Italy has no chance of solving its bank and economy problems, if it does not understand the regulatory distortions

Sir, Sarah Gordon writes: “Thousands of small and medium-sized companies have gone under, taking with them the bank loans on which they depended, as well as demand for lending”, “The spreading pain of Italy’s bank saga”, August 11.

First let us make on thing very clear, those thousand and SMEs that have gone under more than they were expected to go under, did so as a result of the 2007-08 crisis. They had not one iota to do with causing the crisis.

And so let me explain it again, for the umpteenth time: Before current bank regulations, pre 1988, pre Basel Committee, no one made a distinction between a Lira or an Euro in capital invested in something perceived as safe, or in something perceived as risky.

But then the Basel Committee came along and decided that, if banks invested in something perceived, decreed or concocted as safe, then a unit of their capital (equity) could be leveraged more than 60 to 1, while, if invested in for instance some loans to SMEs and entrepreneurs, that same unit could only be leveraged 12.5 to 1.

And so of course that introduced a very serious distortion of the allocation of bank credit to the real economy, which persists until today, all because our besserwisser bank regulators, insist on that they are besserwissers.

If Italy does not allow its SMEs or entrepreneurs to have fair access to bank credit then it is doomed to stagnation… that is unless La Banca Sommersa comes to its rescue.

@PerKurowski ©

Selling the notion of being able to make banks safe, at no cost, is pure unabridged populism.

Sir, I refer to Tony Barber’s “Renzi is the last hope for the Italian elite” January 2.

In it Barber attacks populism and writes about how important it is for Italy that “Mr Renzi’s reforms of the tax system, labour market, judiciary, public administration, electoral system and much more succeed”.

Again there is no reference to the unabridged populism contained in the notion that you can make banks safe, at no cost.

That populism is imbedded in the current risk-weighted capital requirements for banks; which allow banks to earn much higher risk adjusted returns on their equity on exposures perceived as safe than on exposures perceived as risky; with not one iota of regulatory concern about how useful for the economy such “risky” exposures could be.

These regulations, carried out in the name of saving the taxpayer from having to pay more taxes, is one of the most important obstacles that is hindering the taxpayers from receiving more taxable income.

That regulatory populism is doing as much damage to Italy, the Eurozone, Europe and the Western World as anything else. Without those regulations we might have had a bank crisis, but none as big as the current that resulted from allowing banks to leverage immensely with what was perceive as safe, like “infallible sovereigns” as Greece, members of the AAAristocracy, and the real estate sector in Spain.

If Renzi is not capable of demolish these populist bank regulations, Italy might still make it, but that would only be as a result of the strengthening of la banca sommersa.

FT, supporting the idea that Basel III is making our banks and our economies safer, is to support populists.