December 12, 2013

ECB, hard-cheese, first you need to test the credibility of the bank regulators

Sir, I refer to Sam Fleming´s and Alex Barker´s “ECB: Credibility test” December 12.

You must be perfectly aware that absolutely all bank crises in history, including the current one, have resulted from excessive lending to something that was ex ante perceived as absolutely safe, but that ex post turned out to be very risky. And no major crisis ever, has resulted from excessive bank exposures to assets that which ex ante considered risky.

And so therefore, allowing the banks to have extraordinarily little capital when exposed to something “absolutely safe”, can only guarantee that when shit hits the fan, all banks will stand there naked, with no capital to cover themselves up with.

And, to top up that mistake, that also allows banks to earn much higher risk adjusted returns on their equity when exposed to “The Infallible” than when exposed to “The Risky”, and which of course creates the distortion that makes it impossible for banks to fulfill their societal role, of allocating bank credit as efficiently as possible.

And so if there is a real credibility test that needs to be carried out first, that is the one of the bank regulators themselves since, honestly, I do not think they know what they are doing, and I consider them being about the largest producers of systemic risks in the financial system.

And with respect to the test of the banks… even more important than what´s on their books, would be to understand all the loans to medium and small businesses, entrepreneurs and start-ups that are NOT on their books, as a direct result of the capital requirements, because that is what can lead to the failure of the whole real economy… and when that failure happens, not even the safest bank stands a chance to survive.

ECB, I know it is hard for you to test your boss, Mario Draghi, the former chairman of the Financial Stability Board, but, what can I say, other than hard-cheese.