August 06, 2017

ECB’s Mario Draghi’s star quality would evaporate had he to publicly answer some hard questions on bank regulations

Roger Blitz writes: “Mario Draghi, president of the European Central Bank, will be the star at the annual Jackson Hole symposium in Wyoming this year.” “Weak dollar remains centre stage” August 5.

Sir, if Mario Draghi, a former chair of the Financial Stability Board, and the current chair of the Group of Governors and Heads of Supervision (GHOS) of the Basel Committee, and therefore one of the most responsible for current bank regulations is the star of anything, that is only because he has never been made to fully answer some questions about current bank regulations in public, by his peers or by for instance FT’s journalist.

There are many many questions I could think of, but let me just indicate two:

First: Mr. Draghi. Do you not think that allowing banks to leverage more their equity with the net margins offered by those perceived safe than with those same margins when offered by those perceived risky; which means it is easier for banks to obtain higher returns on equity with “the safe” than with “the risky” does not distort the allocation of credit to the real economy?

If Draghi answers no, then there is nothing to do, as he would be evidencing he is clueless about finance on Main Street. If he answers yes then follow up with: Don’t you think this could be dangerous for the real economy and who authorized you and your colleagues to do so?

Second: Mr. Draghi, obviously current risk weighted capital requirements for banks, more perceived risk more capital, less risk less capital, indicates you the regulators believe that what is perceived as risky, is what is risky for the bank system. So, will you please tell us when there has ever been a bank crisis that has resulted from excessive exposures to what was perceived as risky when placed on the balance sheets of banks? As far as I gather from history all bank crisis, no exceptions, have been caused by unexpected events, criminal behavior or excessive exposures to what was perceived as safe when incorporated on banks’ balance sheet but that later, ex post, turned out to be very risky.

If Draghi answers yes, then he is deaf and has not heard the question. If he answers no, then ask him to explain why Basel II assigned a standard risk weight of 20% to what was AAA to AA rated and a 150% to what was rated below BB- and would therefore not be touched by bankers even with a ten feet pole.

Sir, Mario Draghi at ECB and others at the Fed with QEs and low interest rates, have just been kicking the 2008 crisis can down the road. The risk weighted capital requirements have caused that can to roll on the wrong roads. That is an act of terrorism against our economies.