With respect to Eurozone sovereign debts, European banks were officially allowed to ignore credit ratings.

Sir, Rachel Sanderson writes, “Data from the Bank of Italy on holdings of Italian government debt, usually the prime conduit of contagion, suggests any Italian crisis now will be more contained than in the 2011-12 European debt and banking crisis, argue analysts at Citi” “Rome political climate is uncomfortable even for seasoned Italy Inc.” August 22.

“But Citi [also] warns of sovereign downgrades. Italy is now closer to the subinvestment grade rating threshold compared with 2011, according to all three main rating agencies.”

But the European authorities, European Commission, ECB all, for purposes of Basel Committee’s risk weighted bank capital requirements, officially still consider Italy’s debt AAA to AA rated, as they still assign it a 0% risk weight.

So in fact all the about €400bn of Italian government debt Italian banks hold, and all what the European financial institutions hold of about €460bn of Italian sovereign debt, most of it, are held against none or extremely little bank capital. Had EU followed Basel regulations they would have at least 4% in capital against these holding, certainly way too little. Lending to any private sector Italian would with such ratings would require 8% in capital… the difference is explained by the pro-state bias of the Basel Committee. 

And that is a political reality that must also be extremely uncomfortable for the not sufficiently seasoned European Union Inc.

Sir, what will the rest of Europe say when they realize that it was not all Italy’s fault, as it was not all Greece’s fault?

@PerKurowski

European banks that leveraged more than 40 (25) times were (are) not banks; only scary betting propositions.

Sir, Stephen Morris, summarizing the state of European banks writes, “Poor profitability, outdated business models, negative rates and little cause for optimism have driven investors away”“Europe’s banks languish in a climate of gloom”, December 28.

As I see it, something leveraged way over 40 times, as many European banks were before the 2008 crisis, should hardly be called bank. When regulators went along with some bankers’ plea to reduce the capital the banks needed to hold, perhaps for bankers to be able to pay themselves larger bonuses, they simply destroyed the bank system that was. 

If I was a regulator, and wanted my banks to grow stronger than their competitors, the last thing I would do, is to allow them to hold little capital.

The regulators, with Basel II in 2004, showed they believe banks could leverage 62.5 times with assets that have obtained an AAA to AA rating. The market initially believed their risk-weighing capacity and valued banks accordingly. The markets, after 2008, no longer believe such nonsense; “There is better risk-reward elsewhere,” one fund manager is here quoted to have said.

The European Commission assigned a sovereign debt privilege of a 0% risk weighting, meaning no bank capital requirement, to all those sovereigns within the Eurozone that take on debt denominated in a currency that de facto is not their domestic (printable) one. The market had blamed Greece for its excessive public debt and is only now beginning to wake up to that statist horror.

Morris writes: “One activist is trying to force it to exit large swaths of the business, arguing it absorbs too much capital for too little return”. That does not mean capital is unavailable for banks.

Do you want bank investors to return? Then offer them to invest in well-capitalized banks with well-diversified portfolios. To invest in banks that values the highest first class loan officers, not some bright equity minimizing financial engineers.

PS. Seeing “Mary Poppins return” reminded me of why good old George Banks went to fly a kite.

@PerKurowski

FT, though fearlessly blaming accountants, seems to sheepishly favor bank regulators.

Sir you write: “Unscrupulous managers, increasingly rewarded with equity incentives linked to accounting measures, have exploited the system. By writing up asset values in line with market values — whether real or estimated — they could book profits, distribute dividends, boost share prices and make incentive payments. Consider investment bankers’ bonuses, distributed ahead of the 2008 financial crisis but based on asset values that tumbled only months later.” “Reform accounting rules to restore trust in audit” August 3.

I agree, quite often accounting is a tool used for not quite ethical behavior. But, when you refer to the investment bankers’ bonuses, you are sure pointing in the wrong direction.

I dare you dare to go back and look at how these investment (and European) banks, before the 2008 crisis, were leveraged with assets perceived (mortgages), decreed (sovereigns) or concocted (AAA rated securities) as safe. Do you think that if they had been required to hold as much capital against these assets, as they needed to hold against assets perceived as “risky”, like loans to entrepreneurs, there would have been room available for all those bonuses? No way Jose!

And you do seem to suggest somehow that the accountants, before that crisis, should have considered the possibility of asset values tumbling only months later. Sir, the explosion, and its real causes, is much more important than the how it is accounted. If accounting is to become even more predictive then we are surely feeding even more worms into that open can of undue behavior.

When we have regulators who believe that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe, I assure you that much more important than reforming any accounting rules, is reforming bank regulation rules. 

Sir, whenever, for whatever great sounding reason, it is argued that banks should not be required to hold more capital, you can be sure there are some neo-bankers thinking about their bonuses behind it.

PS. Neo-bankers? Yes because that is not the bankers I remember. Then they were savvy loan officers, now they are just equity minimizing financial engineers. I am sorry for feeling quite nostalgic.

PS. Most of the bonuses that are currently paid out to bankers, are still firmly rooted in the low capital requirements against what is perceived, decreed or concocted as safe.

@PerKurowski

Regulators must now help banks escape the business model of capital minimization their distortive regulations created

Sir, Richard Blackden, while discussing European banks, writes: “Their return on equity (RoE) — a common measure of a lender’s performance — has been hit by regulators’ demands that they hold more capital.” “European banks still out in the cold” October 4. 

If banks had to hold the same amount of capital against any asset (as they de facto used to), then banks could do traditional banking, which was investing without distortions in the assets that offered them the highest risk adjusted margins.

Currently banks can’t do that because, with the risk weighted capital requirements, the risk adjusted margin of an asset, has now to be placed in perspective of how much capital is required against it. And so banks have become used to maximize their risk adjusted returns on equity, not so much by banking in the traditional sense, but by minimizing capital.

Of course just generally increasing capital requirements, while leaving a part of the risk weighting distortions in place, makes it much harder for the banks and the markets to understand and adjust to new realities.

Therefore, the faster regulators rid the banking sector of the risk weighting distortions, and impose one single capital requirements for all assets, the better for banks and, even more important, the better for the real economy.

I am sure investors would love to invest in banks that were made to operate and compete as banks in the traditional sense.

This world were you can now read about a bank’s common equity tier one ratio being for instance 10.8 per cent; something which could seem indicative of a leverage of less than 10 to 1; only to find out the real leverage could for example be over 30 to 1; and this only because some regulators wanted for him and you to have better information, is too damn confusing for any normal investor that could have wanted to have some bank shares, in his conservative portfolio.

@PerKurowski ©

We need banks that profit by taking reasoned risks; and that have capital to cover for a good chunk of the unexpected.

Sir, I refer to Dan McCrum’s and Thomas Hale’s “Stagnation saps enthusiasm for Europe’s banks” August 6.

It includes contradictory statements like “the financial architecture appears solid” and “most people accept there is enough capital in the system now. Not just investors, but regulators as well” with that of “a rounding error of just 1 per cent on European asset values would wipe out More than a third of European bank equity, the all-important number determining ability to absorb losses.”

The ex ante perceived risk-weighted capital requirements for banks has introduced total confusion into banking. Not only with respect of these having reasonable equity, but also with respect to their business. Over the last decades, banks have looked to maximize their returns on equity much more by reducing the capital required, than by analyzing gross risk/reward ratios as such. And that must come to an end.

First EBA’s recent stress tested European banks indicated that they were leveraged almost 24 to 1, and that makes them clearly undercapitalized, not so much in terms of the expected, but in terms of the unexpected, which is what bank equity should be there for.

And secondly, we urgently need banks to assume their more traditional role of earning their profits by taking reasoned risks in the real economy… that economy in which a unit of capital is a unit of capital, independently of it being invested in something safe or something risky.

To avoid risks, especially when currency does not carry negative interest rates, a mattress seems to suffice. And for the society (taxpayers) to support banks that make their profits by avoiding taking risks, and not by helping it to build future, is stupid.

Some tweet sized conclusions:

The last decades banks have earned huge returns on equity mostly by minimizing equity, that has to stop.

European banks are severely undercapitalized, not that much in terms of the expected, but in terms of the unexpected.

Banking should be about helping society to take risks, not avoiding these. For that mattresses suffice.

Bankers capable of reasoned audacity are magnificent. Equity reducing bankers, are, at best, absolutely tedious.

Just looking at their dumb risk-weighted capital requirements, bank regulators should be disgraced by society.

@PerKurowski ©

History, more than blaming Greece for the crisis, might marvel at how Greekish Europe became.

Sir, Martin Wolf, making a case for Eurozone solidarity towards Greece writes: “Blame for the mess lies quite as much with irresponsible (mainly French and German) private lenders…” “If Greece leaves, the euro will be fragile.” July 8.

By now Martin Wolf knows that European banks, between June 2004 and November 2009, were allowed to lend to the government of Greece against only 1.6 percent of capital, which meant they could leverage over 60 times to 1 their equity. And so the first part in that call for solidarity would be much stronger if stated as it really was: “Blame for the mess lies quite as much with irresponsible bank regulators named by Eurozone governments giving irresponsible private lenders incentives to lend too much to Greece…”

But beware, European banks can still lend to most European sovereigns against much less capital than what they are required to hold when lending to the European private sector. And by doing so Europe still implicitly holds bank credit to be more efficiently used by their government bureaucrats, than by their entrepreneurial citizens. And most, including Martin Wolf, keep on turning a blind eye to this absolute lunacy.

Wolf also argues: “Blame for the mess lies [also with] the governments that decided to provide the loans to Greece with which to bail those lenders out. This refinancing was of negligible benefit to Greece”. Since the implication of that is that, instead of private lenders’ shareholders suffering losses from lending to Greece, it is now the Eurozone taxpayers who will… that might provide great political incentive for the Eurozone’s leaders to double down on “solidarity” towards Greece… pushing the can further down the road.

All young Europeans need to learn much from seeing the Greek pensioner’s not being able to cash in their bank cheques. Europe and the euro are fragile, with or without Greece.

@PerKurowski

The most urgent financial sector reform in Europe is getting rid of its dangerous credit-risk-adverse bank regulations

Sir, Wolfgang Münchau describes the immense problems low interest rates cause the pension fund industry, and we can only hope that is no news to those supporting low interest rates “Real danger lies in Mitteleuropa’s financial sector” March 9.

But then Münchau states: “Low interest rates are, of course, not the cause of this slow moving wreck. The cause is, of course, the train” and goes on to proclaim: “If there is anything in Europe that requires urgent reform, it is not the Greek product market, but the German and Austrian financial sector… if Germany continues with its policy of forcing a deflationary adjustment in the eurozone and running large saving surpluses with an unreformed financial sector at home, we should prepare for the next big financial crisis”.

I am curious, what financial sector reform does Münchau refer to? Is he not aligned with Basel III?

Sir, for more than a decade I have known for sure that what no economy can afford, in order to remain sturdy, is someone giving its banks special incentives to lend to those perceived as safe and to stay away from those perceived as risky; something which the Basel Committee has foolishly done by means of credit-risk weighted equity requirements.

For reasons that escape me, Münchau and most other at FT have decided to ignore that argument.

So if there is one urgent financial sector reform pending in Europe (and other places) that is getting rid of current bank regulators and their senseless aversion of credit risk.

But sadly it just looks only to get worse as its insurance sector is now also being threatened with similar mistaken regulations, Solvency II.

At the end of the day, with these bank regulations, even Germans will suffer the same or worse tragedy than the Greeks

Sir, bank regulators, the Basel Committee and the Financial Stability Board, fully endorsed by ECB, allowed all European banks to hold much less equity when lending to the government of Greece or to the banks in Greece, than when lending to Greek small businesses or entrepreneurs. That led to the excessive indebtedness of Greece and Greek banks, and caused too little bank credit to be awarded to those who could best drive the real economic growth in Greece.

And because of that Greek and Cypriot citizens will now have to suffer deflation or inflation (same shit), having to pay higher taxes, and perhaps even be the subject to capital controls as those Hans-Werner Sinn proposes in “Impose capital controls in Greece or repeat the costly mistake of Cyprus” February 17.

If I was a Greek citizen I would of course lodge my “J’accuse the ECB of high treason or imbecility” … but I would also warn my fellow Europeans, that, with these lousy and discriminatory regulations, they are all no doubt heading the same way to a similar tragedy... including the Germans.

In fact Germany, which shares with the US the largest possibility of becoming the last safe haven in town, might end up with its sovereign safe haven as the one most dangerously overpopulated.

All Eurozone’s banks are also in a periphery, which is something that should be considered by ECB’s-Draghi-QEs

Sir, I refer to Christopher Thompson’s “Banks seek lower cost risk capital” February 3.

It states “Under proposals from international regulators, the biggest 27 “globally systemic” banks will have to double the capital they must hold under the Basel III requirements by 2019. This implies a €200bn-€300bn capital shortfall in Europe alone according to estimates by Citi.”

Is that not a clear indication that where an ECB-Draghi-QE could be most useful, would be by filling that equity gap, as fast as possible, subscribing bank shares to be later resold to the market.

Otherwise the travel from here to there in terms of bank equity is going to hurt a lot… especially all those “risky” small businesses and entrepreneurs which borrowings generate the largest equity demands on banks.

And the beauty of that is that even Germany would agree because, in terms of the Eurozone’s banks, including the German, all find themselves, just like Greece, in the periphery.

The ECB might also benefit from looking at how Chile solved its bank problem

FT, what about the moral responsibility of journalists of telling it like it is with Greece’s debt?

Sir, your FT reporters write: “Germany and France warned Greece not to expect taxpayers in other countries to pick up the tab for its policy decisions” “Berlin and Paris rebuff debt forgiveness call”, January 29.

The most important reason for such attitude is that Greece’s debt problem is primarily attributed to Greece and to banks. If Europe was really made aware of the role their bank regulators had causing this mess, European would be able to understand better why Europe at large need to share much more in the responsibilities of providing solutions.

In this respect I need to repeat, to all of your journalists, what I commented to you Sir and to Martin Wolf, just two days ago. 

Had it not been for the fact that European regulators allowed banks to hold little or even zero equity against loans to sovereigns, like Greece; which tempted banks with extraordinary expected risk-adjusted returns on equity when lending to sovereigns, like to Greece, then banks would never ever have lent so much money to Greece.

What about the moral responsibility of bank regulators of not distorting the allocation of bank credit? What about the moral responsibility of journalists of telling it like it is?

I am sure that if this truth really comes out Greece’s debt problem could be looked at in a much more understanding light… and perhaps would allow Greece, in a first stage, to restructure all its debts in terms appropriate to the risk-profile regulators held it to fit… something like that of Germany’s.

What would Greece’s debt profile look like if it received terms like 30 years at 1 percent?

Europe is caught in a bank regulation trap set up by the Basel Committee and the Financial Stability Board

Sir, I refer to Ralph Atkins’ and Michael Mackenzie’s “Caught in a debt trap” January 29.

They write “Crisis-fighting actions by central banks have not only sent yields on government debt to lows not previously seen in recent history but many of them are negative. Across much of Europe, investors are actually paying for the privilege of lending money to governments in some cases.”

Indeed, but little can be concluded from that without referencing the regulatory trap in which banks have been caught.

In Europe banks represent by far the most important part of how liquidity is transmitted to the real economy. And Europe’s equity scarce banks, because of tightening equity requirements, for instance by means of the leverage ratio, while the risk-weighted equity requirements are still in place, are being forced to take cover, more and more, in what regulators have denominated to be safe havens… with deposits at central banks and debts of “infallible sovereigns” being the safest of those.

And so banks, at gunpoint, are forced to accept negative rates on their deposits with central banks or incest in low yielding sovereigns. And so what we see is not a market expressing its free will, but a market that is competing with banks subject to distorting regulations.

If Mario Draghi had not been the Chairman of the Financial Stability Board, and might therefore be too reluctant to concede how disastrous current bank regulations are, then perhaps the recent stress tests of European banks would have included an analysis of what was not on their balance sheets. And that would have pointed squarely to the lack of lending to the “risky” small businesses and entrepreneurs… those tough risk-takers Europe needs to get going now when the going is tough.

I still believe bank regulators did it all because of sheer group-think derived stupidity but, if not, they should be… well, I leave that to you.

Draghi does not deserve independence. The shackles that most need to come off are those of the European economy.

Sir, you write: “the European economy is still dependent on large troubled banks that have little ability or inclination to boost economic activity”, “Draghi fights a battle for independence at the ECB” January 15.

Why cant’ you say it like it is? European banks are instructed, in de facto very clear terms; by means of portfolio invariant credit risk weighted equity requirements, not to care about boosting economic activity, not to finance a risky future, but to stay put financing the safer past.

The best ECB could do to help boost economic activity is to make sure the discrimination against the fair access to credit of small businesses and entrepreneurs is eliminated. But, since that would best be carried out increasing the equity requirements on what is perceived as “safe”, it would leave a tremendous hole in the banks that cannot and would not be filled fast enough by the markets. And that is where the ECB could step in subscribing important amounts of interim bank equity that is resold to the markets over time.

To do so would require explaining how regulators create the problem, and Draghi, as a former Chair of the Financial Stability Board, does not seem a likely candidate for a sufficiently expressed and explained mea culpa.

Action on this front is urgent… think of all the loans that have not been given in Europe, to those Europe most need to have credit, since Basel II was approved in June 2004.

You end concluding that “It is high time the shackles came off” Indeed, but not those of Draghi, or so much those of the ECB, most urgently those of Europe’s economy.

Europe, urgently, fire Basel Committee’s members; and ask ECB to inject €1tn as equity in Europe’s banks

Sir, Simon Samuel’s mentions as a consequence of Basel III the possibility of a collapse in bank lending in Europe that would dwarf the €1tn or 2€tn of QEs that ECB might carry out, “Withering regulations will make for shriveled banks”, January 14.

Good for him, someone for the inner circle of bank regulators, is finally beginning to speak up on what needed to be said… sort of ages ago. Let us now see if FT also dares to live up to its motto “Without fear and without favour”.

That said the reality is worse than what Simon Samuels describes, because the credit shrinkage he refers to would primarily affect those Europe most needs to have access to bank credit, namely risky small businesses and entrepreneurs, "The Excluded" . And that because the “withering regulations” are still including the portfolio invariant credit risk weighted equity requirements for banks, which operating on the margin, excludes the risky in favor of “the infallible”.

What would I do? Throw the risk-weights out and hope that history forgets our stupidity. Impose a 10 percent equity requirement on all assets, and then, to get us from where Europe’s banks are, because of Basel I, II and III, to where they must be, have the ECB “offer” to subscribe all equity needed to meet those new requirements. ECB should of course commit not to use the voting rights of that bank equity and to resell for instance 10 percent of those shares per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Sir any ECB-QEs, or excessive fiscal stimulus, before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

PS. Sir, if my Tea-with-FT blog post in November last year helped to push Simon Samuel to speak up against other members of their mutual admiration club… then I have been right insisting in sending you the letters you do not welcome or acknowledge.

If I could decide, this is what I would tell ECB to do with all Europe’s banks… I think

Sir, Tom Braithwaite writes: “Banks have been forced to become safer and more boring. By closing down the casino, regulators have reduced the chances of disasters”, “Investors might yet long for the days of Dimon’s swagger” January 13.

How on earth does Braithwaite know that? Why are we to believe that regulators, who allowed banks to leverage over 60 times to 1 on exposures to the AAArisktocracy, or even more to exposures to infallible sovereigns like Greece, know anything about reducing the chances of disasters?

Let me just start by reminding him that when playing roulette if you bet pennies more on a safe colors than on risky numbers… you are guaranteed to lose more, in the long run.

How does Braithwaite know that disaster is not happening at this very moment, because that small business or that entrepreneur who could save the economy of tomorrows Europe, is denied fair access to credit because these banks are given incentives to play it safe, to play on colors and avoid the numbers?

Braithwaite quotes Stefan Ingves the Chairman of the Basel Committee on Banking Supervision saying “Leverage is an inherent and essential part of modern banking system” and yet Ingves and his regulatory buddies do not understand that by allowing different leverages for different assets they are de facto imposing capital controls which re-directs the flows of credit to the real economy in many dangerous ways.

Sir, the more I see the urgency of correcting for the regulatory distortion imposed by the Basel Committee, and the risk and difficulties of travelling from here to there in terms of required bank equity, the more I believe we need to:

Impose a 10 percent equity requirement on all assets, and then have the ECB offer to subscribe all equity needed to meet those new requirements. ECB should commit not to use the voting rights of that bank equity and to resell 10 percent of it per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Any ECB-QEs before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

With Portfolio Invariant Perceived Credit Risk Weighted Equity Requirements for Banks, Europe, the whole G20, is doomed.

Sir I refer to the reports and warning about Europe’s economy, November 13.

As long as regulators insist on using Portfolio Invariant Perceived Credit Risk Weighted Equity Requirements for Banks, Europe, in fact the whole G20, is doomed.

What more can I say that I have not already explained to you in more than a 1600 letters about what these regulations with their misguided credit risk aversion cause, and that you prefer to ignore?

Europe, having ECB injecting liquidity instead of banks, is indeed a real recipe for disaster or waste.

Sir I refer to Claire Jones’ “Draghi’s go-it-alone style off the menu” November 7.

ECB “has announced that four private sector asset managers will begin buying asset backed securities on its behalf starting this month.”

Why does ECB trust more that will inject liquidity better in Europe’s economy than banks allowed to do so freely without regulatory distortions?

That question reveals the real dilemma. The credit-risk-weighted capital/equity requirements for banks, impede these to allocate credit efficiently and so bureaucrats, whether outsourced or not, who put absolutely no money at risk, have to step in and do the lending.

Europe, that is indeed a real recipe for disaster. In this case it is better for you that ECB sends a small check to each European, for a loan at .1% interest, payable in 20-30 years. Who knows, ECB might even recover more of its money doing so… at least in nominal terms.

PS. Mario Draghi still does what he can to evade his responsibility.

Forget the liquidity trap, Europe is mostly trapped in a regulatory trap.

Sir, Martin Sandbu opines that “we should take issue with the idea monetary policy has done as much as it can”, “Central bankers are ensnared in a trap of their own imagination” November 3.

And Sandbu believes ECB must “buy anything – but whatever you do, buy something” in order to get inflation going, in order to make real interest rates negative… “if that is what the economy needs fully to employ its resources”.

That sounds desperate and extremely dangerous… because that sounds like a recipe not necessarily for getting inflation going, but for the markets to lose their trust in the ECB, but more importantly so in the Euro.

But of course central bankers are ensnared in a trap, not even of their own imagination, but of their own doing.

Forget about liquidity trap when the real problem is a regulatory trap that stops liquidity from going to where it should be going in the absence of the trap… and current credit-risk-weighted capital requirements for banks do just that.

Sandbu writes that ECB “typically changes the money supply by offering loans to banks rather than buying financial assets – making monetary expansion dependent on banks’ willingness to take up the offer.”

So? Why does not ECB better push regulators into using a simple non-distortive leverage equity ratio for all banks independent of their assets… and then inject billions in preferred shares into the European banks? Those shares could have a clause making them redeemable in 30 years time.

That way, the day after, banks could at least again lend to the medium and small businesses, entrepreneurs and start-ups, something they cannot currently do because of an outright stupid suicidal bank regulation.

Martin Wolf, it is not Europe’s banks which are too feeble to spur growth. It is their regulators who are.

Sir, I refer to Martin Wolf’s “Europe’s banks are too feeble to spur growth” October 29.

Wolf writes: “High leverage impairs the ability to finance growth. A responsibly managed yet highly leveraged institutions would seek to… hold highly rated assets. This is likely to militate against the productive investments the Eurozone needs”.

Indeed… but why is it so Mr. Wolf? Could it possibly be (as I have so mono-thematically explained to you for soon a decade) because feeble bank regulators decided, for no good reason at all, banks needed to hold more capital/equity against highly rated assets than against more “risky” productive assets?

Mr. Wolf, tell us, what responsibly managed bank should not responsibly look to obtain the largest risk adjusted returns on its equity?

Of course some bankers might have lobbied strongly for some ultra-low capital requirements, but it was the regulators who approved these… and so stop blaming the banks so much, and join me in blaming those who are most to be blamed.

Of course Europe’s banks have “too little capital”, and that is mostly because too little capital was required of them when lending to what was officially perceived as safe. But it is not the too little capital that mostly hinders banks from helping the real economy… it is the distortion produced by the credit-risk-weighted equity requirements.

If Europe does not rid itself of those feeble bank regulators, very fast, it could soon be game over for Europe.

All Europe’s banks would fail a test of whether they allocate bank credit efficiently.

Sir, Gavyn Davies writes “Stress tests will not themselves bring the Eurozone back to health” October 28.

He is absolutely right, because for that to occur it would all have to start with a test of how European banks are helping the Eurozone, and since the credit-risk-weighted capital requirements that caused the current deep economic malaise are still in place, banks would clearly fail that test.

Davies also correctly holds that “not all of the problems of a diverse banking system can be fixed at once”, but, unfortunately, all the banks can be made to have problems, by means of just one systemically faulty bank regulation.

And so when Davies writes “banks need to restore their risk appetite, having spent several years preferring to build their capital buffers rather than lending to risky small businesses” I must ask where has he been. Does he not know that banks, because of credit-risk-weighing are primarily building up their capital buffers, precisely by not lending to anything that requires them to have more capital?

Davies, concludes with “The best that can now be said is that a dysfunctional banking system should no longer be a fatal impediment to growth, on the optimistic assumption that the [fiscal, monetary, structural] and other measures that Mario Draghi has promised – including a sizeable monetary stimulus - come on stream.”

No way! Doubling down on a still so dysfunctional banking system would just waste away a sizable monetary stimulus- making it all so much more dangerous for Europe.

Europe, it is your bank regulators who most must be stress-tested!

Sir, I refer to all the writings in FT on October 27 about the stress tests of European banks in order to ask you:

If all banks that failed had only given loans to infallible sovereigns, then they would have classified as the safest. Do you really think that would have helped investors to have confidence in Europe?

Frankly, regulators who can come up with something like The Basel Committee’s Bank Stability Decree, have no moral right to test any bank.

Sir, even a hedge fund founder is quoted stating: “We now know that we can have a 5 per cent contraction in the eurozone economy and the banks will still have more than 8 per cent capital – that is very positive for the sector.”

What? If lucky, it might be more than 8 per cent of capital of the-risk-weighted assets… and that, as you should know by now, can be extremely faraway from meaning the same thing.

And, why after spending so many million dollars on consultants, did they not even give us the so easy calculated leverage ratio?

And talking about the consultants, we should have their names, so as to know who to hold accountable, as paid collaborators of what seems more to be a farce concocted by regulators to save face.

PS. Sir, you who have been so mum on this issue, show me anything perceived or officially stated as "risky" that caused the turmoils in the European banking sector.