Europe, Basel Committee’s risk weighted capital requirements for banks, is the kiss of death for your real economy.

Sir, Frédéric Oudéa, president of the European Banking Federation, writes: “The Basel Committee is targeting the degree of variability in how banks define the risks that ultimately determine their capital requirements. The highly technical nature of this topic should not divert attention from the fundamental question that lies behind the review: how, in the future, will European banks be able finance the economy and hence foster growth and raise employment?”, “New Basel banking rules’ impact on European economy” November 28.

But though Oudéa correctly argues that any review of current rules, “should not… disrupt the financing of the real economy”, he then does not tackle the “fundamental question”. That’s because be completely ignores, willfully or not, that the risk weighted capital requirements for banks seriously distorts the allocation of bank credit to the real economy.

In 1997 when getting some strange vibes about what was going on in the world of bank regulations I ended an Op-Ed with: “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

The risk weighting has added a dangerous layer of regulatory risk aversion that causes banks to no longer to finance the “riskier” future, only to refinance the “safer” past or present. Since risk taking is the oxygen of any development, these regulations, if continued, represent a kiss of death for Europe… and others

Now, anyone should be rightly concerned with that getting rid of the risk weighting would create such bank capital shortages that it would put a serious squeeze on bank credit. As a solution I have suggested grandfathering current capital requirements for all the banks current assets, and then apply a fixed percentage, like for instance 8%, on all new assets. That should of course include the public debt, since a 0% risk weight for the Sovereign and 100% for We the People, is a pure and unabridged unbearable statism.

Now, if regulators absolutely must distort, so as to think they earn their salaries, I suggest they use job-creation and environmental-sustainability ratings, instead of credit ratings that are anyhow being cleared for by banks.

@PerKurowski

Europe and US, care less about how your banks are doing, and more about how these can help your economies do better.

Sir, I refer to Martin Arnold’s “Top European bankers warn of US threat to their future” and 

Frédéric Oudéa's “Europe needs homegrown bulge bracket banks” October 12.

Arnold writes: “The comments by two of Europe’s most senior bankers underline the growing angst in the industry about its performance and prospects. European banks are cutting thousands of jobs, selling billions of euros of assets and repairing balance sheets — while US rivals are expanding and growing stronger.” And Oudea concludes: “Europe also needs a few large players with strong capabilities on financial markets”.

In essence that means a call for bank regulations to be relaxed in order to make some banks stronger and bigger. There is nothing bad with that, at least not with the “stronger” part. But that is not the main priority.

At this moment, both Europe and US, as well as other, need to cast away their concerns about how banks as an industry is performing, and think much more about how banks can best serve the rest of the economy. And if banks were able to do so, that would also serve their own best long term interests.

That should begin with throwing out the risk weighted capital requirements that doubles the sensitivity to credit risk perceptions, and thereby distorts the allocation of bank credit to the real economy.

I have no idea where this notion of banks being able to survive splendidly, independently of the state of the overall economy was born. It is not something new, in 1997, having had my first brief encounters with the risk-weighted capital requirements for banks that originated in Basel, I wrote the following in an Op-Ed:

“If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

@PerKurowski ©  J