Italy, there are very important lessons from the bank crisis that regulators do not want you to learn.

Sir, Ferdinando Giuglano writes: “banks with more equity and fewer bad loans on their books are better-equipped to lend to dynamic start-ups, which will drive economic growth in the future” “Italy resists Brussels’ tough love on banks” January 18.

That sounds so right, but unfortunately it is not. “banks with more equity and fewer bad loans” will still prefer to go for what their equity could be leveraged more with because that is how they maximize their expected risk adjusted returns on equity. And that means lending to what is perceived, decreed or concocted as safe and not to usually risky dynamic start-ups.

Giuglano also writes: “Italy’s lenders are saddled with around €350bn in non-performing loans — the product of the economic crisis and a stream of poor lending decisions.”

How sad that there is no research on the origins of those performing loans. It would be extremely useful to see which problem loans result from which cause in order to understand what happened. Without having access to any data I would bet that the loans perceived as safe, and against which banks had to hold little capital, represent the largest percent of poor lending decisions, and the loans that might be consider risky are those suffering the most from the economic crisis… among other because banks, scarce of capital, are forced to get out of these.

There are things about bank regulations that regulators do not want us to learn. And as a consequence, we still suffer from the mistakes.

Sir, I see Giuglano is a commentator for La Repubblica. Would he help me ask his Italian bank regulators the following very simple and basic questions? Depending on their answers Italy might want to sue the Basel Committee for Banking Supervision on the grounds of very negligent regulatory behavior. 

@PerKurowski

Failed bank regulators, Mario Draghi, FSB, should not be given a chance, ECB, to cover up for their mistakes, Greece

Sir, Ferdinando Giugliano, Sam Fleming and Claire Jones write: “Mr Draghi is adamant that rules, not politics, have dictated its approach to Greece and other member states.” “Peak Independence?” November 9.

Thomas Hoenig’s the vice chairman of FDIC in a speech delivered on November 5 stated: “Some sources of risk undoubtedly have been fed by current regulations designed to direct banks’ activities in accordance with regulators’ views. For example, banks levered up on sovereign debt of nations such as Greece due to the zero risk-weighting given by “risk-based” rules.”

Clearly FDIC’s vice chairman agrees with what I have been saying for years, namely that it was the Basel Committee, and their associates, who did Greece in.

Mario Draghi the now President of the European Central Bank and the former chairman of the Financial Stability Board, should never have been placed in a position where he could try to cover up for his participation in the mistakes that brought Greece down.

As is the fatal credit risk weighted capital requirements for banks still conspire against all Greek SMEs and entrepreneurs having fair access to bank credit, in order to help their land crawl out of the hole its in.

PS. When I think about all those “risky” who because of regulators have not had fair access to bank credit in order to try to create the new jobs the new generation need… I get so… sad/mad

@PerKurowski ©

Capital controls imposed by bank regulators caused the problem that threatens to push Greece out of the Eurozone.

Sir, Ferdinando Giugliano writes: “Greek authorities have imposed sweeping capital controls to prevent a collapse of the banking system that threatens to push Athens out of the Eurozone. But with economic activity grinding to a near halt and the country’s banks still bleeding deposits, the price of these extraordinary measures is becoming apparent… The downturn is bound to curtail tax revenues, worsening the Greek government’s dire finances”, “Capital controls squeeze a suffocating economy” July 3.

That, though entirely correct, does not tell the whole story. It was when regulators introduced credit-risk-weighted capital requirements for banks, which distorted the allocation of credit to the real economy, that an inconspicuous and dangerous form of capital controls was introduced. And since the lowest risk-weights were assigned to sovereigns (governments), the greatest beneficiaries of such controls were statist ideologues and government bureaucrats, which was a very inconspicuous form of clientelism too.

For instance, although admittedly it must be hard to believe, between June 2004 and October 2009, European banks were allowed to leverage their capital 62.5 times to 1 when lending to the Greek government. And of course that caused the banks to lend too much to a government that found it too hard to say no to credit.

But now many governments, like Greece, need to build up their tax-base, something that requires allowing ordinary SMEs and entrepreneurs to have fair access to bank credit. And this has created a conflict for those statist ideologues and government bureaucrats who feel they still have room to benefit from these regulatory advantages. How are they supposed to recommend their less lucky-colleagues to give up, what they had all considered to be entitlements gained for their class written in stone?

When the young get hold of what bank regulators are doing to their future, they will revolt… Ättestupa?

Sir, Ferdinando Giugliano writes about an “unholy alliance in support of the elderly” that expresses itself in “sparing pensioners and older workers from the cuts their governments need to make as they seek to reduce their budget deficits.” “Left and right across the bloc unite to protect pensioners” June 26.

He states: “many pension systems will pose a rising burden on government spending. But since the age of the median voter will also rise, it will become more tempting to penalise younger workers — for example by raising taxes and social security contributions — rather than cut pension benefits…reducing the incentive to work and, as a result, lowering growth. This would undermine the stability of the very pension systems they vow to protect.”

That is correct, but it is even worse than that. In essence, by means of the credit-risk weighted capital requirements for banks, regulators have imposed on banks investment/lending criteria much more appropriate for pensioners with few years life expectancies, than for the young who need much more risk-taking in order to have a chance to obtain jobs and be able to enjoy reasonably good retirements.

It is all so unsustainable. There is no way that when the young finally understand the hurt that is being done to them, that they will not revolt… and then perhaps suggest to us the reinstatement of “Ättestupa”

Anyone knows in what those “targeted corporate cash piles” are currently invested in?

Sir, I refer to Ferdinando Giugliano’s “Corporate cash piles targeted in hunt for growth”, February 10.

It is hard to undersand all the implications of for instance taxing those cash piles, if you do not really know in what those cash piles are currently invested in… because one thing is for sure, that cash is not really cash under some corporate matrasses… Who knows, they could even be invested in public debt at negative rates. And that would of course require a rethink of the whole issue.

If government actions induces the mobilization of all those $3.5tn in cash reserves held by non-financial companies in the world that Giugliano writes about, that sure sounds like a large wave you would want to keep a very close eye on.

What is a European bank to do, but to help inflate the sovereign debt bubble and pray?

Sir, I refer to Claire Jones and Ferdinando Giugliano reporting “Draghi signals imminent action to combat eurozone inflation” May 9.

So what is a European bank to do if there is more liquidity, the ECB pays nothing on deposits, and it has no capital to meet the capital requirements for lending to anyone else but to sovereigns? It has no choice but to help to inflate the sovereign bubble… and of course join whole Europe in prayers for that these central bankers know what they are doing.

As you know... since they do not understand that risk-weighted capital requirements for banks creates huge and dangerous distortions in the allocation of bank credit, at least I do not think they do know what they are doing.