April 01, 2013

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 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!