Pension funds, widows and orphans have been told to keep out of what’s perceived safe, that’s now the banks’ domain.

Sir, Robin Wigglesworth writes about “an environment where many safer bonds still offer insultingly low rates” “Greed set to trump fear as high-yield bonds live up to their name” August 8.

Bank regulators, with their credit-risk-weighted capital requirements, allow banks to leverage their equity and the support received by deposit guarantees and similar, immensely, as long as they stick to lending to “The Safe”.

Consequentially the more regulators favor and therefore subsidize bank lending to “The Safe”, the lower will be the interest rates paid by “The Safe” and, of course, in relative terms the higher the rates “The Risky” need to pay.

Ergo… non-banks who have to evaluate the increased spreads between The Safe and The Risky, without counting with the regulatory bank-subsidies, are more tempted by, or are in more need of the higher rates paid by “The Risky”.

Pension funds, widows and orphans were the one investing in “The Safe” Now they have been told to get out of there… “That’s for the banks!”

The Risky, like the SMEs and the entrepreneurs they used to have access to the banks… now they are left out in the cold… desperately looking for some crowd-funding.

@PerKurowski

Fat chance Mario Draghi and ECB will be able to help “The Risky”

Sir, Ralph Atkins writes about “the challenge the ECB faces in ensuring low official interest rates feed through into lower [bank] borrowing costs, especially for job-creating small businesses in countries such as Italy and Spain”, “Blow to ECB as widening loan rates hit south" April 1.

Current bank regulations allow banks to obtain immensely higher expected risk adjusted returns on equity with assets perceived as “absolutely safe” than on assets perceived as “risky”. The “risky” must therefore pay the banks more than usual in order to make up for that competitive disadvantage in access to bank credit created by the regulators.

Mario Draghi, the ECB president, and who as Chairman of the Financial Stability Board has been closely involved with bank regulations, has never even understood how current capital requirements cause the widening of the spreads between "The Infallible” and The Risky”

And so with respect to the possibilities of the ECB successfully meeting the aforementioned challenge I can only say… Fat chance!

Interest rates are low, but the ratio of rates to the “risky” over the rates to the “infallible” is probably the highest ever.

Sir, John Authers quotes Deutsche Bank’s market historian Jim Read on us “entering the unknown” with respect to the interest rates being “so low, for so long, for so many”, and he writes in UK “the base rates are at the lowest in 318 years, “London property market cannot avoid mean reversion” September 10. 

Absolutely, but those are the rates for those in the center rated absolutely safe, those so much favored by accommodating capital requirements for banks. If he wants to see a quite different story, he should look at the ratio between the interest rate charged to the “risky”, those living in the periphery, like small businesses and entrepreneurs, divided by the interest rate charged to the officially “infallible”, and he might then find that ratio larger than ever. 

If the current mean, which has resulted from these capital requirements is to revert to some historic standard then regulations should also conform to a historic standard. 

Authers also writes “Bank of England’s balance sheet is its biggest, compared with the size of the UK economy, since the records began in 1830”. But, to get a real grip on the true monstrous size of that balance sheet, he should perhaps also include how much QE all those commercial banks, acting almost as quasi-branches of the central bank, have provided to government’s treasury, because that requires little or no capital of them.