At a growth summit Matteo Renzi and Francois Hollande should just ask ECB’s Mario Draghi a simple question
Sir, I refer to Hugh Carnegy’s report “Hollande presses for growth summit” August 29, and I would strongly suggest Matteo Renzi and Francois Hollande, they ask Mario Draghi the following.
“Mr. Draghi. As you were for years the Chairman of the Financial Stability Board and therefore an expert on bank regulations we would like to ask a simple question.
Currently European banks are not lending to medium and small businesses, entrepreneurs and start-ups because that type of lending is considered to be risky by regulators, who therefore require banks to hold much more of that extremely scarce bank capital (equity) against that type of loans than against other supposedly safer loans. And that we would hold makes it impossible for our economies to grow in a sturdy way.
So can you please explain to us, in an easy way, why bank lending to medium and small businesses, entrepreneurs and start-ups is considered risky? We ask so because one could think that having banks not lending to these borrowers would be something way riskier for Europe and our economies.
Could it not in fact be so that the risk of your risk-weighted capital requirements creating distortion in the allocation of bank credit is far more dangerous than what the borrower’s credit risks represent to banks?
And while you’re at it Mario, please explain to us what is the reasoning behind the risk-weights? For instance are these to reflect the possibilities of a borrower not repaying the bank, or the possibilities of a bank going under because of a borrower does not repay? If the latter it would seem to us, humble laymen in these matters, that what is perceived to be safe and therefore is lent to much more by the banks represents more real danger… not the skimpy lending to those perceived as “risky”.
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