June 06, 2014

As is, €400bn of cheap ECB Mario Draghi loans would only end up financing “infallible sovereigns”, not small businesses.

Sir, I refer to Claire Jones reporting and You and other opining about the announcements by Mario Draghi on lower ECB interest rates and of “up to €400bn of cheap loans for eurozone banks in an attempt to boost lending to the regions credit-starved small businesses”, June 6.

Again, for the umpteenth time, it is not money to lend European banks lack, it is capital… as in shareholders’ equity… since these are severely undercapitalized as a result of regulators like Mario Draghi, against all empirical evidence of what causes bank crises, having allowed them to hold almost no capital at all, when lending to the housing sector, to “infallible” sovereigns like Greece or investing in securities rated AAA.

And because of that the banks do now not have the shareholder’s capital required to lend to “the risky” small businesses, especially since regulators like Mario Draghi, again against all empirical evidence of what does not cause bank crises, decided banks need to hold much more capital when lending to these. And Sir, we do not need a ECB’s Asset Quality Review to know that!

And so to ignite lending to small businesses and other “risky”, so that the unemployed European youth is not doomed to become a lost generation, and so that all €400bn of cheap loans do not end up as more easy money for “the infallible”, requires getting rid of the bottleneck that the risk weighted capital requirements signify.

The problem with that though is that this requires a mea culpa from high fliers like Mario Draghi (Ex-FSB), Mark Carney (FSB) Stefan Ingves (BCBS) and others (perhaps of you too Sir) … something which is not likely to happen… since they clearly still believe they are the masters of the universe.