For UK to re-engineer its growth model, it needs to de-engineer its loony risk adverse bank regulation model

Sir, Alberto Gallo writes: “At the heart of Britain’s problems is its unbalanced growth model, centred on London and financial services, a lack of investment in sectors that boost productivity rather than asset prices, and the resulting inequality… Britain needs a plan to re-engineer its growth model” “UK must rebalance growth model to steer past Brexit iceberg” October 20

That is a very clear definition of the problem. Unfortunately, among the proposed solutions, Gallo leaves out what needs to happen with bank regulations.

In short, for the umpteenth time, the risk weighted capital requirements for banks hinder these from financing the riskier future, having them only refinancing the safer past. The risk weights of 0% the sovereign, 20% the AAArisktocracy, 35% residential housing and 100% unrated SMEs and entrepreneurs shouts out what is wrong… unfortunately too many, FT included, are blind or deaf.

Unless Britain eliminates the distortions in bank regulations that work against productivity it is doomed to like old soldiers to slowly fade away… living up, little by little, all its past economic achievements.

@PerKurowski ©

Until Europe trashes risk-weighted capital requirements for banks, ECB’s QE liquidity will not go where it should.

Sir, Alberto Gallo writes: “Against the ECB’s [QE] bazooka lies an wall of obstacles. The first is an impaired banking system, muddling through €1tn of bad loans with balance sheets still three times as large as the eurozone economy. The second problem is a lack of corporate investment, despite lower interest rates. The third is shallow capital markets, a “bottleneck against ECB liquidity trickling down to small and medium-sized businesses, responsible for 80 per cent of job creation.” “More QE on its own will not unblock the eurozone bottleneck” December 7.

Gallo suggests: “There are three ways to make QE work. One is to boost monetary stimulus with public investment. Governments have little fiscal ammunition for large-scale stimulus. A credible co-ordinated plan could provide the right signal to kick-start private investment, coupled with QE.” 

No! Since Gallo works for RBS, which must be interested in leveraging its equity as much as possible, especially with what is perceived as “safe”, he does not want to see, or does not dare to disclose the most important obstacle for getting liquidity to the SMEs… those he calls “responsible for 80 per cent of job creation.”

I will repeat it again, for over the thousand time, to see if FT finally dares to wake up. The biggest obstacle, is the risk-weighted capital requirements for banks, those that cause banks to earn much less risk adjusted returns on equity when lending to “The Risky” than when lending to “The Safe”.

It is as easy as that! The problem is that ECB’s Mario Draghi, as the former chair of the Financial Stability Board, does not want it to be known that he shares in the responsibility for the biggest cock up in regulatory history.

@PerKurowski ©

Regulators painted the banks into the dangerous corner of holding much of what is perceived as safe against little capital.

Sir, Alberto Gallo notes “The irony is that the Fed is becoming trapped by its own policies. QE and low rates have helped to solve the banking crisis, but also pushed investors to take on bigger risks” “Fed has grown complacent on credit market risk” July 1.

Yes but what has trapped them even more than so is that while providing liquidity and low rates because portfolio invariant risk weights, they forced banks into ever larger and dangerous exposures to what is, for the times being, officially perceived as “absolutely safe”.

Look for instance at the UK where even though BoE expresses concern of a housing bubble, it still permit banks to hold much less capital against mortgages than for instance against loans to SMEs.

The real problem we face today is that it is impossible for regulators to help banks out of the dangerous corners they have been painted, while they refuse to admit the possibility that it was they who did most of that painting.