The bank capital requirements for Greek banks when lending to its government, should be the same as when lending to Greek entrepreneurs.

Sir, Kerin Hope reports: “Christos Staikouras, the finance minister, told the Greek parliament the Hercules scheme would boost the stability of the country’s financial system and open the way for increased lending to fund the real economy”

In my opinion removing non-performing loans do not guarantee increased lending to fund the real economy. For that to happen the bank capital requirements for holding Greek public debt should be the same as when lending to the real economy. As is, all it will do is to allow banks to easier continue funding the Greek government, all in accordance with that implied Basel Committee principle that government bureaucrats know better what to do with bank credit they’re not personally responsible for, than for instance Greek entrepreneurs.

For having assigned Greece’s government a zero risk weight, even though Greece cannot print euros on its own, if I were a Greek citizen, I would try to haul the European Commission in front of the International Court of Justice. That caused and still causes the excessive borrowing by Greek governments not especially known for resisting temptations, something which has mortgaged the future of all Greek grandchildren.

https://teawithft.blogspot.com/2018/09/in-case-of-greece-eu-violated.html

@PerKurowski

The regulators are responsible for the doom loop between Italy’s heavily indebted public finances and its banks

Sir, David Crow and Rachel Sanderson write: “Filippo Alloatti, senior credit analyst at Hermes, said that [Italian] banks were “super long” on Italian government debt, which accounts for between 13 and 15 per cent of their total assets… Such heavy exposure has revived the spectre of the doom loop, which describes the inextricable link between Italy’s heavily indebted public finances and its banks”, “Italy’s lenders feel heat as doom loop fears return” October 12.

In a letter published by Financial Times in November 2004 I asked: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?”

And one of the most surprising things for someone like me who plays no formal role in the regulation of banks is why the world did not object to the horrors of banks regulators that, with Basel I in 1988, for the purpose of risk weighted capital requirements, assigned a risk weight of 0% to the [friendly] sovereign and one of 100% to the citizens.

That this regulation that so clearly favors crony statism was introduced a year before the Berlin Wall fell is evidence of how much can go wrong, if we allow unelected officials to engage in groupthink within a mutual admiration club.

Central bankers and regulators around the world have, with their especially low capital requirements against sovereigns, been setting our bank systems up to an especially monstrous crisis, and still they congratulate themselves for more resilient banks.

Just like they have set us up, to an equally especially monstrous disaster in waiting, with their especially low capital requirements for banks financing the purchase of houses; which has transformed houses from being safe homes into risky investment assets.

Central banks have of course made it all so much worse by keeping ultra low interest rates, and pouring huge amounts of QE liquidity on this structurally faulty regulatory fabric.

Our banks have been painted into a corner. What would happen if regulators suddenly announced that the risk weight of the sovereign had to increase from 0% to a meager 1%? 

If Italy goes down the tube will financial authorities lay the full blame on Italy, just as they did with Greece after they doomed it with that odious 0% risk weight?

Sir, you know I feel the Financial Times has kept complicit silence on all this.

@PerKurowski

The main challenges for Greece are the same main challenges for the Euro and for EU

Sir, I refer to Jim Brunsden’s and Kerin Hope’s “Athens faces challenging road ahead as it reaches milestone exit from bailout programmes” August 20.

The authors summarize what Greece must do in order to grow out of its current tragic predicaments with: “In exchange for a big debt relief deal in June” Greece must “Hit the targets” like sustaining “a primary surplus of 3.5 per cent of gross domestic product annually until 2022.” “Stimulate the economy”, “Fix the banks” “Create an investor-friendly environment” and “build investor confidence by completing flagship privatisations”

What? “In exchange for a big debt relief” That’s laughable! Is it not more the case of cleaning up bank creditors balance sheets, or being able to keep Greek credits on the books, relief? How much would all EU creditors of Greece have been able to collect from Greece? Would EU have invaded a fellow EU nation?

No, if Greece is to have a chance of meeting any of its commitments then at least two things must happen: 

First: The EU must find a sustainable way for solving the challenges posed by the Euro. When the Euro was being launched in an Op-Ed I wrote: “Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive” And Sir, that bomb, now soon 20 years later, has not been deactivated, and EU has wasted precious time on much more comfortable issues. EU needs to find sustainable solution to it, just pushing the debt-cans forward will not do.

Second: If EU wants to survive and become a Union, then it needs to act as an adult and learn to assume the costs of its own mistakes. Let me be clear, again for the umpteenth time. Had not EU authorities assigned a risk weight of 0% to the governments of Greece, and a 100% weight to the Greek tax paying citizens, then the difficulties of Greece, in comparison to those it now suffers, would be minuscule.

Sir, those opposed to Brexit, the Remainers, should be working at that. Otherwise the Brexiters might soon tell them: “You see, thanks to us, we got out of EU, in the nick of time.

@PerKurowski

The severity of Greece’s financial crisis was caused, directly, by totally inept bank regulators

Sir, Jim Brunsden, Mehreen Khan and Kerin Hope report “Greece is approaching a momentous moment: the end of eight years of international bailouts that forced the country into unprecedented belt-tightening in exchange for a cash lifeline from eurozone governments and the IMF” “Eurozone and IMF are still to agree a package as deadline approaches” April 27.

What I find impossible to understand is how European bank regulators, and European central bankers, have been able to hide from the Greeks the fact that they directly caused that crisis to be so much worse than it would have been, had they not meddled.

For the purpose of the capital requirements for banks, they assigned Greece’s public debt a 0% risk weight, and this as if Basel II’s credit rating dependent minuscule risk weight of 20% was not bad enough.

Would Greece have found itself in such troubles had banks needed to hold the same capital when lending to the Greek government than when lending to Greek citizens? Absolutely not!

Those retirees protesting against pension reforms, and all those young Greeks who have had to left their country in order to stand a better chance in life, should now all jointly be protesting in Basel against the Basel Committee of Banking Supervision, the Financial Stability Board and all bank regulators.

https://teawithft.blogspot.com/2015/06/europe-you-want-truth-it-was-not-euro.html

@PerKurowski

Greece should be ashamed of presenting public sector pensions as a deal breaker, instead of youth unemployment.

Peter Spiegel and Kerin Hope report on FT’s front page that: “Mr Tsipras insisted he would continue to resist the cuts to public sector pensions demanded by creditors” June 18.

Sir, if I was a young unemployed Greek, I would go mad if I saw that the point of honor for my government, in order to negotiate or not with its creditors was the payment of the pensions of the public sector. I don’t understand how it can get away with this… or have all young Greek with any initiative already left Greece.

If I was Tsipras the following is the point I would make… or the line I would draw.

Europe, our bank regulators in the Basel Committee for Banking Supervision, all picked by you and none by Greece, decided that banks needed to hold much less capital when lending to our government, than for instance when lending to any unrated European SME.

And that meant that banks could leverage their equity and the support they got from the society much more when lending to our government than for instance when lending to any unrated European SME.

And that meant that banks could earn much higher risk adjusted returns on their equity when lending to our government than for instance when lending to any unrated European SME.

And so of course banks lent too much to our governments and too little to our SMEs.

If Greece wants to get out of its current predicament, and to be able to offer its youth good employments, these stupid risk adverse regulations must be reversed.

But that takes a lot of bank capital and we need you to helps us re-capitalize our banks. By the way you have the same problem with your banks.

@PerKurowski

“The Risky” Greeks and Germans, should ally to request from both of their governments, a vital structural reform.

Sir Tony Barber and Kerin Hope write that “Greek banks rely on the European Central Bank for favourable funding arrangements, which the ECB has warned it will halt without a new agreement between Athens and its creditors” “Greek leftists’ victory throws down challenge to euro establishment”, January 26.

And I just wanted to ask: “Who do small Greek businesses and entrepreneurs rely on for their funding arrangements, if Greek banks are precluded from lending to them, as a result of the credit-risk-weighted equity requirements imposed by the Basel Committee?

It is also reported that “Germany’s central bank president Jens Weidmann said last night he hoped the new Greek government would continue to tackle its structural problems”.

In this respect I can only hope that the “risky” Greeks form an alliance with the likewise perceived “risky” German small businesses and entrepreneurs, in order to require from both of their governments, the structural reform that ends the current odious discrimination against “The Risky” when accessing bank credit.