! Because business lending requires banks to hold much more of that extremely scarce bank capital than what mortgage lending does.

In fact anyone that in Europe, with added liquidity and lower interests tries to help medium and small business, entrepreneurs and startups, to gain some access to bank credit, without considering eliminating completely the considerable differences in capital requirement for banks when lending to these “The Risky” than when lending to “The Infallible”, has no idea of what he is doing. Scary eh?

But perhaps Draghi knows. When Claire Jones and Christopher Thompson, in “Draghi pins hopes on ‘orphan child’ plan” write about asset backed securities and capital charges and that “Mr Draghi said that decision was in the hand of independent regulators and beyond central bank’s control”, it sure sounds like the former chairman of the Financial Stability Board is trying to wash his hands.

And you argue “Purchases of asset-backed securities will only make a difference… if loans are genuinely taken off strained bank balance sheets, freeing space for new lending”. I ask, what kind of new lending are you referring to? I guess all the bank lending we would see would be that which requires them to hold little capital.

In fact, I suspect that most of what that part of the ECB exercise would achieve, is to dress up the banks before the oncoming asset quality review and stress tests… Might ECB be getting nervous about what it might find? Indeed, ignorance is often bliss!