Europe, urgently, fire Basel Committee’s members; and ask ECB to inject €1tn as equity in Europe’s banks

Sir, Simon Samuel’s mentions as a consequence of Basel III the possibility of a collapse in bank lending in Europe that would dwarf the €1tn or 2€tn of QEs that ECB might carry out, “Withering regulations will make for shriveled banks”, January 14.

Good for him, someone for the inner circle of bank regulators, is finally beginning to speak up on what needed to be said… sort of ages ago. Let us now see if FT also dares to live up to its motto “Without fear and without favour”.

That said the reality is worse than what Simon Samuels describes, because the credit shrinkage he refers to would primarily affect those Europe most needs to have access to bank credit, namely risky small businesses and entrepreneurs, "The Excluded" . And that because the “withering regulations” are still including the portfolio invariant credit risk weighted equity requirements for banks, which operating on the margin, excludes the risky in favor of “the infallible”.

What would I do? Throw the risk-weights out and hope that history forgets our stupidity. Impose a 10 percent equity requirement on all assets, and then, to get us from where Europe’s banks are, because of Basel I, II and III, to where they must be, have the ECB “offer” to subscribe all equity needed to meet those new requirements. ECB should of course commit not to use the voting rights of that bank equity and to resell for instance 10 percent of those shares per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Sir any ECB-QEs, or excessive fiscal stimulus, before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

PS. Sir, if my Tea-with-FT blog post in November last year helped to push Simon Samuel to speak up against other members of their mutual admiration club… then I have been right insisting in sending you the letters you do not welcome or acknowledge.

Basel is now only increasing the regulatory discrimination of “The Excluded Risky”

Sir, imagine a father with five sons who has declared he just loves the oldest one. Clearly the other four are not happy about that. But now the father declares that he also loves the second son. Will the three remaining unloved sons feel better or worse?

That is the question you have to answer when trying to interpret the meaning of the announced relaxation of the Basel liquidity rules for banks.

Lex in “Basel tov”, January 7, believes that this relaxation should make it “less likely do deter financing of activity in the real economy”. 

Not so! The distortions in the markets in favor of “The Infallible” and against the excluded “The Risky”, will increase. And that could only worsen the conditions in the real economy, as those who represent the least risks for banks, are not necessarily the most important actors on the margin of that economy.

Let me phrase it like this: In the real economy the existence of favorable conditions is much more important for “The Risky” than for “The Infallible”

Basel keeps tightening the noose around the neck of “The Risky and Excluded”, and thereby killing the real economy.

Sir, Brooke Masters, FT’s chief regulation correspondent, reports on January 6 that “Banks win more flexible rules” with respect to the assets that might count towards the liquid coverage ratio LCR, and that “the results are largely good news for bank profits because institutions will be allowed to count more, higher-yielding assets in their liquidity buffers”. 

What no one seems to care one iota about is that the more you widen the definitions of “The Infallible and Included”, by allowing  banks to  lend to them against ultra low capital requirements, and including them in these liquidity requirements, the more you will tighten the rope around the necks of “The Risky and Excluded”, primarily all those small, medium sized business and entrepreneurs with no ratings or not so good ratings, but whose access to bank credit is still vital for the strength and sturdiness of our real economies. 

Indeed these bank regulators are as dangerous as they can be. For instance, Sir Mervyn King, called the agreement “a very significant achievement [and] a clear commitment to insure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort.”; as if the lack of liquid assets, and not the lack of good assets, was the fundamental problem. 

What was the primary cause of the current crisis? That all the investments in triple-A rated securities backed with lousily awarded mortgages to the subprime sector in the US, or the huge loans to sovereigns like Greece were not sufficiently liquid, or that they were outright bad? No doubt the later! 

And why did these assets become so bad? Simply because the bank regulators whetted too much the appetite of the banks for this type of assets.

When are we going to parade these Basel regulators down Fifth Avenue wearing their well earned cones of shame and as we must do?

Never forget that in the real economy, the existence of favorable conditions, like access to bank credit,  is much more important for “The Risky” than for “The Infallible”