Does Christine Lagarde really know about the zero risk weighting of eurozone sovereigns bomb?

Sir, Anne-Sylvaine Chassany writes how Christine Lagarde was interrogated in 2016 about an incident while she was the finance minister in France, related to a vital memo she missed, and which led to herfailing in “preventing an allegedly fraudulent €403m state payout”. “Although spared prison and a fine, she was found guilty of negligence, though the court decided the conviction would not constitute a criminal record” “Lagarde’s lesson in how to deal with imposter syndrome” July 10.

That must have been a very uncomfortable experience for Ms. Lagarde. And in this respect I wonder if she has for instance read what Sharon Bowles the then European Parliament’s Chair Economic and Monetary Affairs Committee opined in 2011?

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, 2 May 2011 Bowles said: 

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

Sir, that was eight years ago… and Mario Draghi or anyone else did not defuse that bomb and so it is still ticking.

A zero risk weighting of any sovereign bond, for purposes of bank capital requirements anywhere is lunacy to me, as it de facto implies believing that government bureaucrats know better how to use bank credit they are not personally liable for, than for instance entrepreneurs. But, when it is assigned to sovereigns who take on debt denominated in a currency that is not their domestic printable one, as is the case in the eurozone, then it goes way beyond lunacy.

Anne-Sylvaine Chassany writes that againChristine Lagarde faces a chorus of doubters. Ms Lagarde is not a monetary policy specialist or an economist by training, skills which, in a perfect world, ought to be part of the job description to succeed Mario Draghi at the helm of the European Central Bank.

That is of little concern to me; there should be more than enough monetary policy specialist or economists and, seeing what many of them have been up to lately, perhaps even too many. 

But does Ms Lagarde really know what she is getting into? Does she really think she can help defuse that zero risk weighting for eurozone sovereign bonds bomb that, if it explodes, will take down the euro, and perhaps the European Union with it?

Someone should ask her that. That is many times more important than the vital memo she missed seeing. Why not the Financial Times?

But then again would anyone really be able to defuse that bomb?

PS. Perhaps the title of this should be "Does Christine Lagarde know she might be on a suicide mission?

@PerKurowski

Nations need unions that represent the unemployed and to get a small universal basic income going, before it's too late

Sir, Anne-Sylvaine Chassany, interviewing Laurent Berger writes: “The leader of France’s largest trade union has warned Emmanuel Macron not to rush labour market reforms as the country’s new president kick-starts negotiations over a bill seen as crucial to revamping the eurozone’s second-biggest economy.The warning is a reminder of the labour relations minefield awaiting the pro-business president” “Macron warned by union leader not to rush reform” May 24.

That evidences how much France and all other nations also need unions that represent the unemployed, in order to create some equilibrium among the forces that influence labor politics.

And of course, setting up a universal basic income system, starting it with a small amount, in France perhaps €150 per month, would also begin to open up the roads to that new society in which robots and automation seem to create structural unemployment.

As I have opined since some years we do need decent and worthy unemployments... before its too late.

http://myubi.blogspot.com/2017/01/my-universal-basic-income.html

@PerKurowski

Ms Merkel, Mr Renzi and Mr Hollande. Do you want to tackle growth and youth issues? Read the memo or give me a call.

Sir, Arthur Beesley, Anne-Sylvaine Chassany in Paris and Stefan Wagstyl report on that the leaders of Germany, France and Italy will attempt to forge a common plan to bolster Europe’s economy; and that Sandro Gozi, Italian secretary of state for European affairs said: “Europe needs an immediate answer on growth, youth and security issues”, “European leaders seek to bolster economy” August 22.

Part of that is because the result of that a the €315bn investment plan introduced last year by Jean-Claude Juncker, European Commission designed to tackle youth unemployment, during its first year, fell well short of expectations.

Here is what I would suggest they should do. They should ask their bank regulators whether when they regulated they gave any attention to the need that banks cooperate promoting sustainable growth and employment for the youth?

The answer they should receive, if the regulators were honest, would be: “Not one iota… all we cared about was for banks to avoid the risks we all perceive ex ante!”.

At that moment Ms Merkel Mr Renzi and Mr Hollande should begin to get an intuition that something is not smelling right.

In short, the current risk weighted capital requirements have banks avoiding the financing of the riskier future, and just keeping to the financing of the safer past, and that’s not the way for our economy to move forward, in order to not stall and fall.

Of course, if they want further explanation on how inept the current bank regulators are, they could read the following aide memoire, or they could give me a call.

@PerKurowski ©

Just you wait till the young discover what the Basel Committee for Banking Supervision has been doing to their future

Sir, Anne-Sylvaine Chassany tells us that “Océane, a 21-year-old Nice resident with purple hair, tattooed forearms and stretched earlobes would love to move to London and open a tattoo parlour” “A waitress with tattooed arms opens my eyes to the youth vote” July 27.

Well that would quite likely require Océane to get a bank loan. But what would Océane say if she understood that her chances of getting a loan at reasonable rates, which might never have been that great to begin with, are now much smaller, because of the regulators.

The risk-weighted capital requirements favors the lending to what is perceived, decreed or concocted as safe, that which always have had ample access to bank credit, over the lending to the risky… and by favoring it unfairly discriminates against the access to bank credit of those ex ante perceived as risky. 

One day, some researcher will calculate the number of loan applications by SMEs and entrepreneurs that have been denied, or approved at much higher interest rates, as a direct consequence of these regulations. When those figures are published and the young realize discovers that banks stopped financing their risky future, and are only now refinancing the safer past, like placing a reverse mortgage on the economy, then, as long as the young are able to look up from their iPads, all hell could and should break lose.

Hear the young: “Baby-boomers why did you do that to us? The banks of your parents did take the risks needed for your future!”

And nothing can foster inequality as much as denying opportunities of fair access to credit… with “fair” meaning here, a not-distorted free-market based risk evaluation process.

@PerKurowski ©

Does Schäuble know ECB’s Draghi agreed with allowing German banks to leverage over 60 times when lending to Greece?

Sir, Anne-Sylvaine Chassany, James Politi and Peter Spiegel write about “Wolfgang Schäuble, advocating a Greek ‘timeout from the eurozone’ for ‘at least the next five years’ if Athens did not accept the bloc’s exacting conditions for a new bailout”; and of that “Germany puts more onus on stricter rules and control from the centre”. “Fears over German power as Merkel and Schäuble end the good cop, bad cop routine” July 18.

That leads me to question whether Wolfgang Schäuble really knows that rules and control from the centre, in this case by the Basel Committee, allowed German banks, between June 2004 and November 2009, to leverage their capital over 60 times when lending to Greece.

And does Schäuble know that banks in Greece are currently required to hold much less capital when lending to Germany or France, than when lending to Greek SMEs and entrepreneur, so as to help Greece develop the means to be able to at least somewhat serve its monstrous debts?

I ask so because it would seem much more important for Schäuble to request a very long timeout from all ongoing negotiations about the future of Europe, the Eurozone and Greece, of the Basel Committee and of all those who have directly had anything to do with current bank regulations.

And does Schäuble know that Mario Draghi, as a former chair of the Financial Stability Board, is one of those severely compromised bank regulators?

The “risky”, those who regulators deny fair access to bank credit, might welcome back Dominique Strauss-Kahn.

Sir, Anne-Sylvaine Chassany writes about the possibilities of Dominique Strauss-Kahn entering politics again “The discreet redemption of Strauss-Kahn” July 14.

On October 7 2010, during a Civil Society Town Hall Meeting, I asked the then Managing Director of the IMF Strauss Kahn the following:

“Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

And Strauss-Kahn answered: "Well, the question about requirements, a couple of requirements for banks. You know, it's a very technical question and a very difficult one, but the way you asked the question, which is why there any kind of discrimination against SMEs is an interesting way of looking at that. In fact, there is no reason to have any kind of discrimination. The right thing for the Bank is to know whether or not their borrower is reliable, but you can be as reliable being a small enterprise than not reliable when you're a big company. So this kind of systematic discrimination has, in our view, no reason to be.

I have not been able to publicly obtain such a clear answer on the issue of how those who by being perceived as “risky”, are already naturally discriminated against by bankers, are now also odiously discriminated against by regulators. And so at least all the ex-ante perceived risky borrowers could welcome Strauss-Kahn’s return… as he might speak up for their rights of having a fair access to bank credit.

In case you want to view it, here is the link to the video of the conference. My question is in minute 47:35 and Dominique Strauss-Kahn's answer minute 1:01:05

@PerKurowski

Greece’s odious debts resulted from odious credits… those that too many want to keep flowing

Sir, I refer to Anne-Sylvaine Chassany’s FT-Lunch with Thomas Piketty, “Europe is choosing the wrong path” June 27. In it, Piketty argues for the cancellation of much Greek debt.

Anyone thinking that Greece’s debt is not already de-facto canceled, by virtue of it being impossible to serve, is either cuckoo, in desperate need of some blissful ignorance, or wants to, instead of honest haircuts, use non-transparent means like inflation to settle it. And so of course the Eurozone’ air would be much clear by biting the bullet. But two comments needs to be made:

First that that should have to go hand in hand with analyzing why Greece got into troubles, in order to avoid a repeat… and that seems to be of no concern to most, including Thomas Piketty.

The over indebtedness of Greece resulted from odious credits that would not have been extended, were it not for regulatory incentives; namely the fact that banks were allowed to leverage immensely their equity when lending to the government of Greece as compared with what they could leverage lending to for instance European SMEs.

The problem though is that, may we say naturally, because of conflicts of interest, too many in Europe, like government employees and/or statist ideologues, are too interested in keeping the flow of these easy credits going. In other words, too many have found redistribution and cleaning up debris after the storm to be a politically more rewarding activity than producing or building more storm resistant houses… and this guarantees the continuance of Europe’s “deeply flawed governance”.

Secondly, allowing banks to hold less equity against the borrowings of “the safe”, than against the borrowing of “the risky”, signifies a subsidy to those who already have more and cheaper access to credit, and a regulatory tax on those who already have less and more expensive access to bank credit. And this translates into an odious and dangerous distortion of the allocation of bank credit to real economy, and which also, by negating opportunities to those most in need of it, is an important driver of inequality. Not wanting to understand this could be explained in terms of intellectual and moral procrastination… and in Europe, I am sad to say to many seem to be engaged in that.

@PerKurowski

Yes “The Risky” borrowers are forced into the shadows, by criminally stupid bank regulators.

Sir, Anne-Sylvaine Chasanny’s and Henny Sender’s title, “Forced into the shadows”, June 7 describes precisely the results from having capital requirements for banks based on perceived risk which so odiously discriminates against the access to bank credit all those who are not perceived as “absolutely safe”. Though, where it says, “With Europe’s banks reluctant to lend”, a better phrasing would be “With Europe’s banks ordered not to lend to those perceived as risky”, because that is in effect what happens when with bank equity being extremely scarce, regulators tell banks they need more of it when lending to “The Risky” than when lending to “The Infallible”

I have explained this in perhaps over a thousand letters to FT, over many years, but FT has never understood or wanted to acknowledge how these bank regulations distort the resource allocation in the real economy. Yes, “The Risky” are being forced into the shadows, by criminally stupid bank regulators, and there is no other way to describe these.