World Bank’s “Ease of doing business” rankings, ignores the regulatory distortion of bank credit

Sir, Rachel Sanderson writes: “Competitiveness has improved… Last year Italy climbed nine places in the World Bank’s “ease of doing business” rankings”, “Italy’s business chiefs buckle up for a shock as reform vote looms” October 20.

That World Bank report, great in many ways, with respect to “getting credit” does unfortunately omit considering whether bank regulations distort the access to bank credit or not.

And so the real main-street value of any recorded “ease of doing business” improvements can come to naught, if, for instance SMEs and entrepreneurs do not have fair access to bank credit; something which they don’t have in Italy, or in any other country that has been smitten by the Basel Committee’s dangerous and foolish risk aversion.

The pillar of current bank regulations is the risk weighted capital requirements. It allows banks to leverage their equity and the support they receive from society differently depending on the ex ante perceived risk. Less risk, more leverage, higher risk adjusted returns on equity.

So the following risk weights should suffice to understand what is going on… that is if you want to understand.

Risk weights: Sovereign 0%, AAArisktocracy 20%, residential housing 35% and the unrated “risky” SMEs and entrepreneurs, the fundamental drivers of the economy, 100%. What more could I say? Perhaps reminding anyone interested that no major bank crisis ever has been caused by excessive exposures to something that was ex ante perceived risky when booked.

Had these regulation been in place when banks originally began to operate in Italy, none of them, and neither the economies, could have developed as they have. 600 years of real banking and soon 30 years of loony Basel Committee reigned banking. Italia capisce?

@PerKurowski ©

Selling the notion of being able to make banks safe, at no cost, is pure unabridged populism.

Sir, I refer to Tony Barber’s “Renzi is the last hope for the Italian elite” January 2.

In it Barber attacks populism and writes about how important it is for Italy that “Mr Renzi’s reforms of the tax system, labour market, judiciary, public administration, electoral system and much more succeed”.

Again there is no reference to the unabridged populism contained in the notion that you can make banks safe, at no cost.

That populism is imbedded in the current risk-weighted capital requirements for banks; which allow banks to earn much higher risk adjusted returns on their equity on exposures perceived as safe than on exposures perceived as risky; with not one iota of regulatory concern about how useful for the economy such “risky” exposures could be.

These regulations, carried out in the name of saving the taxpayer from having to pay more taxes, is one of the most important obstacles that is hindering the taxpayers from receiving more taxable income.

That regulatory populism is doing as much damage to Italy, the Eurozone, Europe and the Western World as anything else. Without those regulations we might have had a bank crisis, but none as big as the current that resulted from allowing banks to leverage immensely with what was perceive as safe, like “infallible sovereigns” as Greece, members of the AAAristocracy, and the real estate sector in Spain.

If Renzi is not capable of demolish these populist bank regulations, Italy might still make it, but that would only be as a result of the strengthening of la banca sommersa.

FT, supporting the idea that Basel III is making our banks and our economies safer, is to support populists.

At a growth summit Matteo Renzi and Francois Hollande should just ask ECB’s Mario Draghi a simple question

Sir, I refer to Hugh Carnegy’s report “Hollande presses for growth summit” August 29, and I would strongly suggest Matteo Renzi and Francois Hollande, they ask Mario Draghi the following.

“Mr. Draghi. As you were for years the Chairman of the Financial Stability Board and therefore an expert on bank regulations we would like to ask a simple question.

Currently European banks are not lending to medium and small businesses, entrepreneurs and start-ups because that type of lending is considered to be risky by regulators, who therefore require banks to hold much more of that extremely scarce bank capital (equity) against that type of loans than against other supposedly safer loans. And that we would hold makes it impossible for our economies to grow in a sturdy way.

So can you please explain to us, in an easy way, why bank lending to medium and small businesses, entrepreneurs and start-ups is considered risky? We ask so because one could think that having banks not lending to these borrowers would be something way riskier for Europe and our economies.

Could it not in fact be so that the risk of your risk-weighted capital requirements creating distortion in the allocation of bank credit is far more dangerous than what the borrower’s credit risks represent to banks?

And while you’re at it Mario, please explain to us what is the reasoning behind the risk-weights? For instance are these to reflect the possibilities of a borrower not repaying the bank, or the possibilities of a bank going under because of a borrower does not repay? If the latter it would seem to us, humble laymen in these matters, that what is perceived to be safe and therefore is lent to much more by the banks represents more real danger… not the skimpy lending to those perceived as “risky”.

PS. FT, dare to question the sanity of current regulations.

If Wolfgang Münchau is right, is it not better for Italy to default and get it over with?

Sir, Wolfgang Münchau writes that “no matter what Mr Renzi achieves [Italy] would be headed for certain default if the eurozone’s future inflation rate were to fall from a previous average of 2 per cent to 1 percent”, “Europe’s new boys face a tough fight on austerity”, April 7.

If Italy defaulting or not depends on Europe producing inflation is true, which I hope it is not, since it seems to convey the bad message that Italians are not the masters of their own future, would it not be better for Italy to default, clear the air, and start afresh? I mean this because arguing that Italy needs inflation to repay its debt, is to say that Italy will actually, de facto, default, through inflation, in real terms, on all those holding Italian debt.

And I also say these because Münchau writes that he “fails to see how the alternative can be made to work” that of a “primary surplus – before interest payments –of at least 5 percent on average for 20 years”.