December 22, 2015

One problem of Europe (and others) is that bank regulators have placed its real economy on an early retirement mode.

Sir, I refer to Tony Barber’s “Europe’s decline is a global concern” December 22.

Barber writes: “EU may not disintegrate but slip into a glacial decline, its political and bureaucratic elites continuing faithfully to observe the rites of a confederacy bereft of power and relevance. It is not an outcome that any European with a grain of common sense should wish for. But it is no longer inconceivable”

Of course it is not inconceivable. Just the silence of FT on one of the most important issues of our times, that of how regulators have distorted the allocation of bank credit to the real economy, is proof enough.

I have explained it many times before to you, and to Tony Barber, but since on this issue I have no problems being deemed as obsessive, here it goes again:

The regulators, with their credit risk weighted capital requirements for banks, created incentives that allow banks to make much higher risk adjusted returns on profits when lending to what is ex ante deemed safe than when lending to what is perceived as risky.

And doing so they in essence doomed the economy into an early retirement, in which it will live on for as long as possible on what it has already created, while avoiding taking the real risks needed in order to move forward.
Barber refers to “three hugely expensive financial rescues of Greece”, but says not a word about that in Greece, banks can still lend to their government against much less capital than what they need when lending to their SMEs and entrepreneurs. 

@PerKurowski ©