ECB’s Mario Draghi’s star quality would evaporate had he to publicly answer some hard questions on bank regulations

Roger Blitz writes: “Mario Draghi, president of the European Central Bank, will be the star at the annual Jackson Hole symposium in Wyoming this year.” “Weak dollar remains centre stage” August 5.

Sir, if Mario Draghi, a former chair of the Financial Stability Board, and the current chair of the Group of Governors and Heads of Supervision (GHOS) of the Basel Committee, and therefore one of the most responsible for current bank regulations is the star of anything, that is only because he has never been made to fully answer some questions about current bank regulations in public, by his peers or by for instance FT’s journalist.

There are many many questions I could think of, but let me just indicate two:

First: Mr. Draghi. Do you not think that allowing banks to leverage more their equity with the net margins offered by those perceived safe than with those same margins when offered by those perceived risky; which means it is easier for banks to obtain higher returns on equity with “the safe” than with “the risky” does not distort the allocation of credit to the real economy?

If Draghi answers no, then there is nothing to do, as he would be evidencing he is clueless about finance on Main Street. If he answers yes then follow up with: Don’t you think this could be dangerous for the real economy and who authorized you and your colleagues to do so?

Second: Mr. Draghi, obviously current risk weighted capital requirements for banks, more perceived risk more capital, less risk less capital, indicates you the regulators believe that what is perceived as risky, is what is risky for the bank system. So, will you please tell us when there has ever been a bank crisis that has resulted from excessive exposures to what was perceived as risky when placed on the balance sheets of banks? As far as I gather from history all bank crisis, no exceptions, have been caused by unexpected events, criminal behavior or excessive exposures to what was perceived as safe when incorporated on banks’ balance sheet but that later, ex post, turned out to be very risky.

If Draghi answers yes, then he is deaf and has not heard the question. If he answers no, then ask him to explain why Basel II assigned a standard risk weight of 20% to what was AAA to AA rated and a 150% to what was rated below BB- and would therefore not be touched by bankers even with a ten feet pole.

Sir, Mario Draghi at ECB and others at the Fed with QEs and low interest rates, have just been kicking the 2008 crisis can down the road. The risk weighted capital requirements have caused that can to roll on the wrong roads. That is an act of terrorism against our economies.

@PerKurowski

Our younger generations have much more valid reasons than savers and bankers to profoundly resent bank regulators

Sir, Patrick Jenkins reports that the world’s savers and bankers have every reason to resent the posse of policymakers, one of the most powerful quangos in the world, the Group of Central Bank Governors and Heads of Supervision — GHOS for short, and that will meet on January 8”, “Time for GHOS train to leave the shadows and reconnect” January 3.

At the meeting the group will discuss “the future direction of global financial regulation” the “system of risk-weighting the assets on banks’ books” and “the riskiness of banks’ mortgages and SME lending”

Well no. Those who most should resent GHOS (and the Basel Committee for Banking Supervision) are the young.

These irresponsible bank experts, without considering the purpose of banks, and without any empirical studies on what causes bank crises, decided that it was much better and safer for banks to finance “safe” houses than to finance “riskier” SMEs.

That translated into bank financing more the basements where unemployed young can live with their parents, than financing the job creation that can allow the young to be able to afford becoming parents too.

To top it up, they also decided that it was much safer to lend to the governments than to the private sector.

I have for more than a decade and in more than 2.500 letters tried to convince FT to help me to ask these “bizarrely secretive” regulators some very basic questions. Unfortunately until now I have had no such luck.

@PerKurowski