Any new IMF managing director should at least know, as a minimum minimorum, that two current important financial policies are more than dumb.

Sir, I refer to John Taylor’s “Choice of new IMF head must not be dictated by the old EU order” August 12.

I have no problems whatsoever with all what Taylor argues and neither with IMF changing its bylaws to allow someone over 65 years to take up the post of managing director.

But I do have two very firm ideas about what the next managing director should know.

First, that the risk weighted capital requirements for banks, based on that what’s perceived as risky, like loans to entrepreneurs and SMEs, is more dangerous to the bank system than what’s perceived as safe, like residential mortgages, is more than dumb. These only guarantee a weakening of the real economy and especially large bank crises, caused by especially large exposures to something perceived, decreed or concocted as especially safe, which turns into being especially risky, while held against especially little capital.

Second, that to assign a 0% risk weight, as that which has been assigned by EU authorities to all eurozone sovereigns, and this even though these take on debt that de facto is not denominated in their own domestic printable currency, something which could bring down the Euro and the EU with it, is also more than dumb. 

Sir, I wonder if anyone of the G20 Eminent Persons Group, international worthies and the names Taylor mention understand and know this. And if they do, why are they silent on it?

@PerKurowski

There is a zero capital requirement for banks on AAA public debt

Sir, some define systemic risk simply as the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, but, that is in fact more the result of the systemic risks that originates from the interdependencies and the failures of the system itself.

John Taylor, in “Exploding debt threatens America” May 27, writes that he believes the debt projected level of US debt to be systemic. Yes indeed, the debt could be so large that it could bring us an awful inflation but, what really propels it as a systemic risk, is not so much its size but the fact that the current minimum capital requirements for banks, in the case of public debts rated triple-A, is an astonishing zero. This not only subsidizes the growth of public debt but also leaves the system totally unprotected.

This type of systemic risk led us to the precipice of the badly awarded mortgages to the subprime sector ,just as it will help to lead us to the precipice of governments too much in debt.