Before ECB does one iota more, we must get rid of the loony portfolio invariant credit risk weighted bank capital requirements.
Sir, Rick Rieder writes, “A thoughtful consideration of where and how capital is being applied could have a positive influence that lasts decades. The status quo cannot be satisfactory for anyone hoping to see the eurozone continue as a global economic force in the century ahead” “ECB’s conventional tools will not solve eurozone woes” August 9.
Absolutely but, before having ECB by buying equities entering further into crony statism terrain, what should be done, sine qua none, is to get rid of those risk weighted bank capital requirements that so dangerously, both for the bank system and for the economy, distorts the allocation of credit.
Precisely because banks need to hold more capital when lending to the riskier future than when lending to the sovereign, and safer present “the return on debt is not matching the risk. So potential lenders have retreated, leaving more expensive equity financing as the sole source of funding. That increases the overall cost of project financing. As a result, growth-enhancing projects never get off the ground, exacerbating today’s negative economic velocity.”
Precisely for the same reason, we are not getting enough of “What is needed is to improved productivity, which comes from innovation and technology.”
Sir, if that immense source of distortion is not eliminated then whatever ECB does will only kick the can further down the road from which one day it will roll back with vengeance on all of us.
@PerKurowski
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