Anyone jumping ship on the delusion that risk-weighted capital requirements make banks safer and economies better, has a better chance to survive

Sir, Wolfgang Münchau discusses many delusions held by both Brexiters and Remainers, and argues correctly: “To make the best of Brexit, the UK will need to embrace a more entrepreneurial and innovative economy” “An old-fashioned economy heads towards a downfall” November 20.

But when he writes: “For Brexit to succeed the UK will end up becoming more — dare I say it — European”, I disagree.

That because when Münchau holds that Britain “has an entrepreneurial culture to build on”, that is unfortunately no longer the case. No country with an active “entrepreneurial culture” would ever have allowed the de facto anti entrepreneurial risk-weighted capital requirements for banks.

Sir, if I had to choose between a Britain that did not hold back its risk takers, and one that was comfortably living off a larger European market then, if thinking about my grandchildren, I would without any doubt prefer the first one.

As I see it the European Union, governed by unelected risk adverse technocrats, who like old soviet central planners paint from their desks roads to the future, is doomed to fail… and that no matter how much “Universities… work more closely with industry”. In that Europe, the faster you jump ships the better.

If I were a British citizen I would instead be calling out to Europe proposing a different EU. Who knows what answer I would get from Poland, Italy, Spain, Portugal and others? Why for instance should they stay with those who most benefit from a Euro made weaker by the weaker?

PS. For those who do not know me in the context of any European Union and Euro debate, perhaps the following Op-Ed could help as an introduction. 

https://perkurowski.blogspot.com/1998/11/burning-bridges-in-europe.html

@PerKurowski

Portugal might need everything to be perceived as risky, so as to stop the regulatory distortions of bank credit

Sir, Peter Wise mentions a “crucial ruling by Canadian rating agency DBRS next month on Portugal’s only investment-grade credit rating.” “IMF fears Portugal recovery is running out of steam” September 23. 

Again, with bank regulations that directly discriminate against the access to bank credit of SMEs and entrepreneurs, only on account of them being perceived as risky, as if those perceptions were not already considered by the banks, there is no way any other type of stimulus is going to be sustainable, and the economy not run out of steam.

If Portugal cannot free itself from these regulations, perhaps the best think that could happen to it is for everything to be downgraded and seen as equally risky.

That would at least allow for some more efficient allocation of bank credit to the real economy. That could give Portugal a chance to work itself out of that hole in which, as I see it, the Basel Committee on Banking supervision, with its senseless risk weighted capital requirements for banks, has helped to dig. 

How sad IMF refuses to understand how current bank regulations distort.

@PerKurowski ©

The ECB, to fix southern Europe, and to not mess up the rest more, might need to fire Mario Draghi.

Sir, Wolfgang Münchau writes about the credit crunch many small companies are facing, “The ECB´s priority should be to fix southern Europe”, April 8.

Münchau suggest that ECB, Mario Draghi, should relax collateral requirement for various classes of asset backed securities, backstop a massive lending program by the European Investment Bank to co-finance loans to small and medium sized companies, or undertake directly the purchase of corporate bonds on the primary and secondary market.

May I suggest just firing Mario Draghi and many of his other bank regulatory colleagues? I mean anyone not capable of understanding how allowing the banks to hold less capital when financing “The Infallible” than when financing “The Risky”, discriminates against the latter, especially in times of serious bank capital scarcity, is simply not capable enough to help out.

Would this make the banks more risky? Of course not! What is perceived as risky does never endanger banks, only what is perceived as absolutely safe does that.

Fat chance Mario Draghi and ECB will be able to help “The Risky”

Sir, Ralph Atkins writes about “the challenge the ECB faces in ensuring low official interest rates feed through into lower [bank] borrowing costs, especially for job-creating small businesses in countries such as Italy and Spain”, “Blow to ECB as widening loan rates hit south" April 1.

Current bank regulations allow banks to obtain immensely higher expected risk adjusted returns on equity with assets perceived as “absolutely safe” than on assets perceived as “risky”. The “risky” must therefore pay the banks more than usual in order to make up for that competitive disadvantage in access to bank credit created by the regulators.

Mario Draghi, the ECB president, and who as Chairman of the Financial Stability Board has been closely involved with bank regulations, has never even understood how current capital requirements cause the widening of the spreads between "The Infallible” and The Risky”

And so with respect to the possibilities of the ECB successfully meeting the aforementioned challenge I can only say… Fat chance!

The survival of Spain and Italy (and Portugal) is day by day being more in the hands of their respective shadow economies, their respective economia sommersa

Sir, no matter where you look in the developed world, you will find dangerous obese bank exposures to what was or still is officially perceived as absolutely not risky, like what was or is triple-A rated and the “infallible” sovereigns; and for the society equally dangerous, anorexic bank exposures to what is officially perceived as risky, like small businesses and entrepreneurs. Nevertheless the bank regulators insist on discriminating against ex-ante perceived risks. 

In this respect, when Robert Zoellick in “Europe is distracted by endless talk of firewalls” April 17, writes that “the survival of the eurozone now depends on Italy and Spain”, but, instead of trying to figure out how their private banks could help out, he recommends a minor capital injection in the European Investment Bank, I can´t help but to feel that the real survival of Italy and Spain (and Portugal) will, in its turn, depend on what the Italians and Spaniards (and Portuguese) can manage to do in their more real and less distorted shadow economies... their respective economia sommersa.

PS. That is specially so when in the official economy regulators apply perceived credit risk weighted bank capital requirements, which so much favors the access to credit of the sovereign over that of entrepreneurs and SMEs.

The Torturer and the Haircut

Sir, your “Europe must use borrowed time well” April 21, reminds us of how scary it is when we see someone calculating with complex formulas a sustainable debt level of a sovereign; just like a refined torturer calculating the pain tolerance of the tortured, to keep the poor bastard from passing out.

Also, who are the least hard for politicians to order a haircut? The sovereigns, their creditors the banks, the current voting tax payers, or the future generation of voting tax payers? Is it so hard to guess?

As always, the race is between postponement and realities-catching-up. As always, we are looking on with masochistic fascination, praying and biting our nails.

The small businesses are unfairly discriminated against by the regulators

Sir, Richard Milne in “The cogs are clogged” February 16 writes about the difficulties of the smaller enterprises to secure the funding they need but fails to even mention the regulatory discrimination they are exposed to.

One of the banks’ historical responsibilities has been to nurture the small businesses until they’re big enough to enter the capital markets, but that ended when the regulators, acting entirely on their own, decided that the most important role for the banks was to avoid taking risks and to that effect set up a system of capital requirements dependent the risk of defaults as perceived by the credit rating agencies.

In effect a bank when doing business with one of those entities that because of an AAA rating should not even need the assistance of the banks must put up only 1.6 percent in equity while, when doing precisely what it is supposed to do, helping the small businesses, it is required to have 8 percent in equity.

At this moment, when all the faulty AAA ratings ate up all the capital of the banks, those small businesses are discriminated more than ever, by this regulatory double whammy of not only having to pay for the additional risk premium the market ordinarily charges, but also having to pay the costs of the higher bank equity requirements.

That this issue of unjustifiable risk-discrimination is not among the first things currently discussed when considering financial regulatory reform is truly mindboggling to me.

Wrong answer!

Sir Malcolm Rifkind gives the wrong answer when saying that “Mugabe must not be allowed to go to Portugal” August 6, as the real question should obviously whether Mugabe, when in Portugal, should be allowed to return to Zimbabwe. Does not Portugal have a judge like Spain’s Baltasar Garzón? Mugabe with his dead wrong economic politics is knowingly decreeing the premature death of many Zimbabweans and if that is not a crime against humanity, what is?