Sometimes, quite often, a government’s help costs you more than it is worth

Sir, Sarah Gordon with respect to the possible consequences of Brexit for small business writes: “The British government has failed to provide the support that is needed” “Aloof state abandons UK small businesses to their Brexit fate” October 18.

Since any government assistance way too often goes hand in hand with having to waste your time, or your money paying their crony consultants for a lot of tasks not necessarily relevant to the problem at hand, I’m not really sure small businesses are here net losers as a result of that lack of support.

Besides what’s to be expected from a government that allows banks to hold much less capital when lending to the sovereign and financing house purchases, than when lending to small businesses?

@PerKurowski

To allow banks to regain public trust and better serve the UK economy, begin by explaining how their regulators distorted banking.

Sir, you write about “the highly concentrated nature of the UK system, which is dominated by a handful of large institutions, with balance sheets skewed towards mortgage lending and other forms of consumer finance” and of a popular resentment of banker’s pay, “Corbyn’s calculated ‘threat’ to the banks”, December 2.

Banks’ balance sheets are skewed towards less-capital or very high risk-premiums, like lending to the sovereign, mortgage lending and other forms of consumer finance

Banks’ balance sheets are skewed away from what requires holding more capital and cannot afford to pay too high rates, like SMEs and entrepreneurs.

If you required banks to hold as much capital for all their assets as they must hold when lending to SMEs and entrepreneurs, then the story would be much different.

If you allowed banks to hold slightly less capital against loans to SMEs and entrepreneurs than against all other assets, that would more than compensate for the lack “of community banks or Sparkassen”; and introduce such economic dynamism that it could more than help you to confront any Brexit difficulties.

If banks needed to hold more capital in general, and therefore needed to compensate shareholders more, then there would be less available space for current abnormal banker bonuses. Ask Sergio Ermotti how much he has to thank regulators for his bonuses.

So, how to ensure that the banking sector can regain public trust and better serve the needs of the UK economy? Sir, why not begin by explaining what the bank regulators have done. We can of course not ask the bankers to explain that.

Oops, but that would mean you would have to explain why you have silenced my soon 2.700 letter to you on this, and that could be too embarrassing for one with your motto.

A brief aide memoire

@PerKurowski

If kicking the can forward does not come with changing what caused the crisis, it will roll back and trample you

Sir, Wolfgang Münchau writes: “Herein lies the true tragedy of the ECB asset purchases… the ECB may never be able to stop them’, “An ailing eurozone still requires extreme treatment” October 30.

Europe is extremely dependent on bank lending and with the risk weighted capital requirements for banks regulators have hindered banks from lending to what the economy most need banks to lend to, namely small and medium sized businesses and entrepreneurs.

Their risk weights for their capital requirements says it all: sovereigns 0%, AAA rated 20%, mortgages on residential houses 35% and the SMEs and entrepreneurs 100%.

Did those perceived as risky SMEs and entrepreneurs cause the crisis? Of course not! They never do.

And keeping in place that same regulatory discrimination against the risky, has guaranteed that most stimuli imbedded in the ECB purchases of assets has not been able to go to where it could most help the economy. Ergo, Europe has a weak economy.

PS. Long term benefits from a hard landing

@PerKurowski

Mme Lagarde, IMF owes Greece and it’s creditors, to explain and correct what was done wrong with bank regulations

Sir, Shawn Donnan writes: “There is broad agreement that the fund and its European partners badly miscalculated the extent of the negative impact of the punishing reforms and severe austerity imposed on Greece”, FT Big Read IMF “Lagarde eyes new act in Greek drama” August 14.

In 2011 during a Civil Society Town Hall meeting at the IMF I asked Mme Lagarde: “If bank regulators had defined a purpose for banks before regulating, we might have had a very different bank crisis, but not as large, systemic, and dangerous as this one…when are you going to require the regulators in the Basel Committee to openly and explicitly define the purpose of our banks… to see if we all agree? 

And Mme Lagarde answered: “My sense is that the most critical mission for the banks--and that is what we are trying to say when say that banks have to rebuild their capital buffers--is to actually finance the economy, first and foremost, and that should be really the critical mission”.

As is, now, some years later, banks still have to operate under the influence of credit-risk-weighted capital requirements, something that of course has absolutely nothing to do with adequately “financing the economy”.

So how can IMF or its European partners get anything right about Greece, if it does not want to acknowledge, or even dare to understand, how current regulations distorts the allocation of bank credit?

Those distortions, by favoring so much public debt, caused the Greek tragedy and, by discriminating against the fair access to bank credit of the “risky”, like SMEs and entrepreneurs it, stops the Greek tragedy from ending.

Mme Lagarde: IMF owes the Greek, and Greece’s creditors, to explain and to correct what was done wrong when regulating banks. That must come before anything else.

What I would do? Make sure banks needed to hold slightly less capital when lending to the private sector than when lending to government bureaucrats.

@PerKurowski