Based on the flimsy notion that below BB- rated is more dangerous to the bank system than AAA, regulators distorted

Sir, Gillian Tett tells us that a central bank official once told her pointing to a Euro note “That’s what’s wrong with Europe… It’s just windows and bridges!”. And she is clear about that “you cannot fight nationalism solely with economic figures — you need faces too” “How to change the face of Europe” May 7.

That, as I had often written to you, goes to the heart of the problem of EU, namely that very few would like to call Europe home, precisely because home is much more about compatriots than infrastructure.

And Gillian Tett writes “These days Mario Draghi, head of the European Central Bank, is providing another unifying force (of sorts). But these are not faces that command popular respect across the continent — or not compared with the heroes of individual nations”

Of course, adorning a Euro note in the future is an honor that should be reserved for nation or union builders, not for destroyers. With time Draghi, Ingves, Caruana, some of the European names among the bank regulators, together with their over the pond colleagues, are going to be held to account for having concocted a destructive invention with what we know as the Basel Committee’s risk weighted capital requirements for banks.

The principle behind these regulations is that a below BB- rated asset, highly-speculative to imminent default rated, which in Basel II was given a 150% risk weight, is much more dangerous to the banking system than an AAA rated prime asset, and which was therefore given only a 20% risk weight.

It was like nannies believing the children to be more in danger when approached by ugly and foul smelling persons, than when approached by nice looking gentlemen who offer them candy.

And based on that sole flimsy principle the regulators shamelessly, not concerned with it at all, went on and completely distorted the allocation of bank credit to the real economy.

Does Gillian Tett also believe in the validity of such principle? And, if not, why does she keep mum on it?

PS. Just as a curiosity, in the weeks before the Euro, I did not write of names, but of bridges… the burning of these.

@PerKurowski ©