March 13, 2016

Wolfgang Münchau, what has risk weighted capital requirements have to do with the primary functions of banks?

Sir, Wolfgang Münchau writes: “Monetary policies, like the ECB’s quantitative easing program, filter into the real economy through various channels.” “The European Central Bank has lost the plot on inflation” March 14.

That is correct but again, so stubbornly, Münchau refuses to mention the not so unimportant fact that credit risk weighted capital requirements for banks, especially when regulatory compliant bank capital is scarce, seriously distorts the allocation of bank credit to the real economy.

Münchau also refers to ECB’s “targeted longer-term refinancing operations” in somewhat skeptical terms, arguing that there is no evidence of ample demand for loans. But there again I would ask if the lack of demand for bank loans is not a reflection of SMEs and entreprenuers having seen their loan applications so much rejected? And again those rejections are much the result of that kind of “risky” lending generating the highest capital requirements for banks.

Helicopter droppings? Yes but why not eliminate the regulatory distortions that serve no purpose first?

I was recently made aware of a paper written by Hyman P Minsky in October 1994, titled “Financial Instability and the Decline (?) of Banking: Public policy considerations

In it Minsky describes the two primary functions of banking as supplying the means of payments; and channeling resources into the capital development of the economy.

And so Münchau, unless you disagree with Minsky, let me ask, for the umpteenth time, what has the pillar of current bank regulations, the risk weighted capital requirements, to do with banks fulfilling efficiently those two primary functions?

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©