When the autopsy on Europe’s economy is performed, the cause of death will be sissy and dumb bank regulatory risk aversion.

Sir, Wolfgang Münchau writes “Lending by banks to the private sector is contracting at accelerated rates… Unsurprisingly the banks are trying to minimize the amount of capital they need to raise by scaling back their risky exposures to private creditors.” “Germany’s coalition will have to break promises”, December 2. And then he writes that “It is rational to expect the credit crunch to continue for as long the adjustment in the banking sector takes place – all the way through to 2014.

Yes, “unsurprisingly” and “rational” are the correct terms, but they are related to the completely irrational capital requirements for banks based on perceived risks.

Before these regulations came into being a bank looked at how to maximize the return of each euro by lending all over the spectrum of perceived risks… and that is what can lead to an efficient allocation of bank credit in the real economy.

Not now. Now a banks looks at the risks of an AAA rated, and since its regulatory risk weight is 20 percent, it uses only 20 percent of a euro when comparing its return to the return of a loan to a “risky” small business, and for which it has to use the full 100 percent of a euro. And, if lending to an “infallible sovereign”, then it can basically measure its returns on equity use 0 percent of a euro as equity.

No! When the autopsy on Europe’s economy will be performed some years from now, these loony and sissy risk adverse regulation virus is going to be identified as the prime cause of its death, and FT and its journalist, by having kept mum on it, will be among its contagion agents.

God, make us daring!

Bernanke calls banks “overcautious”. He´s got to be joking, or insulting our intelligence.

Sir, Robin Harding reports “Bernanke says overcautious banks are slowing recovery”, November 16. Frankly, for someone like Bernanke, who belongs to the nanniest and sissiest bank regulatory establishment ever, this is either a bad joke or an insult to our intelligence. 

Our current bank regulators allowed banks to leverage their equity amazingly much when holding assets perceived as absolutely not risky, “The Infallible”, and therefore to shun away completely, from anything officially perceived as “The Risky”, because these could of course not provide the banks with an equal expected risk adjusted return on equity… and now Bernanke is calling the banks overcautious? Come on! 

If Bernanke want banks to return to their normal level of caution, all he has to do is to make the capital requirements for banks the same for all assets… and so clearly the ball is in the regulators hands.

Martin Wolf, it is the risk-taking austerity we’ve really got to be scared of

Sir, Martin Wolf writes that “Europe is stuck on life support” February 1, and concludes that only shifts in competitiveness between the members will give the latter the opportunity to survive disconnected. Who would not agree, the issue is how to achieve that. It starts by better understanding what caused this mess we’re in and, in that debate, much more important than discussing the dangers of fiscal austerity, is realizing the dangers of risk-taking austerity.

The banks, courtesy of the Basel regulations and the capital requirements based on perceived risk, have now all been painted into the corner of what is officially perceived as not-risky, and where of course any real shifts in competitiveness do not normally reside.

Take for instance Italy, in many ways it has survived in spite of its governments, and, nonetheless any European bank is currently required to have much more capital when lending to an Italian small businesses or entrepreneur than when lending to the Sovereign Italy.

Mr. Wolf, at this moment, much more than a Heinrich Brüning, who we really must fear, are the sissies in the Basel Committee, in the Financial Stability Board and in the UK’s own FSA.