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 rate spreads should not be analyzed in absolute but in relative terms.

Sir, you know that I hold that regulators with their capital requirements for banks, manipulated the relative risk-adjusted return on bank equity to be much higher for what was officially perceived as absolutely safe, than for what was perceived as risky. That, pushing the banks to hold excessive exposures to some of “The infallible” that later turned out to be fallible, and against holding minuscule capital, was the prime cause for the crisis. That, reducing the incentives for the banks to lend to “The Risky”, those actors who on the margin are the most important for the real economy, is hindering the recovery.

And so of course I am amazed to see one of your star writers, Martin Wolf, writing “A perilous journey to full recovery” January 30, without even touching base on this issue.

But, that said, what I wanted to comment on today is the ease with which so many, like Wolf, use the concept of interest spreads between “yields on sovereign bonds of vulnerable eurozone sovereigns and those on German Bunds” to point in some direction, without adjusting for changes in the base rate. For instance is a 2 percent spread when the base rate is 3 percent, higher than a 1 percent spread when the base rate is 1 percent? As I see it, not really, in the first case there is a 66 percent difference, in the second 100 percent. Interest rate spreads, as most in life, is quite often not something absolute but something relative.

Why do bank regulators subsidize Germany’s borrowings and tax Spain’s?

Sir, I refer to your “Eurozone weights another palliative” June 21, and many other writings referring to the increasing interest rates on some European sovereign borrowings.

The capital requirements for banks when lending to Spain, is much larger than when these lend to Germany, why? Is the risk differential not already imbedded in the rates? Is not the interest rate spread between those borrowers higher than they would be in a free market? Is this not counterproductive? Why does Germany receive a regulatory subsidy while Spain has to pay a regulatory tax?