April 14, 2015
Sir, John Kay writes: “The medical profession is often resistant to innovation, especially innovation that challenges accepted wisdom — in the 19th century the Hungarian doctor Ignaz Semmelweis struggled for decades to persuade his colleagues that the best thing they could do for patients was wash their own hands”, “Pragmatism works best in the reform of economics”, April 15.
I am not a bank regulator by profession, but boy do I identify with doctor Semmelweis’ struggles. For a decade I have tried to persuade bank regulators that the worst thing they could do to promote the instability of banks, and the destruction of the economy, is to distort the allocation of bank credit to the real economy. But, there they are, getting their hands dirty, and still applying their Portfolio Invariant Credit-Risk-Weighted Equity requirements for banks.
Semmelweis did not manage to get his message thru to the medical community during his lifetime, since his observations conflicted with the established scientific and medical opinions of the time. The rejection of his ideas might have caused him to be committed to an insane asylum in which he was supposedly beaten to death.
I take the rejections of my arguments with much humor, and have the full support of family and friends, and so I believe I will be able to escape a similar tragic destiny.
Sir, roulette is a game where absolutely all bets produce exactly the same expected financial payout; in this case a small loss since the house wins when the zero comes up. What would happen if regulations forced casino to increase the payout for “safer” bets, like betting on a color, than for “riskier” bets, like betting on a number? Easy, the game of roulette (and the casinos) would not be sustainable.
But, to forcefully alter the payouts and introduce a disequilibrium, is exactly what bank regulators have done by allowing banks to leverage much more their equity, and the support they receive from taxpayers, with assets perceived as safe than with assets perceived as risky.
The result will be too much betting on what’s perceived as safe, and too little betting on what perceived as risky; something that of course makes the financial sector and the economy unsustainable.
Unfortunately, the IMF, the Basel Committee, the Financial Stability Board; and experts like Lawrence Summers, Ben Bernanke, Paul Krugman, and Martin Wolf, none of them wants to acknowledge the risk-adverse distortions in the allocation of bank credit to the real economy, that the current bank regulations produce.
And, without considering that, then the whole discussion to which Martin Wolf refers to in “An economic future that may never brighten” April 15, becomes incomplete and unproductive… or in franker terms… nonsensical.
April 13, 2015
Sir, I refer to Joel Lewin’s “European QE redraws junk bond frontier” April 14.
Were the implications not so tragic one could have joked about Europe having fallen into the hands of a Chancey Gardiner like figure; the gardener elevated to Economic-Guru in Jerzy Kosinski’s “Being There”.
ECB’s/Mario Draghi’s seems not to understand the dangers of flooding the markets with QE liquidity, while the channels for that to flow by means of bank credit to where it is most needed, like to SMEs, are clogged. Firmly clogged by senseless credit-risk-weighted equity requirements for banks.
The overflow of liquidity, into more risky bonds, creates clearly serious risks for individual investors. But, for the economy at large, much worse is the dangerous overpopulation of the “safe-havens”; and the even more dangerous refusal to explore the risky bays, where there is a chance to find what could feed the future.
At least a normal gardener would now you need to water the plants, but not too much.
April 12, 2015
Blind to effects of risk weighted equity requirements for banks, Summers-Bernanke do not understand what’s happening
Sir, Wolfgang Münchau refers to discrepancies between Lawrence Summers and Ben Bernanke about the deep causes of the economic slowdown, “Macroeconomists need new tools to challenge consensus”, April13.
Both Summers and Bernanke, like most or perhaps all other famous economists, Münchau included, fail to consider the dramatic consequences of the new bank regulations that came into effect in the early 1990s with Basel I, and which really exploded with Basel II in 2004.
Before the advent of risk-weighted equity requirements, banks could be leveraged differently. But, whatever their leverage was at a particular moment, it was de facto applied to all bank assets, independently of their respective credit risk. That meant banks evaluated credits solely on the basis of the risk-adjusted net margins these were expected to produce; since those margins would contribute in the same way to generate the returns on bank equity. Those were the days of relative fair-access for all to bank credit.
When credit-risk-weighted equity requirements were introduced this resulted in that the risk-adjusted margins produced different risk-adjusted returns on equity, depending on how many times regulators allowed these to be leveraged. And that marked the beginning of the current ear of unfair access to bank credit. Those perceived as “safe” would have better risk-adjusted access to bank credit than those perceived as “risky”.
In practical terms those perceived as “safe” would get too much ban credit at too easy terms, while those perceived as “risky” would get too little bank credit at relatively too harsh terms.
And of course this dramatically distorted the allocation of bank credit to the real economy and has made many traditional macroeconomic assumption irrelevant.
And of course any economist unaware of the Great Distortion, or not wanting or daring to consider its implications, has no idea of what is really going on.
Technocrats, pouring QEs over clogged financial transmission mechanisms, set us up for the mother of all hangovers.
Sir, Henny Sender puts her finger on what should be of utmost concern for most delegates to discuss during IMF and World Bank meetings next week, namely that “Weak growth suggests QE might not have been worth the costs” April 11.
And Sender is so right remarking on how “odd… is the absence of a vigorous debate about the costs of these experiments, whether in the US, in Japan or now in Europe.”
With their QEs, unelected technocrats are pushing our economies higher and higher up a mountain of risks, for absolutely no purpose. As I’ve written to you Sir, at least a hundred times, if the liquidity provided by these schemes, are not allocated efficiently to the real economy, then absolutely nothing good can come out of it.
But the same unelected technocrats, simultaneously, by means of credit-risk-weighted equity requirements, have clogged the financial transmission mechanism, hindering bank credit to reach where it is most needed, the SMEs and the entrepreneurs. In other words, we are being set up for the mother of all hangovers. Damn those technocrat clowns!
According to the report by Swiss Re that Sender quotes, “US savers alone have lost $470bn in interest rate income, net of lower debt costs”. That is only one of the first symptoms.
April 11, 2015
Allow the SMEs and entrepreneurs to help build up the economy, and bridges to somewhere will follow.
Sir, Alan Beattie writes “The IMF, transformed from an agent of neoliberalism to a Gosplan-style advocate of public works, also supports a government investment push”, “The less appealing way to abolish boom and bust” April 11.
IMF, in Chapter IV of its recent World Economic Outlook of 2015, titled “Private investment: What’s the hold up” acknowledges: “Firms with financial constraints face difficulty expanding business investment because they lack funding resources to do so, regardless of their business perspectives” (page 11); “financially dependent sectors invest significantly less than-less dependent sectors during banking crisis” (page 15).
Yet the primary “Policy Implications” reached by the study is: “a strong case for increased public infrastructure investments…[and] for structural reforms…for example reforms to strengthen labor force participation and potential employment, given aging populations. By increasing the outlook for potential output, such measures could encourage private investments” (page 18).
And only then, almost as an afterthought, is it that the IMF puts forward: “Finally, the evidence… suggests a role for policies aimed at relieving crisis-related financial constraints”.
What “suggests a role”?
How on earth can IMF consider public infrastructure investments more important for the economy than relieving financial constrains?
One explanation could be that the study includes only data that “cover public listed firms only” and not data about “unlisted small and medium sized enterprises” (page 13). Clearly, if you do not study those most in need of access to bank credit, then you will of course not be able to measure the real importance of relieving financial constrains.
The second explanation is that IMF’s professionals insist in covering up for the mistakes of colleagues, the bank regulators. That is because relieving the real financial constrains, requires exposing how the current credit-risk-weighted equity requirements for banks odiously discriminates against the fair access to bank credit of those who most need it, like the SMEs and entrepreneurs.
Sir, the most important thing to do is to get rid of the regulatory distortions so as to enable banks once again to allocate their credit more efficiently to the real economy. If that is done, then you might find places whereto bridges should be construed. Otherwise the risk of building too many bridges to nowhere, is just too big for any economy to manage.
Sir, I refer to John Gapper’s and Tanya Powley’s fabulous interview with James and Jake Dyson “All inventors are maniacs” April 11.
Just thought you might be interested in a post on my subprime-bank regulations blog that I posted last year. It begins with:
“There I was trying to dry my hands wringing them in some tepid air blowing from the round hole of an appliance, thinking about how much more efficient the flat whole hand reaching drier was, when suddenly I thought… if I were a bank regulator I would at least give Dyson’s engineering group a call to see what they would think I should do….
I invite you to read it:
What correlation Andy Haldane? There is not even a regression between perceived risk of assets and major bank crisis.
Sir, Tim Harford mentions that “Andy Haldane, chief economist of the Bank of England, recently argued that economists might want to take mere correlations more seriously”, “Cigarettes, damn cigarettes and statistics” April 11.
I agree and a good place to start would be to even establish whether a correlation exists. Currently regulators have decided that what is perceived as safe from a credit point of view, shall require banks to hold much less equity than what is perceived as risky. That introduces serious distortions in how bank credit is allocated to the real economy.
I presume such equity requirements could only be justified if these helped to make the banks so much safer in such a way, that the benefits that would bring to the economy were larger than the possible negative effects of an inefficient credit allocation. Personally I do not see how that could be.
But no such analysis backs the credit risk weighted equity requirements that currently form the pillar of bank regulations.
Much worse yet, there is not even a regression between the ex ante perceived credit risks of bank exposures and major bank crisis… so there is not even a correlation to look at.
And so yes, Andy Haldane should run that regression, and take the resulting correlation seriously, even if as a regulator he then must eat plenty of humble pie.
I say so because starting from the angle of causation, I expect the correlation Haldane would find would indicate that the safer a bank asset is perceived ex ante, the more danger to the banking system it represents. In other words a 180-degree different relation than what bank regulators actually assume.
Why is it so hard to have regulators following the precept of do no harm?
PS. Follow my adventures battling the Basel Committee for Banking Supervision (and the Financial Stability Board)
April 08, 2015
With the Basel Committee’s injudicious regulations, it is very difficult for a bank to give credit judiciously.
Sir, Henny Sender holds that “Banks must lend more judiciously to prosper in emerging markets” April 8. Who could disagree with that? That applies of course to all markets and not only emerging markets.
But in order to do that, banks need to focus 100 percent on the borrower and not, as now, spend too much time looking at how it can structure the loan so as to be required to hold the least of equity against it.
When we read about Stan-Chart’s “commodity-related exposures” and that “much of the lending uses property as collateral” one gets the feeling that perhaps the “minimize the equity” objective might have triumphed the “know your client” criteria.
And this is but one of the should-be-expected, unexpected consequences of the Basel Committee’s injudiciously distorting credit-risk-weighted capital requirements..
April 07, 2015
Unbelievable that with so much history, Europe, instead of with a “Bang!”, could be going down with a whimper.
Sir, Robert D Kaplan, in “America is growing impatient with Europe’s appeasement”, April 7, states as a matter of fact “Gutsy is not a word one would use to describe Europe’s political class”. Sadly, very sadly, it is very hard to debate that.
And right below, giving credence to such an affirmation, we find Martin Wolf writing in “China will struggle to keep its momentum”, that “The world must pray the Chinese authorities manage this transition successfully. The alternative is not to be contemplated”; which basically reads like an anxious European convinced that his future is all-dependent on China’s.
Really, if Europe thinks it will be better off accommodating to Putin’s Russia; or if it thinks that its economy will be better off depending on China’s; (or if it feels that its bankers should earn their returns on equity solely with what is perceived as safe), then sadly it would seem that Europe is lost before the fight has even begun.
But hidden, somewhere in its gutters, there must be a reserve of European elites who can understand that it is time to stand firm… since it seems unbelievable that with so much history Europe, more than going out with a Bang! could be going down with a whimper.
Aren’t there any Bravehearts or Churchills in Europe anymore?
And, having observed the growing nanny mentality in America, its elite should be careful too. When drones are viewed as more convenient than boots on the ground, many strange things can happen.
Any regulator that would call what is currently happening an unexpected consequence is clearly not fit to regulate.
Sir, I refer to Stephen Foley’s “BlackRock chief warns ripple effect of strong dollar threatens US growth” April 7.
It states that Larry Fink, CEO of BlackRock “highlights the risk that monetary easing has inflated asset bubbles as investors such as pension funds searching for yield in a low interest environment are pushed into riskier classes”. And it quotes Mr Fink with: “This mix of growing assets and shrinking yields is creating a dangerous imbalance”. I am left wondering whether Mr. Fink really knows what is going on.
Does he know that one reason for why pension funds “are pushed into riskier classes”, is that they are pushed out from the perceived safe havens by bankers pushed into safer classes by their regulators with their silly and dangerous credit risk weighted equity requirements for banks? And that is just going to get worse the tighter bank equity gets to be, and when insurance companies also regulated with Solvency II in a similar way?
Indeed, “monetary policy seem insufficiently attuned to the conundrums their actions are creating for investors” But regulators are equally attuned to the conundrums their actions are creating for the fair access to bank credit of “the risky”, like for all the SMEs and entrepreneurs we need to get going when the going is tough.
And regulators please do not call all this an unexpected consequence. If you do it just evidences even more that you are definitely not fit to regulate.
More than the decline of individual countries, we are experiencing the decline of the world in general.
Sir, any country that signs up on the idea of allowing banks to hold less equity when lending to what is perceived as safe, than when ending to what is perceived as risky, has ordained a risk aversion that will cause it to decline. It will not longer finance sufficiently the more risky future, but will try to trot along for a while, by refinancing the safer past. Most of the world is currently implementing this type of Basel Committee regulations, China included.
And so any discussion on the decline of any country, like Gideon Rachman’s “Britain’s risky obsession with America’s wane” April 7, needs to be held against the perspective of a general decline.
For a starter no country with this type of regulations can aspire to reach world leadership based on its own efforts. Any increased leadership it could reach would only be based on someone else losing it faster.
Rachman refers to some having complained about Britain’s abandonment of “kith and kin” in the Commonwealth. Be that as it may it is much worse; like most of the world, it is abandoning its children, by refusing to take the risks needed for them to move forward, hiding in the very short-term safety of safe havens… soon to be dangerously overpopulated.
But again, of what importance can such minutia be to FT?
Sir, you know I am convinced that the pillar of current bank regulations, namely credit-risk weighted equity requirements for banks is extremely stupid, as regulators clear for risks already cleared for by the banks. And so the consequences of that can only be too much credit at too lenient terms to what is perceived as safe, and too little credit at too harsh terms to what is perceived as risky.
If instead those equity requirements cleared for instance for the potential of job creation and or the sustainability of planet earth then we would also distort, but at least we would have injected some purpose to that distortion.
And so when I read Amy Kazmin´s “New Delhi Notebook: Politicians pass the polluted buck while air quality worsens” March 7, I immediately think of recommending the Indian authorities the following:
Set up an environmental rating agency, and allow banks to hold less equity against any loans that have a good environmental rating. That way the banks can leverage more that type of loans and get a higher risk-adjusted return on their equity for a good purpose. Let us never forget that what the bank really leverages is not only its own equity but also the implicit and explicit supports the taxpayers and society in general grants them; and so it is not outrageous to ask for that support to serve a better purpose than only a quite dangerous risk aversion.
When the products of groupthink do not stay in Vegas, and are applied elsewhere, that can be truly sinister.
Sir, Janan Ganesh writes: People that work in the same field develop their own codes and slang. They sleep and socialize with each other. Without intending it, they seal off the world from uncomprehending outsiders. It is a byproduct of specialization and there is nothing sinister about it”. “The average voter is immune to romance and fevered rhetoric” April 7.
Hold it! That depends on whether what the specialists do in their intimacy stays in Vegas or not. For instance, when bank regulators got cozy in their little Basel Committee mutual admiration club, and through an incestuous groupthink came up with their portfolio invariant credit-risk equity requirements for banks, well that turned into something extremely sinister that completely distorts the allocation of bank credit worldwide.
Since it can always pay back through inflation, I bank regulator, decree sovereign debt to have a zero risk-weight.
Sir, Diane Coyle begins “A history of inflation – and a future of deflation” April 7 with describing high inflation as “socially and economically corrosive, redistributing purchasing power away from small savers and those on low wages that do not keep up, and also degrading trust in long-term bargains”. In other words a truly public bad.
But then, because of “the effect deflation would have on real debt burdens” and how this would be “inhibiting a return to growth”, she ends arguing that “A quick and political painless way to reduce debt burdens, private and public, is a bout of high inflation.” Clearly a case of the damned if you do and damned if you don’t.
But, if what is really needed is a 30 percent inflation to cut all debts back to something livable, why not an Emergency Act that decrees a 30 percent haircut applicable to all debts in the society, including that of banks to its depositors. Would that not be a more transparent, less distortive and, hopefully, a politically more painful solution, so that we can get a little bit more accountability into the system?
I mention this because clearly the concept of inflation not being a haircut, although intellectually very repulsive, must be a prerequisite for allowing bank regulators to argue something so loony as a zero percent risk-weight for sovereign debt.
April 06, 2015
Sir, John Dizard writes Investment managers will “wind up shocked, sputtering something about what happened to them could not have been expected because it was a seven, eight or nine sigma event… [since] Capital controls are not on the CFA exam, or accounted for by standard, or even the most sophisticated, probabilistic risk management models.” “A [capital control] plan till you get punched in the mouth” April 6.
Well neither are bank regulations, just another more subtle form of capital controls, part of a CFA exam, which is why subprime mortgage CDS, Cypriot bank deposits, investment-grade EM corporate debt, real estate in Spain and other similar turn out to be shockers.
Had it been on CFA’s curriculum, then anyone could have understood that, allowing banks to leverage up especially much with what was perceived as “safe”, would have to end in tears.
PS. In October 2004, in a letter published by FT I wrote and warned about how “our bank supervisors in Basel are unwittingly controlling the capital flows in the world.”
In 1988, US bank regulators enlisted the “Home of the Brave” to the causes of risk aversion and communism.
Sir, Lawrence Summers writes: “we may be headed into a world where capital is abundant and deflationary pressures are substantial. Demand could be in short supply for some time… the priority must be promoting investment, not imposing austerity”, “It is time the US leadership woke up to a new economic era”, April 6.
That is correct, but, when Summers opines the remedy to be: “The present system places the onus of adjustment on ‘borrowing’ countries. The world now requires a symmetric system, with pressure also placed on ‘surplus’ countries”, I disagree. What the US most needs is to get rid of its regulatory asymmetry, that which is expressed by requiring banks to hold more equity against assets perceived as risky than against assets perceived as safe.
Summers mentions that because China is launching a development bank, and some of US’ allies will join it, that “This… may be remembered as the moment the United States lost its role as the underwriter of the global economic system”. Not true!
It was in 1988, when the US signed up on the Basel Accord that stated the risk weight which determined the equity requirement for banks was to be zero percent for sovereigns, and 100 percent for unrated citizens, that the ‘Home of the Brave’ gave up the willingness to take the risks that had allowed it to become the underwriter of the global economic system.
In essence that was also the date when the US went statist, or, in more direct terms, became communistic.
April 04, 2015
They pay just 0.0025 to 0.02 cents of a dollar per advert to reach me online? No way! I am worth much more!
Sir, I refer to Tim Harford’s “Online ads: log in, tune out, turn off” April 4. It contains some very enlightening data for someone not in the business of targeting ads but only being a target of ads. Harford mentions that the rate for cheap advert may be as low 25 cents of a dollar per 1000 views, while good adverts may pay the publisher 2 dollars per 1000 view.
So that means that someone reaching me with a cheap advert pays for that 1/40th of a cent of a dollar while someone reaching me with a good advert pays 1/5th of a cent of a dollar. What a shocker, I thought getting my attention span was worth more than that. De facto I am a Mechanical Turk working at the receiving end. Not only do I perceive any income for that, zero salary, but, to add insult to injury, they are valuing the access to my attention span at ridiculous low rates.
It is clear that I urgently need someone to develop an App that will only allow ads that produces me an income of X dollars per hour of my attention span to reach me. The provider of that service, in charge of collecting my earnings, would have to work on a commission basis, so that I can be sure we are both targeting the same end results.
Since now and again I would wish to see a little of what is available in the cheap advert markets, occasionally I authorize allotting some of my valuable attention span, on a pro-bono basis.
PS. That X dollars per hour of my attention span will fluctuate according to market conditions.
April 01, 2015
Making clear the role of dangerously lousy bank regulations, would help to bridge many differences in Greece.
Sir, Martin Wolf writes: “The creditor side considers its generosity to profligate Greeks exemplary. The Greeks believe that private lenders were guilty of irresponsible lending, that the “rescue” was not of Greece but of those selfsame careless lenders and, above all, that Greeks have suffered enough. Both positions have merit. But no good will come from hurling such charges at one another”, “A mishap should not seal Greece’s fate”, April 1.
Absolutely! But what could have been happening if for instance a Martin Wolf had used his platform at FT to ask: “But what were European bank regulators doing allowing banks to lend to Greece's government against basically no capital at all, so that banks had all incentives on earth to lend to Greece excessively?”
Would that have made a difference? I believe so.
As is, in the hurling of accusations between Greece and creditors, no one says a word about the role bank regulators played. They are the ones most to blame… but seemingly they got themselves a lot of protectors.
That is truly sad. The reality is that what Greece most needs now, is to liberate itself from regulations which, by favoring the access to bank credit of those who can only dig it deeper into the hole where it find itself, government bureaucrats, discriminates against the fair access to bank credit of those who can most help it to recover, its SMEs and entrepreneurs.
March 31, 2015
Sir, Tony Barber writes: “A continent enfeebled by economic crisis” March 31. I have a question to him (and you).
What does Barber think would happen with his retirement account if, since he began to save, he would have paid his investment manager much higher commissions on returns produced by safe investments than on returns produced by riskier investments. Would his investment manager not have played it overly safe for him?
But, on a societal level, by means of those credit-risk weighted equity requirements which allow banks to earn much higher risk adjusted returns on their equity when lending to something “safe”, than when lending to something “risky”, that is precisely how current regulators have instructed our banks to act.
Whether we like it or not, banks have a very important role to play as investment managers for our economies. And the reason we taxpayers implicitly agree to support banks is not for them to avoid risks but to, with reasoned audacity, take intelligent risks on our behalf.
We need our banks to act much more like aggressive hedge fund in which the manager, the bank, takes a great commission, but also produces great results for us the investors, and for our economies.
Barber quotes Frederick the Great with “Diplomacy without arms is like music without instruments”. Indeed, but banking without risk-taking can only, in the best of cases, result in paying out some lousy annuities to those with very short life expectancy.
Europe (and other) has been enfeebled by risk-adverse bank regulations and, amazingly, this seems to be a non-issue for most of you at the Financial Times.
March 30, 2015
Accepting credit-risk weighted equity requirements for banks, is accepting the economy going into early retirement.
Sir I refer to Yoichi Takita’s “Split emerge between central bank and policy makers”, your special report on Japan, March 30.
Takita writes “ The government is working hard to ensure investment and employment growth will lead to an economic upswing.”… and for that Mr. Abe will try “eliminating disincentives such as high corporate tax rates, big electricity bills and excessive economic rules”.
I do not know enough about Japan to evaluate how much that could help, but, if it was for instance Europe, which depends so much on bank credit, then that would not suffice. That is because any country that tells its banks to go and leverage much their equity, and the implicit support they receive from taxpayers, on what is “absolutely safe”, and to stay away from “the risky”, is a country that has placed itself, unwittingly or voluntarily, in an early retirement mode not compatible with any sturdy and sustainable economic growth.
Sir, Laura Noonan writes “The avalanche of post-crisis banking regulation is coming to an end and most of the uncertainties weighing on the financial industry will be dealt with in the next year, Basel Committee secretary-general William Coen has said”, “End in sight for post-crisis bank reform” March 30,
And she quotes Coen with: “There is light at the end of the tunnel, the big pieces are there and it’s really now about getting to the finish line”
Sorry, as I see it, they have not really started, there’s much more bank regulatory stupidity than what we should tolerate. For example:
Regulators should have no concern with individual banks failing, but with the banking system itself failing. In fact they should know that the failure of individual banks is needed in order to help to strengthening the bank system at large.
Regulators should foremost be concerned with how banks perceive credit risks, and with how they manage these. But they do also concern themselves with the perceived credit risks in order to set the equity requirements. Doubling down on the same basic perceptions can help no one.
Regulators should know the banks play an essential role in allocating credit to the real economy, and that they need to be extremely careful in not distorting that process. And yet they allow banks to leverage their equity, and the implicit support these receive from taxpayers, differently depending on perceived credit risks, something that of course distorts.
Most of us ordinary citizens are extremely risk-adverse. And that is why we as taxpayers agree to give support to banks so that they, on our behalf, take some of the risks we know the economy needs to go forward. So why on earth do regulators believe we taxpayers support the banks for these to be only safe mattresses in which to stash away our savings?
By the way, besides stupidity, there is immorality. To discriminate against the fair access to bank credit of the “risky” those who by being perceived as risky are already discriminated against by bankers, kills opportunities and promotes inequality.
Perhaps the Basel Committee is so blinded by its own mistake so that there’s no other way than to start from scratch… beginning with holding bank regulators accountable for their stupidity and immorality.
I want a net 40 percent of the revenues generated by ads on the web in which I am the target. Who can help me?
Sir, I refer to Robert Cookson’s “Web publishers in arms race with adblockers” March 30.
Clearly picking up information about what we are up to on the Internet, and screening us for what we might like, in order to reach us for with some advertising, is big big business. And stopping that from happening seems also to be big big businesses… and now we read that sometimes those two big big interests even collude to get the most out of us.
But what about us, the targets? Is there no way we can participate in those revenues? Anyone who figures that out could have a very interesting business model in his hands.
For instance: “I want to prohibit any ad blocker to block any ad in which I am the target and in which I do not get a share of the ad-revenues… let’s say 50 percent”. Who can help me with that? I am willing to pay 20 percent out of my revenues for that service… in order to retain a quite modest 40% of my value as a target.
PS. Sir, between us, to block any ads targeted at me, without my explicit authorization, sounds like something quite criminal to me.
March 29, 2015
When the how to fight deflation is unequivocally dumb, and when deflation is the only good news in town
Sir, I refer to Gillian Tett’s “How deflation gave lower prices a bad name” March 29, with two brief comments:
One: Let’s suppose deflation is unequivocally bad. Even so to try to avoid it by artificially inflating the value of existing assets, by means of QEs, caring less about the creation of new assets, by means of bank regulations, sounds like something unequivocally dumb.
Two: For savers, who have sacrificed much consumption earlier in their lives, and who do now earn zero or even negative interests on what they consider as save investments, deflation must sound like the only good news in town.
Sir, I refer to John Dizard’s “Central banks enlist ageing populations in the competitive devaluation game”, March 28.
Dizard discusses Bank of Japan’s paper “Demographic Changes and Macroeconomic Performance — Japanese Experiences”; IMF’s “Is Japan’s Population Aging Deflationary?” and a paper by BIS titled “Can Demography Affect Inflation and Monetary Policy?”
One aspect not discussed in connection to this demographic change, is that since increased risk-aversion goes with the investment objectives of an aging population, the demand for safe havens relative to risky bays should be increasing.
Add to that the sad fact that bank regulators decided, on their own, that it was more important for our banks to avoid risks instead of to allocate bank credit to efficiently to the real needs of the economy, that of course also adds immensely to the demand for safe havens.
And it is only getting worse. Now by means of added Basel III liquidity requirements for banks, and Solvency II regulations for the insurance sector, which all-predicates risk-aversion, the demand for what’s “safe” must grow even more.
And, since any safe haven can become extremely dangerous if overly populated, it should be clear that an amazing scarcity of financial safety is lurching around the corner. Poor widows and orphans financially they will be more widowed and orphaned than ever.
But also poor the coming young generations, those who will be denied that societal risk-taking that could help them to have a good future with plenty of jobs.
March 28, 2015
Sir, I refer to Tim Harford’s “Highs and lows of minimum wages”, March 28.
In it Harford writes: “A fascinating survey reported in the World Development Report showed World Bank staff some numbers and asked for an interpretation. In some cases, the staff was told that the data referred to the effectiveness of a skin cream; in other cases, they were told that the data were about whether minimum wages reduced poverty. The same numbers should lead to the same conclusions but staff had much more trouble drawing the statistically correct inference when they had been told the data were about minimum wages. It can be hard to set aside our preconceptions.”
Sorry, is that not good? Should World Bank staff not be more careful about drawing a statistically correct inference from data relating to skin cream than from data relating to something that could have such profound implications as minimum wages? In statistics, besides confidence levels, do we not need significance of conclusion levels?
For instance I sure wish that some staff somewhere, when presented data concerning the credit risk of bank borrowers, for the purpose of setting the equity requirements for banks, would have had the sufficient presence of mind to remind everyone of that what they really needed was data about what caused major bank failures… something completely different.
Had someone done so, and had someone been able to make bank regulators listen, the world would have saved itself many tears and much trouble.
PS. You might have noticed a made a slight mistake :-) I left it that way because, most probably, those who not understand what I really meant, might not be able to understand it even if I corrected it.
PS. You might have noticed a made a slight mistake :-) I left it that way because, most probably, those who not understand what I really meant, might not be able to understand it even if I corrected it.
Sir, I refer to Nikolaus Blome’s “The quest for common ground between Greek morals and German maths” March 28.
Suppose only Greece had regulations that included the current credit risk-weighted equity requirements for banks; those which distort the allocation of credit by allowing banks to leverage their equity, and the support they receive from taxpayers, much more for exposures to something perceived as safe, than on exposures to “the risky”, like to SMEs and entrepreneurs.
In that case you can bet that the structural reforms Germany and Europe would request from Greece, would have included getting rid of such nonsense; on moral and on math grounds.
On moral, because it is immoral to discriminate against the fair access to bank credit of those who already, by being perceived as risky, have less access to it.
On math, because there is nothing that guarantees that those perceived as safe will in fact be safer for banks, quite the opposite; and there is absolutely nothing that states that “the safer” will allocate resources more efficiently to create supply demand and jobs in the real economy.
But that structural reform, of something that affects all in Europe (and many more countries), is not even on the table… and one really has to wonder what dark forces could be in play.
Sir, you write “labour markets in advanced economies need liberalization… But policy makers should not expect that supply side reforms will create their own demand. Appropriately easy fiscal and monetary policies must be pursued. The engine of jobs creation needs fuel to work.”, “Keeping the world’s labour markets busy” March 28.
But again, steadfastly, you say nothing about how the fuel of bank credit can create jobs, if allowed to flow freely. Since Basel I, about 25 years ago, bank credit has been instructed to flow to where the risk-weights are low and so the allowed leverages of bank equity are high. That means that the access to bank credit for "the risky", like SMEs and entrepreneurs, has unfairly become more and more difficult. Anyone who believes this does not affect job creation needs to go and have a look at reality.
Let me put it this way. Suppose their had been no Basel Committee credit-risk-weighted equity requirements; and suppose someone, to solve Greece’s problems, now suggested:
“We must increase the equity requirements for banks when lending to SMEs and entrepreneurs because they are too risky and so it is better that banks give loans to the public sector, so that plenty of good paying public sector jobs are created.”
Would you, the Troika or anyone else approve of such a plan? I doubt it. But as this is how it is, why are you silent about that? Is it because it takes less courage to qualify a proposal as idiotic than to qualify something dumb done and on which one kept silence as idiotic?
Things are not getting better… our current regulators clearly do not know what they are doing.
In the Basel Committees’ consultative document “Revisions to the Standardised Approach for credit risk” I was shocked seeing that the risk-weights are now proposed to be smaller the larger the private corporation is… as if the larger you are the safer or the better able to use the credit you are. How on earth do we achieve more jobs and less inequality when being opposed by such regulators?
March 27, 2015
Sir, the Lex Column writes about “Nigerian banks: wrong concentrations” March 27.
I just thought it would be a good opportunity to remind everyone that we have put our banks into the hands of regulators who, on their own, have decided to impose “portfolio invariant” equity requirements for banks. And that means the regulators do not consider the benefits of diversification, nor the dangers of concentration.
By their own admittance, to do otherwise, would be too hard work for them.
Sir, I refer to Daniel Ben-Ami’s review of David M. Kotz’ “The rise and fall of neoliberalism capitalism” FT-Wealth, Spring 2015.
It states: “It is richly ironic that the Fed chairman from 1987 to 2006 was Alan Greenspan, an ardent devotee of Ayn Rand, an arch free marketer”.
Hold it there!
Hold it there!
Put that in the perspective of the Basel Accord having approved, in 1988, that the risk-weights for determining the equity banks needed to hold when lending to central governments was to be zero percent, while the risk-weight when lending to an SME, or to an entrepreneur, or to an ordinary citizen were set to be 100 percent.
Put that in the perspective of that with Basel II, in 2004, the regulators determined that the same risk weight for a member of the private AAArisktocracy was to be only 20 percent, while the risk-weight applicable to an SME, or to an entrepreneur, meaning to an ordinary citizen was to remain 100 percent.
If anything distorted free markets, that was it!
And in 2007-08 the AAA-bomb detonated and short after "infallible sovereigns" like Greece ran into big troubles
And so what conclusions can we have to reach? Could it perhaps be that Alan Greenspan was just one of many moles, planted by statist or anti-capitalist ideologists, in the heart of the capitalistic system, meaning its banks?
March 26, 2015
You Greeks, in order to stand a chance, should begin by throwing out the statist/communist Basel Accord bank regulations.
Sir, I refer to Mohamed El-Erian’s “Missteps and miscalculations that could cost Greece the euro” March 26.
In it El-Erian decribes the challenges for Greece as “restoring economic dynamism, jobs and financial viability” and as tools to achieve those goals “three policy changes that many economists agree on: reducing excessive austerity, revamping structural reforms to unleash broader economic dynamism, and removing crippling debt overhangs that undermine existing productive activities and discourage the stimulus that comes with new investments.”
And I repeat, for the umpteenth time. You cannot restore dynamism, jobs and financial viability in Greece or in any country with bank regulations that, for the purpose of setting the equity requirement for banks, indicates the risk-weight of central governments to be zero, while the risk-weight of an SME or an entrepreneur is set at 100 percent.
Anyone who thinks that one Euro lent by a bank to Greece’s government will produce a sturdier economic growth, than a Euro lent to a Greek SME or a Greek entrepreneur… is a statist, a communist or most probably both.
Greeks (and all you other citizens) if you want your young ones to have a chance to get a good job in the future, you’ve got to urgently get rid of all statist/communist Basel Accord bank regulations.
Sir, Scott Minerd holds: “But in the long run, classical economics would tell us that the pricing distortions created by QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and standards of living over time” “QE likely to impair living standards for generations” March 26.
And Minerd writes: “The long-term consequence of the new monetary orthodoxy is likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity.”
It is so much worse than that:
The long-term consequence of the new bank regulatory orthodoxy, that of weighing equity requirements for perceived credit risk, is going to permanently impair living standards for generations to come, while creating a false illusion of making our banks safer.
It is regulating in favor of what is perceived as safe and against what is perceived as risky, as if what’s “safe” is not already benefitted and as if what’s “risky” does not already suffers. That has introduced the mother of all distortions in bank credit allocation… which blocks much of the liquidity provided by QEs to reach what it should reach…and... this is not even an issue!
And all that does it not help to make our banks safer? Of course not! What is perceived as risky is never threat to the banking system, only what is perceived as “safe” is.
March 25, 2015
Sir, I am from Venezuela, and the United States has at least recently criticized what is happening in my country, while China in most non-transparent ways has mostly dedicated itself to finance and take advantage of what is happening in my country. And that I confess is one subjective reason for why I find it so hard to agree with Martin Wolf’s “It is folly to rebuff China’s bank”, March 24.
But that said I also feel that in order not to lose yourself in the new globalized world, you need to be able to reassert who you really are, now more than ever. And in that respect, few are so close as the US and Britain. In April 1999, feeling that the UK could become slightly uncomfortable with EU and with the Euro, and having heard about the ideas of Conrad Black and Paul Johnson, I even speculated in an Op-Ed about “A new English language empire”.
In essence I find no good reason why the UK should lend some credibility, against what is clearly no real influence, to an organization that does not really share its values. I am certain that, at least for the time being, when Wolf and I, UK and US, speak about development, we mean something quite different than what current China does… or at least so I hope.
PS. And, sincerely, I find Martin Wolf’s “As a former staff member of the World Bank” statement, indicating that as far as not living up to the “highest global standards”, AIIB and World Bank would stand on similar ground, to be clearly out of line.
PS. And by the way, to present oneself as a development buff, while at the same time not objecting to those credit-risk-weighted equity requirements for banks that clearly stand in the way of development, is sort of silly.
March 24, 2015
Sir, I refer to Gideon Rachman’s “Growth will not save Europe from extremists” March 24. But there will not be any sustainable sturdy growth in Europe, while the regulation of its banks is in the hands of extremist. Only extremist could, for purposes of bank equity requirements, assign a risk weight of zero percent to central government debt and that of 100 percent to an unrated SME or entrepreneur.
Rachman writes “France and the rest of the member states… need mainstream politicians that can paint a convincing and optimistic picture of the future”. Indeed, and that message should go somewhat along the following lines:
“Europeans, we were horribly sabotaged by regulators who completely distorted the allocation of bank credit. Because of them we lost 25 years but, once we get rid of them, we will be able to resume the creation of the jobs our future generations require and deserve.”
Sir, Claire Jones, in “Eurozone jobless outlook points up fears of persistent stagnation” March 24 writes of “ECB projections, highlighting deep scars left by the bloc’s financial and debt crisis”. What is wrong with you all? Have I not explained it to you all in hundreds of letters?
Again: It has been more than 25 years since Basel I redirected banks to lend more to the public sector than to the private sector; and more than 10 years since Basel II also within the private sector, redirected banks to lend to those perceived as safe and to avoid the “risky”.
And that means effectively the Basel Accord has ruled that government bureaucrats, because they represent “an absolutely safe borrower”, are more capable to efficiently use bank credit and generate jobs than what the so “risky” SMEs and entrepreneurs can do.
If you really cannot understand what that signifies for the medium and long-term potential of an economy to generate jobs… you are either statists, communists or simply daft… I hope it is the latter.
Jones writes: “ECB believes government can dent unemployment by pressing on with making their labor markets more flexible and competitive.” That would help, but before you get rid of the regulators’ heavy hand guiding where bank credit should go, there’s really little to do. Unfortunately, ECB’s Mario Draghi, as a former Chair of the Financial Stability Board, is one of the guilty of the regulatory distortion… and so there is a reputational conflict.
PS. Do you still not understand that if bank regulations had not been tilted so much in favor of “the infallible sovereigns”, then Greece, no matter how much it shaded its accounts, would not have been able to rack up as much public debt as it did? Do you not know that if European banks had not been allowed to leverage their equity, and the taxpayer support they receive, more than 60 times to 1 when investing in securities that carried an AAA rating, that the subprime crisis might never have happened? And of course that same line of arguments explains much of the mishaps when lending to Icelandic banks or financing real estate in Spain.
Sir, again, no bank lending to what was not perceived as safe and therefore did not allow banks’ to hold little equity, had anything to do with causing the crisis. Of course, after the crisis has broken out all suffer, and, so unfairly, the innocent “risky” usually suffer most of all. But that has to do with ex-post consequences and not with ex-ante perceptions.
March 23, 2015
When regulators layer their concerns with risk on top of bankers’, the “risky” (SMEs), get no fair access to credit.
Sir, Wolfgang Münchau writes: “The link between a government buying bonds and a company in Sicily creating local jobs is long, indirect and uncertain… The truth is that we just do not know the impact of QE until we collect evidence of how the policy transmits to the real economy”, “The success of eurozone QE relies on a confidence trick”, March 24.
I am not entirely sure it was Münchau’s intention, but that translates directly in the question of: Do Mario Draghi and his colleagues have any idea of what they’re doing?
On that Sir, you know my opinion: No! They don’t… as evidenced by their acceptance of credit risk weighted equity requirements for banks that so dangerously distorts the allocation of bank credit to the real economy.
Here Münchau insists in the popular mantra of “Investors will only invest in plant and machinery if they see a rise in demand”. But, that covers only one type of investors, since there are other who believe, foolishly or not, that what they want to do, would help to create demand… and, as they say, those are the tough ones we need to get going, when the going gets tough.
Unfortunately this type of investors, SMEs and entrepreneurs, would need fair access to bank credit, that which is currently denied them, on account of regulators layering their concerns about credit risks on top of bankers’.
March 21, 2015
Sir I agree with Gillian Tett in that “A degree of creativity should be on the college curriculum” March 21. But that must also include making sure that creativity has a chair wherever important decisions are taken.
I say it again… had there for instance been some genuine representation in the Basel Committee of historians, and why not of anthropologists, these would have questioned the wisdom of the risk-weighted equity requirements for banks that have so completely distorted the allocation of bank credit to the real economy.
At least the chance of having someone able to quote Mark Twain in that “bankers are those who lend you the umbrella when the sun shines and want to take it away as soon as it looks like it is going to rain” could have given those central-banker-regulators some second thoughts, while they were doing their groupthink, in their cozy mutual admiration club.
March 20, 2015
Pär Boman, at the end of the day, your children and grandchildren, and your nation, are your most important customers
Sir, Andrew Hill refers to that the chief executive of Handelsbanken told the “FT in 2013 that he had studied 5,000 years of credit risk, while the bank draws on minutes of board meetings from the past 140 years to inform its attitude to customer loans and business cycle”, “Creative forces”, “Boldness in business” March 20.
What a splendid occasion that would have been to ask Pär Boman whether in all that information, he had found any sort of evidence supporting that bank regulators should require banks to hold more equity against what is from a credit point of view perceived as risky from, than against what is perceived as absolutely safe.
That as you know Sir, has in my opinion introduced the most serious disruptive distortion in the allocation of bank credit to the real economy.
Unfortunately, in “Customers first”, Richard Milne later reports that Boman opines: “I don’t think it’s our role to have an opinion on whether the democratic system has taken the right or wrong decision. We see regulation more as a signal system from parliament on how we want banks to behave”.
That’s a shame. My opinion is that it is precisely persons like Pär Boman who owe their customers’ society, the duty to speak out if they feel signals provided by regulations could be taking banks down the wrong route.
Richard Milne quotes Boman in that the “main lesson [from] the 140 years of board minutes that lie in the basement… is that about every 17 years there is a financial crisis.”
That could be… but another lesson that should be extracted from that data is when did banks do the most for their nation between crisis and crisis… and I doubt the answer to that would be… “When we took no risks.”
On the web I find that Pär Boman has three kids… and one of this days he might have grandchildren too. He should never forget that, at the end of the day, they and his nation are his most important customers. And I am absolutely sure they do not need regulators like the Basel Committee and the Financial Stability Board to infuse their banks with dumb credit-risk aversion. That is no way how to finance their future.
And Andrew Hill and Richard Milne, your duty, that is to press Pär Boman and others to speak out.
Martin Wolf holds that “Britain can only walk tall if productivity is reignited” March 20.
To “walk tall” means to be brave and self-assured. Sincerely how on earth can Martin Wolf believe that Britain could walk tall or regain productivity with wimpy regulators who tell banks to go an make their highest risk adjusted returns on equity with assets perceived as safe and to stay away from assets perceived as risky?
Wolf refers rightly to problems inherited by the financial crisis but still phrases it as a consequence of a widely shared “overconfidence in finance”… which shows he still does not get it.
When you impose credit-risk-weighted equity requirements on banks it is clearly not a sign of confidence but a sign of a lack of confidence. You are in essence telling the banks “We do not trust you to assign to the credit risk you perceive sufficient importance to clear for these in the size of your exposures and with the risk-premiums you charge… so we are also going to clear those credit risks for you in your equity.”
And Wolf also keep on referring to the need of less fiscal austerity, especially as “government is able to borrow at sub-zero real rates of interest” blithely ignoring that with the Basel Accord of 1988 banks were allowed to lend central governments against zero equity while, when lending to the private sector they needed to hold 8 percent of it.
Thus government borrowing costs became subsidized in a very nontransparent way… and the cost of that subsidy is paid by the lower productivity that results from the misallocation of bank credit.
But what do you mean Kurowski with banks not taking risks, have you not seen the disaster they caused?
Indeed I have, and all their problems were caused by excessive exposures to what was perceived as safe, by bankers and regulators alike, and could be held against very little equity. That to me is more a sign of excessive risk-aversion than of excessive risk-taking.
March 19, 2015
Interest rates must go up… but that must also be compensated eliminating the distortions of bank regulations.
Sir I refer to Sam Fleming’s “Fed loses ‘patience’ and opens way to first rate rise in a decade” March 19. All the hullaballoo, by so many actors, around the Fed’s intentions, as if it was all up to the Fed to make the economy work, is just mind-blowing.
I have no doubt interest rates should be increased, considerably, because rates lower than what the authorities are targeting the inflation rate, in your face, isn’t natural, in any financial market.
But, in order for that not to cause excessive recessionary impact, absolutely all the regulatory discrimination against the fair access of “the risky” to bank credit needs to be eliminated.
Please regulators, let the SMEs, the entrepreneurs, the start-ups ride to the rescue of our real economy, before its too late... these "risky" borrowers never ever caused a major bank crisis... as bankers are more than enough scared of their credit risk.
How? There are different options… here is a link to one I suggested for Europe.
March 18, 2015
Sir, John Kay referring to linkages between “testosterone and risk-taking” writes “We might have better banks if there was rather less male risk-taking and more female regulating and organizing”, “The finance industry needs more female skill” March 18.
If we in a game of roulette bet one dollar on either a safe color or a risky number, we are talking about exactly the same expected financial results, in this case a loss because of the zero the house reserves to itself. But, from that testosterone risk taking point of view are they really similar bets?
Currently we have bank regulations which, even though all major bank crisis have resulted from excessive betting on what was ex ante perceived as safe but that ex post turned out to be risky, allow banks to leverage much more their equity with what is perceived safe.
Since for instance they give a risk weight of only 20% to an AAA rated private borrower but a 100% risk-weight to an unrated borrower, the regulator is indicating, in roulette terms, that betting one dollar on the safe color, gives you five times the expected risk adjusted return than betting that same dollar on a risky number.
And all that while the real economy needs banks to give fair access to bank credit to “risky” numbers, the SMEs and entrepreneurs.
So, since regulators seem to have been blinded by some excessive misguided risk-aversion, what might most be needed, is instead more male risk-taking among regulators.
Before Greece asks Europe to give it a chance it should stop hindering the free fair flow of bank credit to Greeks.
Sir, I refer to Yannis Dragasakis’, Yanis Varoufakis’ and Euclid Tsakalotos’ “All we ask is that Europe give Greece a chance” March 18.
Before they have the right to ask that of Europe they should give their own citizens a chance.
They write of “Many of the 60 per cent of young people out of work will one day be reclassified as long-tem unemployed”… and yet they play along with bank regulations which by favoring credit to the government, hinders the free flow of fair credit to SMEs and entrepreneurs, those who stand the best chance to create the sustainable jobs the Greek youth so urgently need.
In Paris, March 25-26 OECD will hold its Integrity Forum 2015 titled Curbing Corruption Investing in Growth. To me, when regulators tilt the access of bank credit in favor of their employers, here by means of risk-weighted equity requirements, it sounds like a sort of corruption, and it definitely stops medium and long-term growth. I hope OECD, though also government dependent dares to analyze that issue.
March 17, 2015
Martin Wolf, bank regulators hindered savings from reaching investment projects… and so secular stagnation resulted.
Sir, Martin Wolf asks and answers: “Why are interest rates so low? The best answer is that the advanced countries are still in a “managed depression”. This malady is deep. It will not end soon.”, “Strong currents that keep rates down” March 18.
And Wolf argues: “The most plausible explanation [for what] Lawrence Summers… has labelled the forces “secular stagnation” — by which is meant a tendency towards chronically deficient demand… lies in a glut of savings and a dearth of good investment projects”.
No Wolf! There are indeed a glut of savings but the reason for the “dearth of good investment projects” is that the savings are hindered from reaching the prime drivers of investment projects, SMEs and entrepreneurs; because bank regulators considered them too risky, and favored bank credit to go where it was perceived as safe.
In 1988 regulators launched the Basel Accord. In it, if banks lent to the government, so that some bureaucrats were to decide how to allocate those resources, the banks needed to hold cero equity.
But, if banks lent that money to some SMEs and entrepreneurs, so that these were given a chance tried to come up with growth, then banks needed to hold 8 percent in equity.
Could the explanation be any clearer? Of course banks stopped lending to “the risky” because “the safe” suddenly provided them with much higher risk adjusted returns.
So when Wolf writes: Ultra-low interest rates are not a plot by central bankers. They are a consequence of contractionary forces in the world economy” it just shows that he still cannot understand what contractionary forces can be powered by means of regulatory risk-aversion.
Wolf holds “We should view central banks not as masters of the world economy, but as apes on a treadmill” Indeed, but what to do when central bankers act like masters of the universe?
John Plender writes: “If the essence of a bubble is that prices lose touch with fundamentals, that is where eurozone sovereign bonds are going. Market participants will be recycling government IOUs into the hands of the central bank regardless of relative risk. At the same time, the central bank-induced search for yield will reach new levels and create new distortions.” “Draghi QE is stoking bond bubble risk” March 17.
Sir, the Basel Accord of July 1988 determined that when banks lent to the private sector then they needed 8 percent equity but, when lending to the central government, they needed cero equity.
And that tilted bank credit towards governments being the constructor of the future, and away from that private sector who had been the principal constructor of the future in the past.
That was a defining moment for our economies, and many of the Eurozone’s current troubles are a direct result of it.
Now since government bureaucrats cannot deliver it, there are less perspectives of future growth, and therefore more need to get a share of what there is… and negative rates, joblessness, the disappearance of annuities, asset bubbles and all what have you, is just part of that struggle.
Frankly, at least our children and grandchildren cannot afford to have bank regulators like those in the Basel Committee.
March 16, 2015
Why worry about bank’s risk models, when the regulators’ own “standardized” risk weights are more than bad enough?
Sir, Laura Noonan writes about the regulators increased concern with how financial modeling by banks can influence their risk weighted assets and thereby the equity they need to hold, “Regulators push banks hard on capital ratio flexibility” March 16.
I care little for those discussions because as I see it, the regulators’ own “standardized” risk weights are more than bad enough.
In 1988, the Basel Accord, Basel I, approved that banks had to hold 8 percent in equity when lending to the private sector but the banks were allowed to lend to OECD’s central governments against no equity at all.
The introduction of such an amazing pro-government bias, I would even call it outright communism, distorted all common sense out of the allocation of bank credit to the real economy. And with Basel II in 2004 they made it worse. And now with Basel III they are digging us even deeper into the hole.
Perhaps, with luck, banks’ own risk models do not assign the same “infallibility” to the sovereigns as regulators do.
March 15, 2015
Sir, I refer to Brooke Master’s “Banks are still struggling to learn from their mistakes” March 14.
Master writes: “bankers say that the real problem with the US stress tests is that they are too complicated, opaque and difficult to predict. Regulators counter that financial meltdowns can come from unexpected sources and banks need to be ready”.
But I would ask the regulators: “If you think that financial meltdowns can come from unexpected sources, and banks need to be ready… then please explain the rationale behind the current risk weighted equity requirements for banks.”
Sir, bank regulators have not even begun to learn from their mistakes… just look at Basel III digging our banks and our economies even deeper into the hole they made.
Just look at how central banks are launching QEs, without even noticing how blocked the channels of bank finance are.
Sir Tim Harford writes: “bored with blaming bankers, we blame robots too, and not entirely without reasons. Inequality has risen over the past 30 years” “Man versus machine again” March 14.
But Tim Harford ends asking: Where are the robots when we need them?
I agree. Robots would never ever have come up with something like the Basel Accord, which, in 1988, decreed that banks were required to hold 8 percent in equity when lending to the private sector but 0 percent when lending to central governments of OECD countries.
Reasonably designed robots, not preprogrammed by statist or communists, would know that the last thing they could do while regulating banks, was to distort the allocation of bank credit to the real economy.
March 14, 2015
Sir, Gillian Tett, as an anthropologist who believes “that discipline to be woefully underappreciated”, applauds Ford “hiring a group of social scientist… to study the culture of modern carmaking”, “The drive to make a more humane car” March 14.
Great idea! That would at least give me some comfort that if automobile engineers were so dumb so as to design a car that would rev up especially fast, whenever the driver perceived everything as safe, and slow it down more than normal, whenever drivers thought it to be risky, an anthropologist would probably inform him that was a very bad idea.
Like they would equally consider it to be a bad idea to have both a driver learner and his instructor driving simultaneously a car with two driving wheels.
But of course these social scientists must have enough character to speak up and not be blinded in awe by car engineers’ supposed expertise.
For instance I wish Ms Tett hade believed more in herself as an anthropologist, so as to speak out against those risk adverse bank regulations that have us and our banks, driving fast off the road of prosperity.
FT, do you not realize the urgency we have to get rid of the current bunch of dangerous and failed regulators?
Sir, John Dizard opines that “the advent of negative yields for the best European government or corporate issuers… is the breakdown of the policy world’s response to the global financial crisis”; and he quotes a European bank’s credit strategy saying: “We have searched through the records and asked the ECB how they think their [asset purchase strategy] will work, and there is no evidence they know the answer” “Investor should embrace the inherent contradictions of quantitative easing” March 14.
Indeed that is truly scary stuff, but it is what I have been writing to you for over a decade. Mario Draghi and colleagues, simply have not the faintest idea of what they are doing.
The negative interest is just one tip of the iceberg. The real intellectual breakdown came in 1988 with the Basel Accord, Basel I; followed up in 2004 with Basel II. At that moment, regulators, with their risk-weighted equity requirements, ordered bankers to perceive safe assets as safer yet and risky assets as riskier yet.
The banks, consequentially, started to compete with pension funds, widows and orphans in chasing too much what was perceived as safe and evading too much what was perceived as risky. Sir, please, what do you think caused problems with AAA rated securities, Iceland’s banks, real estate in Spain, or lending to Greece, that they were perceived as risky? Of course not!
Now we have run out of safe assets, but regulators still pay banks with low equity requirements to go for these, and now, by means of Solvency II, they want even to impose that same stupidity on insurance companies.
What will happen? That the real “risky”, like SMEs, will still not have access to bank credit because, as Jeremy Stein of Harvard has argued, banks are too busy “getting high quality stuff by swapping, or ‘transforming’ it, with low quality paper”… to keep the regulators happy and pass stress tests that will allow them to pay dividends and repurchase stock. How crazy can it be?
Do you not realize the urgency Europe and the whole world has to get rid of the current bunch of dangerous and failed regulators?
PS. Dizard write "Regulators and politicians are insisting that risks be taken without taking risks". That in a nutshell is the message I have sent FT in more than a thousand letters, but that it has preferred to ignore.