June 28, 2011
Sir, Gillian Tett in “Why they´re happy in the valley of the shadow banks” June 28 worries because “notwithstanding the fact that the financial crisis largely started in the non-bank sector, or shadow bank world, thus far at least, western regulators have focused most of the reform efforts on the regulated banks”. Where does she get that first part from? And why would she assume that the shadow world behaves worse than the formal regulated one? For instance, there are no regulations on hedge funds, but rarely do you see any of them being leveraged more than 10 to 1, but you sure found regulated banks with a duly authorized leverage of over 50 to 1. Let me be frank, with bank regulators like the current, the only reason why I would place my money in regulated banks, is not because of the regulations, it is for the protections that might anyhow be present… in other words a 110% moral hazard risk.
Right now, even after the recently increased capital requirement of 9 percent to be applied to global systemic important financial institutions, these might still leverage 55 to 1 when lending or investing in what carries a risk-weight of 20%, the same risk-weight that applied for triple-A rated securities collateralized with mortgages to the subprime sector, for lending to Icelandic banks, or for lending to Greece. Sincerely, observing that, any advisor could have all the right to shout out “Careful, take cover, run for the shadows”
June 27, 2011
Sir, Brooke Masters in “Regulators agree extra bank capital protection” June 27, reports that now the “global systemic important financial institutions”, G-SIFIs, have convinced the bank regulators that, for a mere 1 to 2.5 percent additional capital, to be paid in easy installments until 2019, and to be applied on risk-weighted assets, to formally award them the franchise of “Too big-to-fail”. What a sad day… for us and for all those other banks that at this moment have been deemed “global systemic irrelevant financial institutions”
And let us calculate. Since the risk weights for investments in private triple-A rated securities are still 20 percent that would dilute the maximum basic capital requirement of 9 percent to signify only a mere 1.8 percent and so the “too big to fail banks” could still leverage themselves 55 times to one, when doing that kind of business… and not to speak of what they could leverage when lending to some sovereigns with a zero risk weight. God help us, our bank regulators have really been taken for a ride!
And Jean-Claude Trichet, European Central Bank President, stepping down as chairman of the Basel overseers group is quoted saying “The agreement reached today will help address the negative externalities and moral hazard posed by global systemically important banks”, Sincerely from a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.
Sir, Tony Jackson discusses the “Basel struggle to put bank capital into perspective” June 27. In doing so he evidences how he and most others discussants tend to forget that bank crisis does not result from lack of capital but by the banks doing the wrong type of lending. Suppose all the banks in a nation had 100 percent capital and then lost it all lending to some sovereign, like Greece, would that mean that the taxpayer would have no losses? How do you separate the taxpayers´ wellbeing from the citizens´ wellbeing? Let us never forget that at the end of the day, it is the quality of the lending of banks that matters the most, not their capital.
My point has all the time been that whenever regulators act like risk managers and set different risk-weights for different lending, which will effectively mean different capital requirements on different lending, they are effectively interfering in such a way that will guarantee that the quality of the lending will be worsened. We did not have a crisis because of a general lack of capital we had a crisis because for some type of lending the regulators authorized basically no capital at all.
From a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.
June 22, 2011
Sir, John Kay in “How not to measure a business – by its rate of return”, June 22, writes “Bank’s macho pursuit of rates of return led not to efficient companies but to the near collapse of the financial system”.
Forget it! If banks had pursued rates of return by for instance lending to Argentinean railway projects then we could perhaps use “macho”, as is they went for what was AAA rated of for Sovereigns like Greece, because that’s where the wimps of the Basel Committee authorized them to leverage their capital more than 60 to 1.
Kay has not yet understood what happened. I hope he dares to ask himself the following: “If I was a responsible bank regulator, what would cause me to lose most sleep at night, the excessive lending by banks to what was perceived as risky or the excessive lending by banks to what was perceived as not-risky but that could in fact be very risky?
Once Kay has answered the previous question, as it must be answered, and then analyses how the current capital requirements are treating what is perceived as not-risky as if it really was not-risky, then he will understand the monstrous mistake committed by the bank regulators.
Greece, as any nation, is represented by is the sum of its public and its formal and informal private sector.
Sir, Martin Wolf in “Time for common sense on Greece” June 22 makes a clear case for why common sense should not be delayed more than it already has. Even the argument that he qualifies as “right” namely that there is a “net transfer of resources into the Greek public sector” is doubtful if the Greek public sector does not merit such transfer.
A World Bank report states “it has been reported that Greeks already hold EUR 250bn in Swiss banking accounts and that the private-wealth capital outflow from the country is ongoing.” If we were just to suppose that all that private money is invested in public sector debt of Germany and France, and that the banks of Germany and France hold that same amount in Greek public sector debt… the question of who is better off in the case of a Greek public debt default, becomes a truly debatable one, since a nation is, at the end of the day, the sum of the public and the formal and informal private sector.
I mention this since in my country, Venezuela, I witnessed how foreign banks in the late 70s and early 80s trampled on themselves in order to lend to the Venezuelan government and, what finally saved the nation, was that the private Venezuelans did not believe in such nonsense and kept their money in safer overseas investments.
Sir, Tom Braithwaite in “Warning on bank rules reform” June 22, writes about the Basel III’s “minimum 7 percent ratio for common equity capital for assets, adjusted for risk” To understand the real significance of that ratio we must be much clearer about the fact that “adjusted for risk” means adjusted for the “perceived risk”, and which does not necessarily have anything to do with an adjustment to the real final and total risk.
Ask yourselves: “If I was a responsible bank regulator, what would cause me to lose most sleep at night, the excessive lending by banks to what was perceived as risky or the excessive lending by banks to what was perceived as not-risky but that could in fact be very risky?”
Once you have answered the previous question as it must be answered, and reflect on how the current capital requirements for banks in Basel II are based on treating what is perceived as not-risky as if it really was not-risky, then you will begin to understand the monstrous mistake committed by the bank regulators.
June 11, 2011
Control the regulators, do not let them sell “Too big to fail” franchises for a meager 3 percent of additional bank equity.
John Authers writes that “Self-control is the key to an investors life” June 11. He is right but the self-control that we all need and should be able to expect is that of the regulators.
The regulator, even though one of the markets most dangerous sources of imperfection could be the banks trusting the credit rating too much, were not able to control themselves and intervened as risk managers making the capital requirements of the banks a function of the same credit ratings the banks were already looking at. And what disaster that resulted in.
And now, displaying again a total lack of self-control, they want to sell “too big to fail” franchises to (SIFIs/G-SIFIs) banks for a mere 3 percent in additional capital. Not only will 3 percent of additional bank capital end up being almost meaningless in the case of a systemic explosion or implosion of these huge banks, but it is also probable that precisely those too big to fail banks that we least should want to be too big to fail, will be those most likely to exploit the franchise for all it is worth, in order to compensate the additional equity required, in the ways we would least like to see these franchises exploited.
Of course regulators will argue these franchises will be the subject of special supervision. Who are they fooling? Is it not hard enough for them to supervise these behemoths without labeling them as the most likely candidates for special support?
June 08, 2011
Sir, Sebastian Mallaby in “The Radicals are right to take on the banks” June 8, suggest that the capital requirements for the banks, in order to reserve against the “notoriously treacherous” calculations of the risk-weights, should hold “a further buffer against ‘model error”, aka geeks who screw it up”.
Just in case Mallaby is referring to other geeks, the geeks in this case were the regulator geeks in Basel, who started to play risk-managers for the world setting arbitrary risk-weights based on the perceived risk of default, and that had already been cleared for by the markets. They set for instance a risk-weight of only 20 percent for lending to anything that carried a AAA rating and 100% for lending to unrated small businesses, even though the latter, because they are rightly perceived as more risky, have never ever set of a bank crisis.
The previous utterly confused the whole market, specially the trusting non-geeks, and so the best thing would just to send those regulator geeks packing, and apply one single capital requirement with no risk-weighting.