Mario Draghi lousy Basel bank diet does not work for Europe, or for anyone else.
Mario Draghi of ECB, as the former chairman of the Financial Stability Board, FSB, knows that current Basel bank regulations implies the following diet:
If banks take on exposures that are risky, and which is like eating spinach to kids, they will be punished with higher capital requirements, which means they earn less risk-adjusted returns on equity, which is something like eating broccoli to kids.
But, if banks take on exposures to what is believed as absolutely safe, something which would be like eating chocolate cake to kids, then they will be allowed to hold much much less capital allowing them to earn much much higher risk adjusted returns on equity, which is something like eating ice cream for the kids.
But seemingly Mario Draghi does not understand that the only economic growth that can result from such a bank diet is dangerous economic obesity, since only real risks, taken by banks with reasoned audacity, can lead to sturdy muscular economic growth.
But Mario Draghi is not alone in not understanding that, in FT he has a solid companion.
I say this with reference to Christopher Johnson’s analysis “Weak ECB loan take-up paves way for QE” September 20.
In it, Thompson referring to the low take-up by banks of “targeted longer-term refinancing operations” writes that “When historians come to write the story of the European Central Bank, they may look back at [that event] as the moment when the countdown to ‘quantitative easing’ began”.
And so clearly it is not yet understood that, because banks must hold more capital when financing what the ECB would want them to finance, SMEs for instance, they cannot oblige, for pure lack of bank capital; or that QEs, which would only be taking up more of the “absolutely safe” investments, can only help to further dangerously overcrowd the havens perceives as safe.
No, history, when it looks back, is primarily going to shocked reflect on how on earth such a bad bank diet came about.
PS. Without the need to look, we should be able to assume that the banks in the troubled periphery, those who are taking some of the TLTRO loans, are not lending to SMEs, but investing the proceeds in debt of periphery sovereigns, that which requires them to hold the least of capital. Please, tomorrow, don't call this an "unexpected consequence".
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