July 25, 2016
July 23, 2016
Most economists do still not understand the current regulatory distortion of the allocation of bank credit to the real economy.
July 22, 2016
FT, without fear and favour, take a long hard look at the incentives regulators dangle before banks
Global disorder: Meddling bank regulators make both what’s safe and what’s risky riskier, and hurt the real economy.
July 21, 2016
Too many, FT included, approve of postponing all cleansing, even knowing that will make the après nous le deluge so much worse.
July 20, 2016
Had regulators left their desk and soiled their shoes, our banks and our economies would be in much better shape.
The first Op-Ed ever I wrote Puritanism in Banking was the result of suddenly having a feeling that many of my clients who, because they were perceived as “risky” always found it harder to access bank credit, were suddenly faced by even larger difficulties, as a result of new bank regulations coming out of Basel.
The “expert” bank regulators there, scared to death of banks failing, from their desks declared that more-perceived-risk more-capital and less-perceived-risk less-capital, and believed that should take care of it all.
They did not walk history to understand that what is ex ante perceived as risky never ever has created those excessive exposures that crises are made of, those have always resulted from excessive exposures to what was perceived as very safe when incorporated on the balance sheets of banks.
And they did not walk main-street so as to understand that banks already clear for perceived risks, with size of exposures and risk premiums, and therefore, when they cleared for the same perceived risk again in the capital, they over-sensitized the system to perceived risk. And even though they stayed at their desks the experts blithely ignored that any risk, even if perfectly perceived, causes the wrong actions, if excessively considered.
And here we are and even in the face of failure, the regulators still refuse to walk and soil their shoes. Let’s take away their desks!
And I have in thousands of letters argued that one of the major problems we face, are the current misconstrued risk weighted capital requirements for banks, those which allow their equity, and the societal support received, to be leveraged much more with what is perceived as safe than with what is perceived as risky.
Though these regulations allowed banks to earn very high risk adjusted returns on equity for quite some time, it caused banks to dangerously overpopulate “safe” havens, like AAA rated securities backed with mortgages to the US subprime sector and loans to sovereigns like Greece… thus the 2007-08 crisis.
And as these impede the “risky”, like SMEs and entrepreneurs, to access sufficiently bank credit… thus the weak recovery.
These regulations were the result of putting our banks in the hands of regulators who did not care, and still do not care, one iota about whether banks allocate credit efficiently to the real economy. And that is of course the risk we can least afford our banks to take.
As a result, our banks no longer finance the riskier future, that which feeds the proteins our economies need to remain muscular, but only refinance the safer pasts, that which only provides the proteins that can cause economic obesity.
And Wolf concludes: “Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. Those who reject chauvinist responses must come forward with imaginative and ambitious ideas aimed at re-establishing that balance”
Mr. Wolf, that has to start by recognizing the mistakes, and holding those responsible for these, clearly accountable… “without fear and without favour”.
So dare to speak out! The risk-weighted capital requirements for banks is pure regulatory populism. If allowed to continue it condemns our civilization to that hardship and mediocrity that will surely be exploited by other dangerous populists who thrive on hardship and mediocrity.
PS. On December 31, 2009, wishing all a happy decade, in a letter titled “The monsters that thrive on hardship haunt my dreams” and that was published by FT I wrote: “As to the banking system, there is nothing that could not be solved by asking ourselves the simple question about what our banks are supposed to do for us, because, unfortunately, that is the question our current very poor set of regulators have never asked themselves.” Now, July 2016, that question is still not being asked, much less responded.
July 19, 2016
To save the banks the regulators must admit their huge mistakes, and rectify these urgently and intelligently
This because the truth is that the current risk weighted capital requirements, those which allow banks to leverage their equity and the societal support they receive more with what is perceived as safe than with what is perceived as risky, are entirely unsustainable, for two reasons.
First, though they might allow banks to earn high risk adjusted returns on equity on what’s safe for quite some time, in the long run they will cause banks to dangerously overpopulate “safe” havens, which is precisely the stuff major bank crises are made of.
Second, as they impede the “risky”, like SMEs and entrepreneurs, to access sufficiently bank credit, the real economy will begin to suffer, and there is not a chance banks can expect to survive with a real economy in tatters.
Substituting a significant leverage ratio for the risk weighting, would eliminate the distortions.
That said it has to be done intelligently, so that the economy does not suffer an excessive credit squeeze. One way could be allowing banks to hold the capital originally required on all their current assets and have the new ones apply solely to any new assets.
Since that would, on the margin, reduce the demand of banks for safe assets such as loan to sovereigns, that would, on its own, help to avoid getting deeper and deeper into negative territory.
I would also suggest European finance ministers to look at Chile’s intelligent way of extricating its banks from very similar difficulties in 1981-1983
July 18, 2016
Gordon Brown, in order to defend globalization, you need to stand up against dumb rulers of it, like the Basel Committee
Banks “throw yourselves back into life” and dare visit the risky bays that our grandchildren need explored.
July 15, 2016
An Inclusive Growth Commission has a much more important thing to do than pushing public investments.
July 13, 2016
A mindless structural reform of regulations castrated the banks and helped to kill the dynamism of the economy.
July 12, 2016
#BoE #FSB Mark Carney why do you bank regulators discriminate so much against us SMEs and entrepreneurs?
July 10, 2016
July 09, 2016
Bank regulators, and FT, should learn backgammon, in order to understand what risk we cannot afford not to take
Might economists have spent too much time at their desks and too little on Main-Street to understand risks?
Where would Philip Tetlock or Robert Armstrong forecast the next bank system-threatening crisis to appears
July 08, 2016
July 07, 2016
The access to bank credit manipulation costs us infinitely more than Libor and all other manipulations put together
July 06, 2016
The two you know what on bank regulations that Martin Wolf and so many more believe should never be names
July 04, 2016
What makes me most nervous about Brexit is seeing how so many of the expert’s elite have gotten the willies.
July 03, 2016
To bring back broad-based and growing prosperity we must get rid of current blind and dumb bank regulators
July 02, 2016
Here is an aide memoire on the egregious mistakes of current bank regulations.
Are the systemic risks, derived from many or all cars being on autopilot, ignored by regulators? Like in banking?
July 01, 2016
When compared to how risk adverse bank regulation help overcrowd safe havens, Brexit is but a small blip.
June 30, 2016
Are risk weights of King John 0%, AAArisktocracy 20% and Englishmen 100% in the spirit of England’s Magna Carta?
June 29, 2016
The real UK economy, SMEs and entrepreneurs, need also to be invited to a “fireside chat” with Mark Carney and BoE
June 27, 2016
June 26, 2016
Sir, Ben McLannahan and Gillian Tett write that the US Federal Reserve reported that “Every one of the 33 US banks that took the first part of the annual “stress test” passed it” “US lenders face higher stress test hurdle”, June 25.
That is good news. But the bad news though is that, as I have said time after time, those stress tests are incomplete. They only include what is on the balance sheets of banks, and not what these should include but perhaps do not include. And that means that the all-important social role of banks of allocating credit efficiently to the real economy is completely ignored.
If banks run into problems because of allocating credit in accordance to the needs of the real economy, that is a much lesser problem than if the real economy does not have adequate access to bank credit.
What do I suggest? Analyze for example the evolution of how many credits, not guaranteed with house mortgages, have been given over the years to “risky” SMEs and entrepreneurs, and I am sure you will be shocked with how the credit risk weighted capital requirements for banks have distorted.
Embracing some inefficiency and duplication will improve resilience and recovery; and will reduce system fragility.
June 23, 2016
FT, you seem to exploit the needs and wants of the young only when it suits you, like today when fighting Brexit
June 22, 2016
It behooves us to stress-test our main bank regulators; the Basel Committee and the Financial Stability Board
Loony and statist bank regulators are destroying the opportunities of the real economy to sustain decent pensions.
Hardheaded bank regulators still believe they’re up against the expected while the real enemy is always the unexpected
June 20, 2016
And now, decades too late, FT publishes an article by LBS’s David Pitt-Watson mentioning that finance needs a purpose
June 19, 2016
In sovereign debt should not moral and ethical issues be more important than collective and pari passu clauses?