Europe’s economists and politicians fail to see the risk of economies growing with carbohydrates and without proteins

Sir, Stephanie Flanders writes “Growth is not nearly strong enough in the eurozone at the moment and it is unlikely to be a lot faster in the coming year. With consumption and consumer confidence picking up and unemployment continuing to fall, however, the recovery does now have its own momentum.” “There is no pressing economic crisis confronting the continent in 2016, thank goodness” “Risks to Europe that economists fail to see” December 30.

Not so, there is a huge crisis in the making. While the risk adverse credit risk weighted capital requirements for banks remain in force, Europe’s economy will grow obese from an excessive intake of safe carbohydrates. In order to grow muscular and sustainable it needs a lot of proteins and exercise.

Ask ECB to perform a new stress test of the banks, and this time not about what is on their balance sheets but about what should be there. I am sure ECB would find that new loans to those who on the margin provides the economy with the real strength to move forward, like SMEs and entrepreneurs, are highly insufficient. 

And those loans to "the risky" they could find, will probably have interest rates that are larger than what the transaction cost and risk premiums merit... as the risky need to compensate for the fact that banks are not allowed to leverage as much with them as what they can leverage with "the safe". 

When you finance the purchase of houses more than the creation of the jobs that will allow buyers to pay utilities and service mortgages that will not end well.

@PerKurowski ©

I challenge all in FT to, without fear, read The Document on Basel II risk-weights and then, without favour, explain it to us in layman terms

Sir, Stephany Flanders writes “Mr Draghi was quite explicit in Jackson Hole: the risk of doing too little in Europe are now greater than doing too much. “Draghi approaches his Abenomics moment”, September 1.

Indeed, but what is really sad is that neither ECB nor European governments say nothing, worse yet, seem to know nothing, about what is absolutely most urgent, namely getting rid of the risk-weighted capital requirements for banks. The credit-risk weighting effectively blocks credit from flowing freely and fairly to all “risky” capillary economic agents, like SMEs and entrepreneurs. Though these borrowers might individually represent risky credits, they are absolutely indispensable for the economy, they pay higher risk premiums and get smaller loans, and they do also not pose major dangers to bank stability, since bankers, like all of us, tend to avoid the risks they perceive.

In fact, I challenge anyone of you in FT to, without fear, read the explanations given by regulators on the risk-weights given in “The Basel Committee on Banking Supervision´s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005” and then, without favor, explain it to us in layman terms.

And please do not tell us that it is not your responsibility to read and understand such document, before reporting or opining on the pillar of current bank regulations. That bank regulators did not dare to question that document is what has gotten Europe and the world in its current bind. And I pray that is true, because to think regulators read it, understood it, and still went ahead and approved of it, is just too scary.