The dangerous distortions in the allocation of credit that risk weighted bank capital requirements cause, is seemingly something that shall not be discussed.

... not even by those former central bankers who refuse to fade away

Sir, with respects to “the attack on the European Central Bank’s by six former central bankers” you write “Only one thing can match the stature of the complainants and that is the hollowness of their complaint.” “The euro’s guardians face a roar of the dinosaurs” October 7.

In their memo we read: “The negative impact of the ultra-low interest environment extends from the banking system, through insurance companies and pension funds, to the entire financial sector. The re-distribution effects in favour of owners of real assets, create serious social tensions. The young generations consider themselves deprived of the opportunity to provide for their old age through safe interest-bearing investments… and also furthers a ‘zombification’ of the economy”

Of course in the short run low and even negative interest rates benefit those who borrow more than those who save but, hopefully, one always hopes that will be made up in the future, by means of increased productivity and economic growth.

Significantly though the “dinosaurs” left out mentioning the distortions in the allocation of credit produced by the risk weighted bank capital requirements, which benefits especially the borrowings of sovereigns, that which FT does not want to discuss either. 

I ask. Where would the Europe/Eurozone’s interest rates on sovereign be if banks, as it was for around 600 years before 1988’s Basel Accord, needed to hold the same amount of capital against loans to the sovereigns, currently 0%, than against loans to unrated European entrepreneurs, currently 8%? Dare try thinking about that. Ask your own journalists to try to answer that question.

And neither do they discuss the special case of the 0% risk weight assigned to all Eurozone sovereigns’ debts, even though none of these can print euros. Could it be because of a bad conscience?

And with respect to the young generation what it really should be up in arms against, are the much lower capital requirements for banks when financing the safer present than when financing that riskier future on which its good outcome the young really depend on.

@PerKurowski

The Emperor in Basel is freaking naked!

Sir, all general bank crisis, as well as most individual bank defaults, have NOT resulted from lending or investing excessively in something perceived as risky, but from either unlawful behavior, or the excessive lending or investment in what was wrongfully perceived as not risky.

Against that backdrop… can you please explain to me the rationale of having capital requirements for banks based on perceived risk? If anything, should these not then be higher for lending or investing in that which is perceived as not risky?

But No! The regulators in the Basel Committee and the Financial Stability Board, they insist on discriminating against those bank clients and operations their official risk-perceivers, the credit rating agencies, perceive to be risky, or have not looked at... like the small businesses or entrepreneurs we wish and need to have access to bank credit. And, in doing so they also, of course, become the most important pushers of excessive lending or investment in that extremely dangerous zone of what is officially perceived as not risky.

And that is why, frankly, I cannot, for instance, muster as much enthusiasm as you do, for a Mario Draghi.

Why we can not leave bank regulators to regulate on their own!

Sir Nout Wellink’s declaration that “Basel II is sophisticated and sorely needed” April 10, is a splendid example of why we cannot leave the traditional bank regulators regulating banks on their own. The just are digging ourselves deeper in the hole we are in!

Of course there is nothing wrong with sophistication as long as it does not take away from our understanding of what is going on, which it will be the end result, which makes further mockery of market transparency; and as long as it does not create new artificial market advantages, which it will by favouring the big banks and the continuation of our craze of putting ever more eggs into fewer basket; and as long as it does not create new systemic risks, which it will as long as “to err is human” applies, just like it applied in the case of the credit rating agencies.

But, what I most object to is that “there will be greater differentiation in the capital requirements for high risk and low risk exposure”. Who on earth told the bank regulators that the only role of banks was to avoid failing and that for that purpose you had to create an additional regulatory bias against risks, more than the natural bias against risk that already exists in the market? No, we do not need the banks to increasingly finance only securitized consumers and public sectors around the world just because that could be construed as having a lower risk of default. To do so could lead the world to default. If we are going to use default risk as a basis, then we better design the minimum capital requirements in terms of units of risk per decent job created.