For banks to lend to businesses it takes two to tango, liquidity and bank capital.

Sir, Valentina Romei, with respect to ECB’s targeted longer term refinancing operationswrites “According to TS Lombard: In both Spain and Italy, TLTRO borrowing corresponds to about 15 per cent of gross domestic product… Yet in both Italy and Spain, growth in commercial bank loan books has been weak”. Francesca Vasciminno, of Fitch Ratings in Milan explains it with “Partially this is the result of banks using the cheap funds “opportunistically to invest in government bonds if yields are attractive” “ECB loans fail to ignite bank lending” April 10.

Does ECB not know that banks in Italy and Spain, which as most banks are not awash with capital to say the least, need to hold 8% in capital against risk weighted assets and currently, because of EU’s insane Sovereign Debt Privileges, 0% against loans (or bonds) to their government?

There simply is no way that a TLTRO, or any other fancy program, is going to sustainably result in more and in relative equitable terms business lending by banks, without the removal of the risk weighted bank capital requirements. One might think that the introduction of a leverage ratio might have reduced its distortions but the truth is that, on the margins, there where it most counts, the distortion pressure of these has only increased.

Sir, soon for the three thousands time, before the insane risk weighted bank capital requirements disappear, there will be no muscular economic growth, which requires risky proteins, and all we will see is increased bank obesity resulting from increased exposures to safe carbs.

@PerKurowski

Wolfgang Münchau, what has risk weighted capital requirements have to do with the primary functions of banks?

Sir, Wolfgang Münchau writes: “Monetary policies, like the ECB’s quantitative easing program, filter into the real economy through various channels.” “The European Central Bank has lost the plot on inflation” March 14.

That is correct but again, so stubbornly, Münchau refuses to mention the not so unimportant fact that credit risk weighted capital requirements for banks, especially when regulatory compliant bank capital is scarce, seriously distorts the allocation of bank credit to the real economy.

Münchau also refers to ECB’s “targeted longer-term refinancing operations” in somewhat skeptical terms, arguing that there is no evidence of ample demand for loans. But there again I would ask if the lack of demand for bank loans is not a reflection of SMEs and entreprenuers having seen their loan applications so much rejected? And again those rejections are much the result of that kind of “risky” lending generating the highest capital requirements for banks.

Helicopter droppings? Yes but why not eliminate the regulatory distortions that serve no purpose first?

I was recently made aware of a paper written by Hyman P Minsky in October 1994, titled “Financial Instability and the Decline (?) of Banking: Public policy considerations”

In it Minsky describes the two primary functions of banking as supplying the means of payments; and channeling resources into the capital development of the economy.

And so Münchau, unless you disagree with Minsky, let me ask, for the umpteenth time, what has the pillar of current bank regulations, the risk weighted capital requirements, to do with banks fulfilling efficiently those two primary functions?

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

With capital buffers thin, European Banks can’t handle the higher capital requirements for small business lending.

Sir, I refer to Lex’s note on the lack demand for ECB’s TLTRO funds, “Eurozone banks: horsing around” December 12.

It holds: “You can lead a horse to water. You can put water in a tall glass, add ice, a wedge of lemon and a cute little paper umbrella. You can bring the bendy straw right up to the horse’s lips. But if the horse is not thirsty, it will not drink.”… And so “Reluctance to take cheap money gives credence to the bank’s claims that low business lending is down to a lack of demand”.

BUT, “An alternative explanation, advanced by RBS, is that the low take up highlights the bank’s lack of capital. With capital buffers thin they do not want the risk of small business lending”.

CLOSE, but not really so. The truth is that “with capital buffers thin” they cannot handle those much higher capital requirements that comes associated with the supposedly risky “small business lending”.

How many times have I explained to FT over the last few years that the current risk-weighted capital requirements for banks impede the banks to efficiently allocate bank credit? Hundreds!

PS. In my homeland, Venezuela, after 15 years of being a columnist in its most important daily newspaper, I was among the four first to be expelled without thanks, when government agents purchased that paper. That’s how it is, in a country where the government receives directly 97 percent of all the nations exports.

But how does it work in Britain? Can an editor or some other influential person, order those working in a paper, for instance in FT, to ignore the arguments of someone… for whatever reason?

Mario Draghi lousy Basel bank diet does not work for Europe, or for anyone else.

Mario Draghi of ECB, as the former chairman of the Financial Stability Board, FSB, knows that current Basel bank regulations implies the following diet:

If banks take on exposures that are risky, and which is like eating spinach to kids, they will be punished with higher capital requirements, which means they earn less risk-adjusted returns on equity, which is something like eating broccoli to kids.

But, if banks take on exposures to what is believed as absolutely safe, something which would be like eating chocolate cake to kids, then they will be allowed to hold much much less capital allowing them to earn much much higher risk adjusted returns on equity, which is something like eating ice cream for the kids.

But seemingly Mario Draghi does not understand that the only economic growth that can result from such a bank diet is dangerous economic obesity, since only real risks, taken by banks with reasoned audacity, can lead to sturdy muscular economic growth.

But Mario Draghi is not alone in not understanding that, in FT he has a solid companion.

I say this with reference to Christopher Johnson’s analysis “Weak ECB loan take-up paves way for QE” September 20.

In it, Thompson referring to the low take-up by banks of “targeted longer-term refinancing operations” writes that “When historians come to write the story of the European Central Bank, they may look back at [that event] as the moment when the countdown to ‘quantitative easing’ began”.

And so clearly it is not yet understood that, because banks must hold more capital when financing what the ECB would want them to finance, SMEs for instance, they cannot oblige, for pure lack of bank capital; or that QEs, which would only be taking up more of the “absolutely safe” investments, can only help to further dangerously overcrowd the havens perceives as safe.

No, history, when it looks back, is primarily going to shocked reflect on how on earth such a bad bank diet came about.

PS. Without the need to look, we should be able to assume that the banks in the troubled periphery, those who are taking some of the TLTRO loans, are not lending to SMEs, but investing the proceeds in debt of periphery sovereigns, that which requires them to hold the least of capital. Please, tomorrow, don't call this an "unexpected consequence".

PS. Here, the full terminology for “risk-weighted capital requirements”

Do FT reporters really understand that capital, as in capital requirements for banks, refers not to general funds but to equity?

Sir, Christopher Thompson reports “Europe´s banks set for €250bn injection” August 18.

And that money, which according to Mario Draghi could eventually increase to €850bn, is to counter the fact that “Overall eurozone banks have decreased lending to the region´s businesses by €561bn since 2009 according to research by RBS, as they seek to raise capital and cut bloated balance sheets”

And I wonder if it is really understood that what the European banks need for renewing lending, to for instance SMEs, much more than that kind of cheap ECB funding, is the bank equity that regulators require them to hold especially much of when lending to those deemed “risky”, as compared to the equity banks need to hold when lending to those deemed “absolutely safe”.

Could the confusion result from that, for instance FT reporters, think of “capital” more in terms of general funds and not in terms of equity?

Could as it would seem Mario Draghi be equally confused about it, even though he was the chairman of the Financial Stability Board? Holy moly!

ECB European banks have no lack of funds but they do have an enormous lack of shareholders’ capital.

Sir, Christopher Thompson and Ralph Atkins report that despite targeted long term refinancing operations, TLTROs, some banks will not lend to SMEs, “Doubts grow over effect of ECB loans” May 10. 

Of course not! “There isn´t a funding crisis any more” they quote Ken Watrett of BNP Paribas saying and the full truth is that there has not been a funding crisis for a long time now. The crisis, in full bloom, is that of an enormous lack of that shareholders´ capital banks are required to have, especially if they to lend to SMEs.

Just days ago, June 4, Sam Fleming ends a comment in the Analysis "Still unstable" with: “Many euro area banks remain undercapitalized, and for the taxpayers to be insulated from future banking crises balance sheets may need to be strengthened by more than €400bn.” What an extraordinary coincidence that the TLTROs figure announced is also €400bn… could there be something there?

PS. By the way think of those chips used by Mario Draghi when doubling down, as the future of our kids.

PS. I have been writing to FT for years on this problem… but Sir, You have silenced me. My TeawithFT blog with all my letters are out there on the web though, and perhaps soon also in a book… and so one day you might have some explaining to do.