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Sir, I refer to Reza Moghadam’s “A modest proposal on QE”, June 12

The problem: “With banks… is that their balance sheets are stuffed with government paper… banks’ sovereign holdings remain sharply skewed to their own sovereign.”

Moghadam’s proposal: “the ECB could buy the excess bonds as part of a new QE programme. It would do so not based on a country’s capital share at the ECB, as is now the practice, but according to the excess exposure in each country’s bonds”

His expected result: “By delinking national banking systems from their own sovereigns, banks would end up holding a more diversified portfolio of sovereign debt.”

Sir, bank balances are stuffed with government paper not because of QEs, but mostly because ever since Basel I in 1988, that is what requires the least capital from banks scarce of regulatory-capital. And what use is it really for the real economies of Europe that their banks end up holding a more diversified portfolio of sovereign debt? Absolutely none!

In November 2004 in a letter published by FT I wrote: How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

It is a problem that regulators do not dare tackle, mostly because its recognition points to the fact that the bank regulators were never really qualified to regulate.

Here is an aide memoire on the horrors of risk weighted capital requirements.

@PerKurowski ©