July 29, 2015

Why do John Kay and his colleagues cover up bank regulators’ prominent role in creating the Greek tragedy?

Sir, John Kay writes: “For every foolish borrower there is usually a foolish lender. The Greek crisis is not simply the result of Athens’ inept public administration but also of an extensive carry trade on eurozone convergence by northern European banks, notably in France and Germany, which obtained short-term profits by matching northern eurozone liabilities with southern eurozone assets.” “What St Luke would say to Schäuble” July 29.

But however foolish bank lender can be, they can be made even more foolish by their regulators. For instance, between June 2004 and November 2009, because of Basel II and Greece’s credit ratings, banks were allowed to leverage their equity, and the support they received by means of deposit guarantees and similar, 62.5 times to 1 when lending to the government of Greece, while being limited to a 12.5 times to 1 when lending to German, French or Greek SMEs or entrepreneurs. 

And John Kay knows that without those regulatory incentives, based on some foolish aversion of credit risk, banks would never ever have lent to Greece as much as they did. And so the question is why does John Kay cover up for the regulators by hushing this up?

And speaking about crazy risk aversion, besides St Luke, John Kay could do well reading St Mathew, 25:14-30.

14 “It will be like a man going on a journey, who called his servants and entrusted his wealth to them. 15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 “Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 “His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest. 28 “‘So take the bag of gold from him and give it to the one who has ten bags. 29 For whoever has will be given more, and they will have abundance. Whoever does not have, even what they have will be taken from them. 30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’

The incentives provided by the Basel Committee, more perceived risk more capital – less perceived risk less capital, clearly instructed the bank servants not to behave according to the Parable of the Talents.

PS. It is clear that the ability to which Mathew 25:15 refers to has nothing to do with the ability of repaying the funds but with growing the funds by putting it to good use. In other words: the efficient allocation of bank credit.

PS. And, from what we read, perhaps Pope Francis would also do well pondering a bit more about that parable.

PS. By the way, should the servant St Matthew refers to, refuse to lend at negative rates?

PS. When John Kay mentions ordoliberalism, I must say that I cannot understand how anyone remotely connected to that economic thinking, could accept the distortions in the allocation of bank credit created by current bank regulations.