“In a world where debt overhang holds growth back for years” what could happen to the safety of “safe assets”?

Sir, David Oakley writes about the possibility that “QE will only properly end when all the bonds purchased mature”. And “For fund managers, it means government bonds may have a more lasting appeal as yields remain lower for longer because of an underlying demand for safe assets in a world where the debt overhang holds growth back for years.” “We are the QE generation, and it is quite a burden” February 1.

But a more relevant question could be: “in a world where the debt overhang holds growth back for years” what could happen to the safety of those “safe assets”?

Here we are with central banks sitting on a great portion of sovereign bonds they cannot retire without affecting the market too much; while at the same time they fix the risk-weight of these bonds, for the purpose of the capital requirements for banks, at zero percent, while that of those who are the only ones who could help growth, the private sector, has a risk weight of 100 percent. Is that not an example of sheer human lunacy that has us begging urgently for some artificial intelligence to bail us out?

@PerKurowski ©

Before managing other systemic risks, bank regulators should dare confront their own large systemic distortions.

Sir, David Oakley and Barney Jopson report that the Financial Stability Board, wants to go after big asset managers, “Asset managers’ bonds push prompts scrutiny” June 3.

Its reason is the following: “Since the financial crisis, the amount of bonds asset managers have on their books has grown dramatically, filling a void created by big dealer banks that have cut their exposure to fixed income. This shift has triggered worries among regulators about what will happen if a rise in US interest rates sparks a rush for the exit in bond markets — and that prospect has fuelled debate on tougher regulation.

Since a loss is a loss, no matter who has to bear it, huge asset managers, no matter what they say, can produce systemic economic shockwaves, and so of course everyone should be concerned with their risks.

But that said the first thing bank regulators need to do, is to understand how their own regulations have impacted the whole financial sector… in many shapes or forms.

I dare them to organize a seminar on: “What distortions do the portfolio invariant credit-risk-only-weighted capital (equity) requirements for banks cause?”

@PerKurowski

Don’t forget the non-AAAs

Sir Peter Spiegel, David Oakley and Ralph Atkins report that “EU rescue fund rated triple A” September 21. Do they really know what that means?

It means that the banks when at some point in the future they are asked to acquire bonds or otherwise lend to European Financial Stability Facility they be able to do so without the need of capital. It will mean that it will be cheaper to fill the hole of the past than to build the mountain of the future. Good or bad? If I owned Greek bonds and wanted to get bailed out I would find that great but, if what I wanted was a bank loan to set up a new venture it would surely be bad, because I would have to pay for the cost of the discrimination in favor of the EU.

Since Basel III kept intact all the risk-weight discriminations in favor of the AAAs and the Jean-Claude Trichet bureaucrats of this world, we should never forget the non-AAAs and private borrowers who are and will have to pay for it all.