January 29, 2016

The central banks monetary policies are hampered more by distorting bank regulations than by bad communications.

Sir, I refer to your “Central banks struggle to make things clear”, January 30. In it you hold that the monetary policy is hampered by bad communications. No Sir, their monetary is hampered much more by bad bank regulations.

Central bankers are also commercial bank regulators. Just look at this list:

Mario Draghi of ECB and Mark Carney of BoE are the former and current chairs of the Financial Stability Board.

Jaime Caruana of BIS and Stefan Ingves of Sveriges Riksbank are the former and current chairs of the Basel Committee for Banking Supervision.

In such a role they have all for years supported credit risk weighted capital requirements for banks which indicate that ‘highly speculative’ below BB- rated assets are far more dangerous to the bank system than ‘prime’ AAA rated assets.

In Basel II the risk weight for ‘highly speculative’ below BB- rated assets is 150 percent while the risk weights for ‘prime’ AAA rated assets is a meager 20 percent.

And therefore according to Basel II banks need to hold 12 percent in capital (basically equity) against ‘highly speculative’ below BB- rated assets, while only 1.6 percent against ‘prime’ AAA rated assets. 7.5 times less!

Honestly, when have banks created excessive dangerous financial exposures to what ex ante is perceived as ‘highly speculative’? Have these all not been created around assets ex ante perceived as ‘prime’ but that ex post turned out risky?

But the stability of the banks is not the most important problem with those capital requirements. The real problem in that they completely distort the allocation of bank credit to the real economy and thereby nullify all central banker’s monetary policies.

Nothing but central bankers' self-inflicted damage!... for which we all suffer.

@PerKurowski ©