The 0% risk weighting of sovereigns is a very subtle version of brutal top-down Stalinism. It will not work either

Sir, Sergei Guriev, the chief economist of European Bank for Reconstruction and Development concludes in that “The Great Soviet Experiment demonstrated the deficiencies and unsustainability of the non-market model” “The Russian Revolution offers economic lessons”

But there, right in front of his eyes, he has bank regulations that with Basel I of 1988 decided, with respect to the risk weighted capital requirements for banks, that the risk weight of a sovereign is 0% and that of the citizens is 100%.

As a consequence banks can leverage their equity more, and therefore obtain much higher expected risk adjusted returns on equity when lending to the sovereign than when lending to the citizen. And therefore banks will lend much more to the sovereign than they would otherwise have done.

Sir, is that just not a much more subtle version of the brutal top-down Stalinism that Guriev writes about? Of course it is! And because it is de facto premised on that government bureaucrats will be able to use bank credit for which they are not personally responsible for better than the citizens, it will not work either.

Unfortunately, it would seem like that the Financial Times wants that statism to remain invisibly subtle.

@PerKurowski

EBRD, Manfred Schepers, what EU really needs most are better-capitalized banks and much less distorting regulators.

Sir Manfred Schepers writes: “European growth is being held back by the inability of small and medium-sized businesses to benefit from the efficiencies of the single market and currency. Growth and employment will come from mid-cap companies that can innovate and compete to become Europe’s new multinationals” “EU needs more equity finance and less debt to move forward” March 12.

Absolutely! But why on earth keeps a senior advisor, and a former CFO at the European Bank for Reconstruction and Development, from understanding what current credit risk weighted equity requirements for banks does to negate the fair access of “risky” small and medium-sized businesses to bank credit.

What EU really needs first are better-capitalized banks and much less intrusive and distorting regulators.

@PerKurowski

As a sanction why not increase the risk-weight of Russia when calculating the capital requirements for banks?

Sir, Wolfgang Münchau writes that “Europe must impose financial sanctions on Russia” July 21, and among the possibilities for that he discusses the European Bank for Reconstruction and Development to stop lending to Russia.

Why not also, for the purpose of capital requirements of European banks, assign to Russia at least the same risk-weight currently assigned to Europeans small businesses and entrepreneurs, namely 100%. At its current credit rating BBB- Russia earns a 50% risk-weight, which means that banks are allowed to leverage twice as much when lending to Russia, than when lending to those who have done absolutely nothing wrong except being perceived as “risky”... something for which they already pay for dearly.

Besides, for a starter, why on earth would you want European banks lend more to Russia than to European job generators?