In a “world full of uncertainties”, how come regulators are allowed to bet our banks on the certainty of perceived risks?

Claire Jones reports that Olli Rehn, a possible contender to replace Mario Draghi opines that Central bankers must have “the ability and agility to manoeuvre though the current world that’s full of uncertainties” “Central bankers face a ‘world full of uncertainties’” November 19.

This is exactly what is wrong, they do accept there are uncertainties all around, but then they are not capable to utter a word when regulators, with Basel II, bet the banks on certainty, by allowing banks to leverage 62.5 times their capital with an asset if only a human fallible credit rating agency had assigned it an AAA to AA rating. 

According to Jones, Rhen agrees with Draghi in that “if Italy wanted ECB help, it had to sign up to a bailout programme from the European Stability Mechanism”. That de facto means that Italy must have to walk the plank as Greece did. 

But, I see not a word about the European Commission “Sovereign Debt Privileges”, that which set a 0% risk weight on Italy’s Euro denominated public debt, that which allowed (or in reality forced) Italy’s banks to overload on that debt. Why should Italy (or Greece), in a Union, have to carry the whole costs of a mistake caused by the Union?

Rhen opines “The only legitimate way of making monetary policy, be it conventional or unconventional, is to look at the economic development in the euro area . . . in its entirety”. He is absolutely right, but then the question is, why have EU not done anything real, in 20 years, to solve the challenges posed by the Euro to the individual nations of that entirety?

Those challenges if not solved, soon, pose a real existential threat to the European Union. Does Olli Rhen really believe that completing a banking union would suffice to take care of that?

@PerKurowski

Eurozone needs regulations that do not distort the allocation of bank credit much more than a full banking union.

Sir, I refer to your “A strong eurozone needs a full banking union” December 28.  In it you mention “The launch of the EU’s so-called single resolution mechanism, a significant expansion of the European Central Bank’s powers, and discuss the need “of a common deposit insurance scheme in the 19-nation Eurozone”… “in order to minimise the risk that fresh crises will erupt in the future and, if they do, to limit the consequences”

But what did that “financial whirlwind that tore through the bloc after 2008, destabilising Europe’s banks and putting into question the survival of its monetary union” really carry?

The answer is that which was perceived or deemed to be safe, and with which therefore banks were allowed to leverage immensely… like 60 to 1.

You seem to be partly waking up to this fact when mentioning “the potentially lethal connection between sovereign debt and overstretched banks that was amply illustrated at the height of the Eurozone crisis”. I am curious about what FT opined about the Basel Accord in 1988 (Basel I), that which set a risk weight of zero percent for sovereigns and of 100 percent for the private sector.

And if because of credit risk weighted capital requirements banks continue to allocate credit inefficiently to the real economy, this not only guarantees a new crisis but also that its cost would be higher than the cost of any fresh bank crisis that could result from totally unsupervised banks.

That is why getting rid of the regulatory distortions should have a much higher priority than the creation of any full banking union in the Eurozone, and that by the way could only help to increase dangerous moral hazards

@PerKurowski

Europe, a perfect disunion of useful banks, is much better than a perfect union of useless banks

Sir, Wolfgang Münchau holds that “Europe should say no to a flawed banking union”, March 17.

Indeed, I agree, but not so much for the reasons Münchau holds.

Current risk based capital requirements allow banks to obtain higher risk adjusted returns on equity when lending to the safe than when lending to the risky. And that distorts completely the allocation of bank credit to the real economy. And banks which do not allocate bank credit efficiently are useless banks.

And in reference to bank unions, nothing sounds as systemic dangerous than a perfect union of useless banks. Were regulators to make amends for their mistake, then Europe would anyhow be much better off than today with a perfect disunion of useful banks.

What are historians going to say about creating a union of dysfunctional banks in Europe?

Sir, I am sure historians will be scratching their heads trying to figure out how the bank regulators of the Basel Committee for Banking Supervision, and of the Financial Stability Board, could have been so dumb so as to base their capital requirements for banks on perceived risks already cleared for by markets and banks through interest rates, amounts exposed and other contractual terms. 

Most probably they will be explaining it in terms of the incestuous group think which can result when allowing “experts” to debate such matters in a mutual admiration club subject to absolutely no accountability at all. 

And the whole idea of creating a union of dysfunctional banks unable to allocate economic resources could be analyzed would also be laughable were not the consequences of it so tragic. 

Wolfgang Münchau, in “Politics has undermined hopes of a banking union” December 17, writes about “when the crisis returns, as I expect, in 2013”. But the truth is that the crisis is already here, and each day that goes by without eliminating the regulatory distortions, only guarantees that its next symptomatic outbreak will be meaner, with or without a banking union.

Much more than a bank union, Europe needs completely new bank regulations

Sir, Alex Barker reports on Michel Barnier, the European commissioners current efforts to create a bank union in Europe, “Time to decide on bank union”, November 26 

If it is for banks to go on lending to “The Infallible”, private or sovereigns, and not to “The Risky” small businesses or entrepreneurs, then Europe does not need a banking union, since Europe will be stalling and falling anyhow. 

What Europe needs, much more than delaying Basel III, is throwing out completely those insane regulations of capital requirements, and now also of liquidity requirements, based on perceived risks. 

By the way does Michel Barnier think that a job in a triple-A rated company is worth much more for the society than a job in an unrated small business? From the regulations he supports it would seem so!

But at least stop the regulatory disunion of European banks.

Sir, Wolfgang Münchau gives many reasons for “Why we won’t solve the eurozone crisis for 20 years” July 9, among others the difficulties of approving and implementing a banking union. 

That might be so, but, meanwhile, there is no reason to make the crisis worse by feeding the disunion produced by the bank regulators when it applies different capital requirements to European banks when lending to different European banks. Those distortions, they could get rid of over just one weekend.

A European banking union should not discriminate between European sovereigns.

Sir, in “One small step for European mankind” June 30, you subtitled it with “The lethal sovereign-bank embrace begins to be pried loose”. 

Hold it there, not so fast, the most lethal part of that sovereign-bank embrace, is that which allows banks to leverage much more its equity when lending to a sovereign perceived as “safe” than when lending to one perceived as “risky”… something which neither sounds much compatible with having a European banking union. 

If those regulations are not changed, they will only doom all the European banks to end up with dangerous obese exposures to the last perceived safe haven in Europe, probably Germany.

Unions don’t work based on discrimination

Sir, you and others write about “Banking union and the euro’s future” June 6, without even referring to the disunion effect discriminatory capital requirements have. 

If you really want to start a banking union then you should start by allowing all banks to be required to have the same capital when lending to each other… and the same goes of course, for all lending to sovereigns. 

At this moment a Spanish bank needs for instance to hold much more capital when lending to Spain or to a Spanish bank that when lending to Germany or to a German bank, and that only stokes the eurozone fire.

PS. This was written before I knew of the Sovereign Debt Privilege that assigned all eurozone sovereigns a 0% risk weight even if they were taking on debt denominated in a currency that de facto was not their own domestic printable one. That was even crazier than Basel I or II.