ECB, swap the European sovereign bonds you acquired with QEs, for fresh bank equity in European private banks.

My heart goes out to the so many who are unemployed in Europe, as a direct consequence of banks not lending to SMEs and entrepreneurs, this a direct consequence of being required to hold much more of very scarce bank equity when doing so, than when lending to the “infallible sovereigns” or to the AAArisktocracy.

My heart goes out to pension funds, widows and orphans, who do not find a “safe” place for their investment and savings because, as a direct consequence of those same bank equity requirements, they must now compete with banks eager to access debt issued by the “infallible sovereigns” or by the AAArisktocracy.

And growth in Europe is so dismal that even those classified as “infallible sovereigns”, are offering negative rates, which of course is a “haircut”.

I have no idea whether it would be politically viable but, if I was the ECB, and or a government in Europe, the following is the proposal I would put on the table for its urgent discussion:

Assign the same 100% risk weight to all bank assets, so as to allow banks to allocate credit efficiently to the European real economies. 

That would signify an 8 percent equity requirement for all bank assets, which would open up a very significant need for new bank equity.

Let the ECB temporarily fill that hole by subscribing bank equity, paying with the sovereign bonds it has acquired as a consequence of QEs.

In due time ECB would resell those bank shares to the markets. While these shares are in possession of ECB, it will refrain from exercising any voting rights.

Banks can do whatever they want with those bonds… but since holding sovereign bonds would now require them to have 8 percent in equity we can safely assume they would resell these as well as other sovereign bonds they had, to pension funds and widows and orphans.

Banks would as a consequence immediately be able to look again at credit request from the tough "risky" risk takers Europe needs in order to have a future. Enough with not financing the future and just refinancing history J

Bankers, having then to service the dividend aspirations of much more equity, could of course see their bonuses slightly constrained J

And I guess that adequately capitalizing banks, is of some interest not only of those sovereigns in the periphery J

What would happen to current market value of bank shares? We do not know, but perhaps their dramatically increased safety would more than compensate for their much lower allowed leverage, and prices could even go up. Who knows, perhaps even pension funds, widows and orphans could become buyers of European bank shares J

Western world... listen!

God make us daring!

Or do like Chile did!

The regulators force “risky” borrowers to pay the banks a kicker for them lending to the “safe”

I can perhaps understand paying widows and orphans a kicker when they invest in something “absolutely safe” and which earns them a very low return, but, to pay that kicker to a bank, that really sounds outrageous. 

And this what regulators actually do when they allow banks to leverage much more their equity for exposures to assets deemed “absolutely safe”, like the AAAristocracy or solvent sovereigns, than what they can leverage “risky assets”, like medium and small businesses and entrepreneurs. 

And the worst is that the kicker is not paid by the government. No! It is paid by those perceived as “The Risky”, by means of interest rates higher than ordinary and by getting bank loans smaller than ordinary. 

Really, that banks are regulated to earn much higher risk-adjusted returns on equity for “safe” than for “risky” is just plain crazy distortion.

And that this is not even an issue, never ceases to surprise me.

We “the real economy” would appreciate this:

That some banks restructure their business into a much less risky operation so as to be able to attract shareholders that appreciate much less risk, like widows and orphans, pension funds and insurance companies and are therefore satisfied with lower returns. 

That could be done by banks by for instance voluntarily agree to hold 15 percent in capital against all of their assets, with none of that horrendous risk differentiation that so much distorts bank lending, by discriminating specially against those “risky” not so risky for banks, businesses and entrepreneurs that try to build an economic future on the margin of the real economy.

And the government, and the FDIC, should be very appreciative of such an evolution, and perhaps should consider giving special long term tax exemptions to any new capital raised for these too-strong-to-fail banks... and that by definition will have a lower return on equity.

If $500bn of fresh bank capital was raised, with that 15 percent capital against all assets, that would leave room for $3 trillion of new bank credit. 

And we, “the real economy”, would certainly very much welcome the managers and the shareholders of the banks, taking a much smaller bite out of us.

Widows and orphans have been locked out from safe investments

It used to be that the safest investments, the absolutely not-risky, that paid low interests, were reserved for what was known as widows and orphans, those unable to shoulder risk. And banks and other investors took care of the “risky”

Not any longer! With capital requirements for banks that are much lower when banks hold assets deemed as “absolutely not-risky” than when they hold assets deemed as risky, the banks have been induced to earn their return on equity among those perceived as “absolutely not risky”.

You tell me, what return could there be left for a widow and orphan from holding an AAA rated security when banks can hold those same securities against basically no equity of their own at all?

Capice? If not…. perkurowski@gmail.com