Mario Draghi, explain to a German widget maker why you assign him a higher risk weight than to a French bureaucrat

Sir, Claire Jones’ quotes Adam Posen, a former member of the UK central bank’s Monetary Policy Committee with: “at the time after the financial crisis when lending to small businesses had fallen off a cliff. It was very compelling to hear from small businesses what credit rationing felt like in practice.” “Beer and bratwurst in Bavaria a missed opportunity for ECB” October 26, to ask one question.

Sir, how do you think Mario Draghi could explain to a German widget maker that his bank, when lending to him has to hold much more capital than if it lends to his government or to some other governments, like the French one?

I ask because in essence those risk weighted capital requirements, tilted in favor of the sovereign and against We the People, de facto implies that regulatory technocrats like Draghi, think bureaucrats are better able to decide what to do with bank credit than for instance German SMEs or entrepreneurs.

Come to think of it, Adam Posen was very lucky the “eight very small business owners” he recalls meeting then at the pub, had not the faintest idea about what was going on… they probably still do not.

PS: Again, here is an aide memoire on some of the monstrous mistakes of said regulations.

@PerKurowski ©

The squeeze between the leverage ratio, and the risk-weighted capital requirements for banks, intensifies the regulatory distortions.

Sir, Adam Posen opines that the Fed should “Keep rates low until the hidden jobless return to work” August 20.

I have not any strong opinions on where rates should be but, when Posen writes “After the global financial crisis, no one can dispute that central banks have to take financial stability into account when making policy”, then I must speak out again.

As I see it, it was precisely when trying to consider financial stability, and to that effect coming up with the risk-weighted capital requirements for banks, that regulators distorted the credit allocation of banks. And that made banks invest too much in safe assets, like for instance AAA rated securities, sovereigns like Greece, and real estate in Spain, causing a crisis; and way too little in lending to medium and small businesses, entrepreneurs and start-ups, causing joblessness.

And so for me more important than anything on the interest rate front, is eliminating the distortions that are impeding job creators to have fair access to bank credit.

And the saddest part of it all is that none of the regulators, in US and in Europe, seem to understand that while they are prudently imposing a minimum floor of capital by means of a leverage ratio, the constraints imposed by the risk-weighted minimal capital roof, become more severe and the distortions intensify… something which really kills the creation of jobs.

“Why has the Fed given up on America’s unemployed?”, is a question that is at least a decade late

Sir, Adam Posen, the president of the Peterson Institute for International Economics asks, “Why has the Fed given up on America’s unemployed?”, August 21.

He should have asked that long ago, because when the Fed, as a bank regulator, accepted the thesis that banks could have much lower capital requirements when holding exposures to the “absolutely safe” AAAristocracy, than when lending to the “risky” medium and small businesses, entrepreneurs and start-ups, the Fed helped to impose regulatory risk-aversion, and thereby gave up on the risk taking needed to keep the real economy producing jobs.

Our banks are in the hands of… may I say idiots?

Any bank regulator, looking at all history of bank crises, should be able to observe that, with the exception of outright frauds, all the crises were the result of excessive exposures to something perceived ex ante as “absolutely safe” but that ex post turned out to be very risky.

And so to allow banks to hold minimum capital (equity) against what is ex ante perceived as “absolutely safe” is sort of idiotic.

Sir, Adam Posen w rites “perhaps the new Fed chief’s main challenge will be to design and institutionalise a set of tools for targeted interventions in public and private credit markets”, “After Bernanke, make the unconventional the norm”, July 16.

If so let us pray that the Fed´s new chief is someone who understands how capital requirement regulations have produced extremely miss-targeted interventions in public and private credit markets. If not, chances are, we will all just be dug even much deeper into the hole we are in.

Mr. Posen also writes about “the more complex reality of how monetary policy is transmitted to the whole economy... In the euro area, low interest rates and commitments to government bond market intervention are failing to improve credit conditions for small and medium-sized businesses across southern Europe”.

Complex? Given the fact how current bank regulations discriminate against small and medium sized businesses, on account these being perceived as “risky” something for which they have already been discriminated for, I do not find that to be a “complex reality” but rather a quite simple result that should be expected.

Not only Mark Carney needs to get out of the City in order to explore and learn.

Sir, Adam Posen holds that “Mr Carney has to absorb substantive structural knowledge of the British economy, from the nature of its regional divergences, to the strengths of its labour market practices, to the deficiencies of its domestic business lending”, “Get out of the City, Mr. Carney, and explore Britain” December 1 

Absolutely, but just the fact that Mark Carney is not from Britain does not imply he needs that any more than any of his predecessors, or any of his colleagues, in Britain and in other countries. 

I do not know about central bankers but, with respect to bank regulators, if there is any special characteristic that seems predominant it is that they have never walked the main streets of their respective nation. For instance they have no idea of how difficult it can be for small businesses and entrepreneurs to access bank credit having to negotiate with Mark Twain’s risk adverse bankers. 

Had they known that, they would never ever have come up with something as foolish as the current Basel regulatory paradigm of capital requirements for banks based on perceived risk; which allow “The Infallible” to access bank credit in more generous terms than ordinary, even dangerously generous, and makes it so much harder and expensive for “The Risky” to do the same. 

And because our bank regulators were so clueless now our banks have extremely risky and dangerous over-exposures to what is ex-ante, in lieu of better alternatives, considered “absolutely not-risky”… and we, especially our youth, are stuck without jobs, as banks lock out small businesses and entrepreneurs.