On January 1, Basel III, the bank regulatory cliff, will just make it all so much worse

Sir, Simon Greaves, in World Diary, December 31, for Tuesday 1 reports “Better bank standards: Key proposals of the Basel III framework of global capital standards for banks become law. Eleven member jurisdictions have published a final set of regulations effective from today… The Basel III package introduces new prudential requirements - capital buffers, a leverage ratio and liquidity requirements”.

But no!, since the capital requirements will still be based on the perceived risks, and now the liquidity requirements will too, we can only expect that the effective discrimination against “The Risky” and in favor of “The Infallible” to persist and increase, and with that the damage this causes to the real economy.

Frankly, in a world with so many concerns, where did the sissy bank regulators get it that their petit bourgeois baby boomer concerns should be prioritized?

Forget about the "Fiscal cliff" this Basel III cliff is much more dangerous

God make us daring!

The incredibly skewed bank exposure in favor of “The Infallible” and against “The Risky” is the Achilles’ heel of the real economy.

Sir, the regulatory standing order for the banks, especially when faced as they are with great scarcity of capital, is to stock up on “The Infallible” assets and get rid of “The Risky”, those for which they are required to hold much more capital. And that is becoming even more imperative when Basel III will impose liquidity requirements based on perceived risk. 

This is what creates the largest distortions in the financial market and so I keep being amazed by how for instance John Authers can write a “Message from Memphis gives a bonds perspective” December 29, completely ignoring the Basel regulations perspective. 

If, as in pre-Basel days, all bank assets generated the same requirements, the current markets would be dramatically different which just comes to show how loony it is to have placed us in the hands of some bank regulators who have no idea of what damage to the real economy they are doing with their silly risk-weights. 

Authers writes “many holders regard Treasuries as truly risk-free [and] this anomaly looks particularly dangerous.” Of course it is dangerous, but by now he should know that no market participants regards the Treasuries as risk-free as the regulators do, like when in Basel II they assigned these a zero risk-weight, and which meant there was no limit on how much banks could leverage their equity if stocking up on these assets.

Resentment is indeed a dangerous sentiment… it not only blinds.

Sir, I cannot for my world understand how Christopher Caldwell can find “Gangman Style” to be more an expression of South Korean culture than of US culture, nor do I understand what myth of US cultural genius he sees debunked, nor what he finds so “stylishly” and not “dumbing down” about “Gangman”, “Gangman stylishly debunks myth of US cultural genius” December 29 2012. 

But no doubt Caldwell is correct when writing about how the US is often resented, as his article is in itself an absolutely perfect example of that, since how else can one otherwise explain an argument such as “iTunes is an American invention” which “magnifies US cultural advantages”. 

And where does Caldwell get that the “Americans think they are better at making popular culture than other people”? I have never really seen Americans making an effort to produce popular culture for other people, but only that other people, mesmerized with American culture or perhaps with what they perceive as the American lack of culture, often soak up more of American cultural productions than they perhaps should… but that is not America’s fault.

Hayek and Keynes would have stood arm in arm against different capital requirements for bank assets based on perceived risk.

Sir, we have the world in financial turmoil as a direct consequence of regulators having allowed banks to hold extremely little capital, 1.6 percent or less, when lending or investing in what was officially perceived as “The Infallible” while requiring the banks to hold 8 percent against any exposure to “The Risky”. And yet five years after the crisis outbreak we can still read comments, by for instance Robert Sutherland Smith, that attribute this crisis to a universal banking which was supposedly freed in the “name of Hayekian neoliberalism”, “Bitter harvest of Hayekian neoliberalism”, December 27. 

In “free banking”, though there is of course different capital costs for different risk structures, there is no such thing as different capital requirements based on the perceived risk of the different individual assets of a bank, and Hayek would never ever have approved of such distorting regulatory stupidity. When will the underlying political agendas allow for that to be understood? 

And of course Lord Keynes, and who wrote “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them”; and who was an aggressive and able speculator on his own, would also fiercely have opposed such folly.

In this age of media driven besserwissers we need to be more skeptical than ever about “expertise”

Sir, John Lloyd writes “It is a source of [British] pride that disorganization is transformed into magnificence” but “that now some have developed an anxiety about muddling through, and the lack of strategic thinking among leaders in public life”, and concludes in “That those who command the public and private summits of the future should be schooled away from the temptation to avoid recognizing complexities”, “Class notes from a course on the age of complexity” December 24. 

Yes! But also… No! Because sometimes the best and only cure to an excessive complexity is simplicity, and so it is vital for those involved in strategic thinking, never ever to consider themselves so superior so as to be capable to manage any complexity. 

Equally, in this age of media driven besserwissers, it is more important than ever for the society to remain healthy skeptical knowing that even the most reputable experts can be very wrong. 

For instance, the primary cause for the bank and economic crisis happening and for the real economy not recovering, lies squarely with the bank regulator “experts”. Arrogantly thinking themselves to be capable of managing the risks for the world, with their capital requirements based on perceived risk, and their risk-weights, they expelled all common sense from markets and banks. 

And five years after the outburst of the crisis nothing has really been corrected, and instead much has been made worse, only because, as a society, we find it so hard to accept that experts can be so incredibly dumb. 

But I assure you, there is no limit for how dumb experts can be, especially when gathered in a mutual admiration club where no one is held accountable. Occupy Basel!

Your objection to Carney´s salary, though correct, is a very petty minded objection not worthy of FT.

Sir, I questioned Mark Carney´s appointment to become the next governor of the Bank of England based on the fact that as the current chairman of the Financial Stability Board he was one of those regulators who did not understand the distortions that their capital requirements based on perceived risks were causing, and therefore he could be of no real service to the real economy of Britain. 

That is a real objection! Your objection to Carney, “True cost of Carney”, December 22, based on his high salary, though correct, is a very petty minded objection not worthy of FT. 

PS. In another effort to make you understand the Basel II distortions I invite you to read a comment where I explain these in terms of the distortions similar regulatory changes to the pay-out for roulette bets would cause.

The financial crisis 2007-08 should have dealt a fatal blow to bank regulations, not to economic liberalism.

Sir, Sir Samuel Brittan in “It is no time to give up on economic liberalization” December 21, writes about “the traumatic event… the financial crisis… 2007-08 administered a fatal blow to economic liberalism”. 

That is only because the amazingly distortive role of bank regulations in generating this crisis has been completely ignored, or silenced. If not, the financial crisis of 2007-08 would not have even remotely signified a fatal blow to economic liberalism, but would indeed have dealt a fatal blow to the crazy regulatory paradigms used by some overly wimpy bank regulators. 

The Basel Committee, primarily with Basel II, imposed on the banks capital requirements based on perceived risks which were already cleared for by the banks and the markets, and completely distorted the financial system. 

As a consequence banks were allowed to earn a much higher expected risk-adjusted return lending to “The Infallible” than when lending to “The Risky”. And, as anyone should be able to understand, at least if allowed to understand it or no other agenda stands in their way, that has absolutely nothing to do with the free markets that economic liberalism promotes.

For the perfect market theory to have been discredited, free markets needed to exist, and they did not.

Sir, Gillian Tett references a paper in Central Banking Journal December 2012, by Paul Wooley and Dimitry Vayanos, which I have not read, but that is quoted stating “Like regulators funds have been following procedures based on the discredited theory of perfect markets”, “Momentum trading part of a wider structural flow” December 21. 

I do not know about the procedures of funds, but, let me assure you, regulators did not believe in any theory of perfect markets; on the contrary, what they did, and still do, was to destroy it. 

When they imposed on the banks capital requirements based on perceived risks which were already cleared for by the banks and the markets, they completely distorted the financial system. 

In doing so they allowed banks to earn a much higher expected risk-adjusted return lending to “The Infallible” than when lending to “The Risky”. And, as anyone should be able to understand, at least if allowed to understand it or no other agenda stands in their way, that has absolutely nothing to do with free and perfect markets, and so, therefore, no theory about perfect markets could have been discredited by the recent crisis.

Should insurance companies hold more capital for insuring “The Unhealthy” than when insuring “The Healthy One Percent”?

Sir you refer to the discussions on the issue of separating of splitting up banks in retail and capital market units, as suggested by The Vickers Reports and the Parliamentary Commission on Banking Standards chaired by Andrew Tyrie, “Banking reform”, December 21. 

That is OK but let me remind you that though there have been many scandals which may have resulted from these two activities occurring under one roof, the current crisis, like for instance the losses in loans to Irish banks, in AAA rated securities, in loans to sovereigns, and in real estate financing in Spain, has absolutely nothing to do with that. 

No!, as long as you are able for instance to be more concerned with interest rates manipulation in The Libor Affair, than you are about the much more significant and perverse interest rate manipulation produced in The Basel Affair with its capital requirements for banks based on perceived risk, you stand no chance of achieving any type of real useful fundamental banking reform. 

As I see it anyone who for whatever reason on purpose ignores what Basel II really did to our banking system is an immoral co-conspirator of The Basel Affair. 

Today The Libor Affair has most probably ended with fines paid and no one really being sure who won and who lost, but The Basel Affair, is still going strong, immorally discriminating as much as always, and perhaps even more, in favor of “The Infallible” and against “The Risky”. 

I wonder what you would have to say if insurance companies were ordered to hold more capital when insuring “The Unhealthy” those with preexisting conditions or belonging to the poorer which now are reported to have a lower life expectancy, than when insuring “The Healthy of the One Percent”. 

That would mean that “The unhealthy” would have to pay even higher premiums than what their unhealthy status would explain and merit; and that the “The Healthy of the One Percent” would have to pay lower premiums than what their healthy status would explain and merit. And my friends that is in terms of access to bank credit, precisely what those regulators in “The Basel Affair” are up to.

Bank regulators need also to reinvigorate urgently their moral mojos.

Sir, I cannot but express amazement with the abundant and detailed coverage given to of UBS and The Libor Affair by the Financial Times, for instance on December 20, when compared to the so little information given out on what the Basel II bank regulations really was about, The Basel Affair.

For instance, just the simple publication of the tables of risk weights corresponding to “Claims on sovereigns, page 19 and “Claims on corporates”, page 23 and that appears in the June 2006 document that compiles Basel II, with an explanation of what that entailed in authorized leverages to banks when holding different assets, would have enlightened your readers of a problem a thousand-fold more significant than the absolutely illegal Libor incident.

In fact Jonathan Guthrie’s assertion that “Big banks must reinvigorate their moral mojos” should apply as much or even more to the regulators. Here we have public servants deciding, for no other reason than to satisfy their boudoir dreams of a world with no bank failures, that those perceived as risky must pay even higher interest rates to the banks than they would ordinarily have to pay, and those perceived as absolutely safe less, and that, besides being plain stupid, is also plain immoral.

And when Caroline Binham reports on how “Lowball [Libor] tenders aimed to paint a rosy pictures of health [of UBS]” this seems so innocent when compared to the so low capital ratios reported by the banks, because of the risk-weighting of assets, and which really confounded all, including all FT’s experts.

John Kay, when at the bar, you’d better ignore those too respectful of the establishment!

Sir, I refer to John Kay´s “To grasp the meaning of Christmas, head down to the pub”, December 19. My first impression was he was building up an alternative explanation for why he preferred to go to the bar with Gillian Tett than with Martin Wolf, without having to state the obvious. 

But then Kay ends with “if you want to understand, the 2007-08 financial crisis, your approach must be eclectic… and, of course, you need anthropological insights that accounts for the peculiarity of human institutions”; and which makes clear that the bar visit he refers to has solely a professional motif.

For about a decade I have forewarned and explained the 2007-2008 crisis, as caused by giving banks excessive incentives for exposures to the ex-ante perceived as “The Infallible”, that which is truly dangerous because it is perceived as absolutely safe; just as getting out of the crisis is now made almost impossible by discriminating against the access to bank credit of “The Risky”, those already safely known as "risky". And though I am an economist and not an anthropologist, I know I am right. 

And so perhaps what John Kay most needs as company when heading down to the bar to talk about the crisis, has nothing to do with the profession but with the willingness of, "without fear and without favour", profoundly question the professional capacity of the establishment.

Bernanke might be a great inflation slayer but, in terms of job creation and bank regulations, he is in way over his head.

Sir, I refer to Sebastian Mallaby´s “Bernanke – the rebel with a cause” December 19, where he suggests Bernanke as a runner up to Mario Draghi as FT´s person of the year, also much based on the same machismo of offering to do “whatever it takes”.

That fighting unemployment might be a great cause, no one doubts, but let us not forget that the road to hell is paved with good intentions, just like the road to the current bank crisis was paved with good intentioned capital requirements for banks based on perceived risks.

To me any person who sets out to fight unemployment by injecting liquidity while there are regulations in place that will not allow that liquidity flow freely, but will channel it mostly to what is perceived as “The Infallible”, simply has no idea about what creates jobs in the long term, nor about how to regulate banks, since it is only among “The Infallible” ex-ante, that the ex-post real big disasters occur. 

In order to create a new generation of jobs you simply cannot discriminate against the access to bank credit of “The Risky”, the small and medium businesses and entrepreneurs. And in order to make our banks safer, you simply cannot ignore what “The Risky” contributes when helping to create a more sturdy economy.

And so Ben Bernanke might be a great inflation slaying central banker, but, in terms of job creation and bank regulations, unfortunately, he is in way over his head, just like Mario Draghi.

Basel, stop forcing banks to lend to the King and AAAristocrats

Sir, you argue that the current proposed liquidity requirements for banks under Basel III be widened so as to include more qualified assets, like “blue-chip equities which trade in deep and liquid markets”, “Keeping it liquid”, December 19. It sounds logical, but in reality just adds another layer of that type of Basel II nonsense which has gotten our banks into problems. 

For a start, it can only create a false sense of security. As long as a bank has “good” assets a bank is liquid, as simple as that, and all the liquidity of some “deep” markets can dry up in minutes if the quality of those assets have been compromised. 

The fact that an asset is considered liquid already benefits the value of that asset, and so pushing by means of regulations for banks to hold liquid assets will just help to distort its real value, just the same way the Basel II or proposed III capital requirements based on perceived risk, distort the market in favor of “The Infallible” and against “The Risky”. 

You correctly mention that “the liquidity rule as it stands, is an instrument of financial repression by governments”, but let me remind you that is just the way current basic capital requirements repress, though on that we have not heard any protests from you. Hopefully you are at long last waking up to this fact. But, just extending the beneficiaries of the repression, to besides the King also include the Aristocracy, will only increase the discrimination against those not blessed, like against all who have no credit rating or a not so good credit ratings, but whose access to bank credit is just as or even more important for the economy. 

Basel II sounded logical too, that is as long as you ignored the fact that what is perceived as “risky” has never ever caused a bank crisis, only what has been erroneously perceived as absolutely safe does that… and in that sense, having more regulations that push “The Infallible”, is just a certain way of guaranteeing that when the next bank crisis occurs, it will be even much larger than need be. 

To me it is frankly incredible how a sophisticated paper like the Financial Times can have fallen into the mental trap of being able to believe that a little tweaking here and there, by regulators will do it. And this by regulators who recently allowed banks to leverage their equity 62.5 times to 1 to Greece. On the contrary, the world, and most especially Europe, needs to rid itself of the scheming and tweaking bank regulators who arrogantly push on, even in the face of absolute failure. 

Let the banks fulfill as best as they can their function of allocating economic resources. And for that, nothing distorts less, than one single capital requirement for all bank assets.

But neither would Lord Keynes have agreed with the bank regulators' super potent bubble blowing machine

Sir, Jeffrey Sachs writes “Hayek was prescient: a surge of excessive liquidity can misdirect investments that lead to boom followed by bust” “We must look beyond Keynes to fix our problems” December 18.

Absolutely, but add to that the fact that bank regulators, by means of capital requirements based on perceived risks, also decided to direct, through the banks, most of the excessive liquidity to “The Infallible”, like the AAA rated or prime sovereigns, and you will be able to better understand what an incredible bubble blowing machine has been created, because, of course, there is never a boom and a bust in what is perceived as “risky”, these always happen where it is perceived to be absolutely safe.

But neither should we imply that Lord Keynes would have agreed with what the regulators were up to, he was much too intelligent for that. Anyone who wrote “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them”, cannot have approved of the crazy idea of bank regulators doling out risk-weights in order to determine different capital requirements for banks.

And Keynes, an aggressive speculator in the stock market, who for instance obtained what has been termed as impressive but volatile capital growth of King´s College Chest Fund, knew very well about the importance of risk-taking… definitely not like our bank regulators whose bedroom fantasies are about a world with no risks and absolutely no volatility.

Mario Draghi is functionally incapable of understanding the “best fundamentals” for Europe.

Sir, Michael Steen reports “Draghi claims eurozone has ‘best fundamentals’” December 18.

Forget it! A former president of the Financial Stability Board, not of the Financial Usefulness Board mind you, and who most certainly thinks of discriminating in favor of “The Infallible” and against “The Risky” as a virtue is simply incapable of understanding the real “best fundamentals” of Europe?

With their capital requirements based on perceived risk and that effectively taxes all those without a top credit rating, and subsidizes those who got one, Draghi belongs to a baby-boomer generation of regulators characterized by wanting to keep it safe, in their life time, in the best “Après nous le déluge” style.

If Europe and the eurozone want to recover the possibilities of a bright future, instead of just trying desperately to slow its decay, then it needs bank regulators who can understand why we go to church and pray “God make us daring!”

And Financial Times, FT, needs also to be clearer about what its own core business is

Sir, in “Banks must learn from past scandals” December 17, you write that banks must be clear about what their core business is, as “the desire to reinvent banking as a high-growth, high return business has bellied its true social function as a utility… to channel capital from those with savings to spare to those with investments to fund”. You also hold that “The pursuit of unrealistic returns seems to have entrenched a culture of recklessness.

Now explain to us why it has taken you in the Financial Times so long to get to this, and also why you leave the regulators out of the picture? Were they not those who regulated without saying a single word about the purpose of the banks; and who allowed incredible returns allowing incredible low capital requirements; and who with their capital requirements based on perceived risks created distortions that made it completely impossible for the banks to allocate economic resources efficiently?

And Financial Times needs also to be clearer about what its own core business is, as readers have deposited much trust in the Financial Times to speak out and inform them on all financial issues "without fear and without favour". And, on the issue of banking regulations, you have silenced some of the most fundamental criticism of it that I have been putting forward to you during many years, especially like how these distort, by favoring “The Infallible” and discriminating against “The Risky”.

You also write that the way current banking acts “is not something that can be changed by a few rule-tweaks.” But the truth is that some few rule tweaks could change a lot. For instance ask the banks to hold something like 8 to 12 percent in capital for all assets and you will immediately see mighty changes.

What are historians going to say about creating a union of dysfunctional banks in Europe?

Sir, I am sure historians will be scratching their heads trying to figure out how the bank regulators of the Basel Committee for Banking Supervision, and of the Financial Stability Board, could have been so dumb so as to base their capital requirements for banks on perceived risks already cleared for by markets and banks through interest rates, amounts exposed and other contractual terms. 

Most probably they will be explaining it in terms of the incestuous group think which can result when allowing “experts” to debate such matters in a mutual admiration club subject to absolutely no accountability at all. 

And the whole idea of creating a union of dysfunctional banks unable to allocate economic resources could be analyzed would also be laughable were not the consequences of it so tragic. 

Wolfgang Münchau, in “Politics has undermined hopes of a banking union” December 17, writes about “when the crisis returns, as I expect, in 2013”. But the truth is that the crisis is already here, and each day that goes by without eliminating the regulatory distortions, only guarantees that its next symptomatic outbreak will be meaner, with or without a banking union.

Up here, on the already too high edge of "the fiscal cliff", forget jumping, but do we climb up or down?

Sir I refer to your “A fiscal cliff fall will cost us dear” December 15. 

“The fiscal cliff” is the name used to describe the possibility of big tax increases and important spending cuts that would send the economy in a downward tailspin which we do not know where it would stop. 

The alternative, which has no name, but I guess to remain “sitting on the edge” would do, though when adjusted for the fact that the edge is position higher and higher each day, “sitting on the ever higher edge” would seem to be more appropriate, does also seem like a quite scary proposition.

My problem is that no one discusses the reason why we find ourselves up here in the first place, and which is because of how the natural market driven Ying-Yang relation between what is perceived as safe and what is perceived as risky, was distorted by utterly intrusive bank regulations. 

Nervous desk-bound nannies created too big incentives (meaning too low capital requirements) for the banks to lend to "The Infallible", as if banks needed that, and to avoid "The Risky" (meaning higher capital requirements), as if banks were not doing that anyhow. And, as a natural result, they doomed our banks to dangerously overpopulate the safe-havens, and for the real economy equally dangerously, to under-explore the more risky but certainly more productive bays. And as a result banks do not finance the future, they only refinance the past.

And I know that safely climbing, up or down from where we find ourselves, already much too high, will require some serious risk-taking. 

And so the first action required before climbing, up or down, because of course we should climb and not stupidly jump, must be to free ourselves from the dead-weights of the risk-weights which were imposed by the most useless dangerous and stupid bank regulations ever.

Two concrete proposals on how to climb better, up or down:

1. Temporarily lower the capital requirements for banks on exposures to “The Risky” 

2. Long term tax exoneration on huge capital increases for banks that accept holding much more capital and not to discriminate based on risk

Now, if you in FT know about any better and safer way to get away from the dangers of the cliff then speak out, because all I read from you and others sounds a lot like just anxious baby-boomers wishing for the can to be kicked down the road, for a while, in the best aprės nous le déluge style. 

And America, before deciding whether to climb up or down the fiscal cliff, go to a church and pray, “God, in the Home of the Brave, make us daring!"

PS. By the way I cannot understand why someone who declares a motto “without favour”, with respect to tax-cut proposals, can hold that it is up to the Republican speaker of the House and not to the President “to make the first move”.

PS. Republicans and Democrats here is a bi-partisan proposal that could be acceptable to both of your extremes.

PS. But, in truth, in too many ways, we are already way over the cliff!

In 2030, will America, “the Home of the Brave”, still be brave?

Sir, Philip Stephen concludes his “In tomorrow’s world, it’s the state versus the individual”, December 14, with observing that in order to reclaim powers lost to a more fragmented and globalized world, “governments will have to act in concert”. 

Indeed, but let us not also forget that acting in concert does not really mean that the results will be right. Just look at the massive mess was produced by one of the most important and concerted global efforts, that of regulating the banks and carried out through the Basel Committee for Banking Supervision. 

In fact, when in November 1999 in an Op-Ed I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” what I was referring to was precisely the possibility of regulators getting it wrong in a very concerted and therefore systemic way. 

One question I would like to ask the National Intelligence Council, since that will definitely determine much where the US will be in 2030 is the following: 

Their report “Global Trends 2030: Alternative Worlds” mentions: “Some analysts expect aging societies to be risk-averse … need to pay closer attention to creating sustainable pension and health-care programs in order to avoid long-term risks”. 

So, what could this mean to the willingness to take risks? Will the “Home of the Brave” be less brave? 

I mention this because the last decade I have been protesting how a senseless risk-adverseness, introduced by our baby boomer bank regulators into our banks, are making the banks create ever larger and dangerous obese exposures to “The Infallible”, and for the real economy equally dangerous anorexic exposures to “The Risky”, like the job creating unrated and not so good rated small and medium businesses and entrepreneurs. 

And this if unchecked will doom the economy of America (and of Europe) to stall and fall. 

Remember it was for very good reasons that, in our churches, we used to pray “God make us daring!”.

If you want to see really big time meddling you need not to go to Italian industry.

Sir, Tony Barber makes some good points in “Meddling does Italian industry more harm to good” December 14. 

What a pity Barber cannot find it in himself to make the same point against the really big time meddling regulators who, with their capital requirements for banks based on perceived risk, create regulatory subsidies in favor of “The Infallible” and regulatory taxes against “The Risky”. 

I guess the bank regulators must belong to Barber’s intimate circle, not so the industrial policy bureaucrats. 

By the way, Mario Draghi, FT’s Person of the Year, as well as Ben Bernanke, Lord Turner and other active in regulations of banks, there you have some real big time meddlers, or schemers

The Fed is part of the most important threat to its own jobless target.

Sir, Gillian Tett expresses concerns about “The ever-expanding digital threat to Fed’s jobless target” December 14.

Bar coding is part of moving forward, and so the job losses it causes is a sort of a justifiable collateral damage. But, losing jobs to a regulatory obscurantism which wants the banks to avoid taking risks, and only do business with those believed to be “The Infallible”, is going backwards, and an act of terrorism against “The Risky”, the job creating unrated and not so good rated civilian small and medium businesses and entrepreneurs.

And so much more worrying is what the Fed, in its role of bank co-regulator, is doing pushing away its own jobless target.

Bailouts and the socialization of losses is not the responsibility of banks but of governments, and what banks really must do, is to relearn the ancient art of lending to “The Risky”

Sir, James Grant writes “Banks need to rediscover the ancient art of caution” December 14, and mixes up any ex-ante behavior of banks, which is their responsibility, with the ex-post socialization of their losses, which is entirely the responsibility of governments. 

Also, were not our current predicaments so sad, it would almost be funny when Grant preaches “A good banker lent against the collateral of short-dated commercial bills, not heaven forfend-property”, and as if implying that the banks had been out on a very risky bungee-jumping tour. 

Does Grant really believe that holding triple AAA rated securities backed with mortgages, and to which the banks were authorized by their regulator to leverage their equity 62.5 to 1, so safe were these, and for which there was an immediate mechanism to obtain liquidity by selling these in a market that very much demanded these securities… evidenced a lack of caution? Is it not an excessive regulatory risk-adverseness against all perceived as “The Risky” and which drove the banks excessively into the arms of “The Infallible”, precisely the spot where all bank crises have always originated. 

No, the problem is that bank regulators, with their capital requirements based on perceived risk, gave the honest bankers an additional motif to behave just like Mark Twain describes them, namely those who lend you the umbrella when the sun shines and want it back when it looks like it is going to rain. And as a consequence banks got caught with excessive exposures to “The Infallible” with no capital at all. 

On the contrary, what bankers must now with urgency relearn, is the art of lending to “The Risky”, like unrated small businesses and entrepreneurs but, for that to happen, we first need to rid ourselves of nervous regulatory nannies who want banks to deal exclusively with “The Infallible”, triple-A rated and sovereigns (like Greece).

God make us daring!

With Mario Draghi and alike, Europe with its fiscal, banking, economical and political union is, in unity, heading in the wrong direction.

Sir, so FT just named Mario Draghi the current President of the European Central Bank and the former Chairman of the Financial Stability Board, the Person of the Year. It clearly is because of his make-my-dayish “whatever it takes”. And you know I disagree.

Mario Draghi, as one of the prominent bank regulators, blithely ignored that no major bank crises have ever resulted from excessive exposure to what is perceived ex-ante as risky, and always from excessive exposures to something ex-ante erroneously perceived as absolutely safe. 

And as a consequence he felt it completely appropriate to require banks to hold immensely much more capital when lending to or investing in “The Risky”, than when lending to or investing in “The Infallible”. Just as an example, because of this, banks could lend to sovereigns like Greece, leveraging 62.5 to 1, while, when lending to the unrated or not so good rated businesses and entrepreneurs, they could only leverage 12.5 to 1… FIVE times less. 

And, consequentially, banks earned immensely higher perceived risk and cost adjusted returns on their equity doing business with “The Infallible” than with “The Risky”. 

And, consequentially, banks created dangerously obese exposures to “The Infallible”, and, for the overall economy, equally dangerous anorexic exposures to “The Risky”. 

And, consequentially, banks, after the tide has gone out, are now standing naked on the shores with little or no capital. 

And, most top regulators seemingly still do not understand what they did! 

In other words, Mario Draghi was or is one of those regulators who does not care one iota about the banks function of allocating efficiently economic resources in the rest of the economy, as long as, in their opinion, the banks are “not taking any risks”... really, not much of a “make my day” there. 

In other words, Mario Draghi was or is one of those regulators who have no understanding of that the society needs for their banks to be able to take risks, in order for the economy to grow, the new jobs created, and in general move forward so as not to stall and fall.

In other words, Mario Draghi was one of the regulators who did the eurozone in.

And before bank regulations stop discriminating against risk-taking, so as to give the real economy a chance, any "whatever it takes", will simply waste whatever scarce fiscal and monetary space that might still be available.

And so when I now hear Draghi mention that Europe, especially the eurozone, has recently made great advances with respect to a fiscal union, a banking union, an economical union, and a political union, I cannot but feel sad thinking that Europe is, in unison, heading in the wrong direction, thanks to, among other, to regulators like Mario Draghi. A Europe, going in the right direction, even if that would entail less unity, is always better.

What does it take to preserve Europe and the euro and that Mario Draghi seems incapable to deliver? The answer can be found in a psalm "God make us daring!" It is high time to abandon the risk-taking austerity that has been imposed on our banks.

Sir, Lionel Barber and Michael Steen end their interview with Draghi, December 14, commenting that dwelling on the past is not what animates him, and quoting him with “That’s not the way I function. I look forward” 

Sir, let me assure you that anyone who can come up with bank regulations that discriminate against “The Risky”, what is in the future, the young, the new, and in favor of “The Infallible”, what is safe, what we already have, the old, is definitely not looking forward, he is hanging on for his life to the past. And I am sorry if this goes for you too!

What would be my person of the year? Easy, it would be that little European entrepreneur who still found it in himself to go out and do something, and not just stay in his ultra-safe bed worrying.

Bernanke’s “close to zero interest while unemployment is high” squares mostly with increased public sector employment

Sir, on your front page of December 13, we read about Ben Bernanke announcing “The US Federal Reserve is expected to keep its rates at close to zero until unemployment falls below 6.5 percent”. 

Excuse me Mr. Bernanke: Interests at close to zero for whom? For those for which banks can lend without holding much capital, “The Infallible”, triple-As and the sovereign, that might be true. But for those banks are required to hold many times more capital against, like all borrowers that do not have a credit rating or do not have a top credit rating, "The Risky", like small and medium businesses and entrepreneurs, some truly important job creators, that is certainly not true. The fact is that the real risk adjusted interest rate differential between “The Infallible” and “The Risky” must be widening by the minute, as bank capital grow scarcer and scarcer, as some of "The Infallible" ex-post join "The Risky"

And since according to the regulators the most infallible of them all, is the Government, and would therefore be the one receiving more and more of these “close to zero interest” funds, it would seem that the only way we will be able to have unemployment to fall below 6.5 percent is by creating public sector employment. Is this the unstated objective? If so, that is not very transparent.

Forget Basel III and go directly to Basel IV, but first make the Basel Committee accountable to someone.

Sir, as you can imagine after the over 900 letters I have written to you about the not really discussed  fundamental mistakes of Basel II, Thomas Hoenig’s “Get Basel III right and there will be no need for Basel IV” December 13, is an extremely welcomed analysis. And it is on the dot when it comes to analyzing bank capital in terms of the risk of bank failures and its consequences. 

But different capital requirements for different perceived risks, also translates into allowing different leveraging of the net after risk and transaction cost margins, something which distorts the markets immensely. It favors what is ordinarily already favored “The Infallible”, and thereby discriminates against what is already being discriminated against, “The Risky”, like the unrated small businesses and entrepreneurs. And in this respect it completely stops the banks from performing efficiently their vital economic resource allocation function. 

So add up these two main lines of criticism, that it does not work for making banks safe and that it does not work for making the economy grow sturdier, and it is easy to understand why Basel II and the current pre-Basel III need, for the sake of our banks and our economies, to be thrown out lock stock and barrel. 

Clearly going from a Basel II to a more correct Basel IV with 8-10 percent tangible equity on all assets, requires some deft navigation skills if we want to avoid hurting the current economy more needlessly. But it can be done! 

That said before allowing bank regulatory schemers scheme and tweak our banks more we must make the Basel Committee for Banking Supervision publicly accountable to someone in a transparent way… and of course start by asking them… what is the purpose of our banks?... so as to see if we agree. 

But, knowing us, even if we correct all that needs to be corrected now, I can assure you that there, sooner or later, will still be need for a Basel IV, IV.2, V and so on… and Thomas Hoenig is clearly well aware of that too.

God make us daring!

Libor manipulators are duly named and shamed, but about "The Basel Affair", the greatest interest rate manipulation ever, not a word.

There used to be a financial market where securities and loans were traded based on the risk and cost of transactions adjusted yields that all of the participants perceived should be applied. In other words, a world where all the risk and cost of transaction adjusted net margins were worth the same. 

Not any longer. As a result of the capital requirements for banks based on perceived risk imposed by the regulators, especially in Basel II, banks now need to use risk and cost of transactions adjusted yields, and also adjusted for the capital required. 

And that means that the risk and cost of transaction adjusted net margin paid by someone officially considered one of “The Infallible”, and that therefore can be leveraged much more on bank equity, is worth much more to a bank than that same margin when paid by one of “The Risky”, and which must be much less leveraged by the banks. 

And this means that “The Infallible” with respect to their bank operation get more access to bank credit and need to pay much less than what they would ordinary have to pay, and “The Risky” get much less credit and have to pay much more for it, than what they would get and pay without these regulations. 

And this what I now call "The Basel Affair", and which amounts to the greatest of all interest rate manipulations ever, has send the world, primarily Europe and America into turmoil; by creating dangerously excessive bank exposures to “The Infallible” backed with little or no equity, while at the same time stopping the world from getting out of its misery, by severely constraining bank credit to “The Risky”, to those not rated or not having a top credit rating. 

And of course the Libor rate manipulators should be arrested, and shamed with their names published on the front pages, like for instance FT’s on December 12, and this even though the consequences of their manipulations are quite unclear and seem to have affected mostly their fellow traders and speculators. 

But we have not yet even seen the names of those guilty in The Basel Affair, on the contrary, from what we see some of them have been promoted and others put in charge of preparing the next set of regulations, Basel III. 

And from what we see of Basel III, the regulatory manipulators have not repented, on the contrary they are set on manipulating even more, since now besides the capital requirements, they are also ordering liquidity requirements based on the same perceived risk, again mostly as perceived by their official risk perceivers, the credit rating agencies. 

And, let me be very clear about it, the greatest ever interest rate manipulation, produced by those of The Basel Affair, has and will produce incredible suffering, as just for a starter it is much responsible from keeping much of our youth from getting their first jobs, or some from getting jobs at all during their lifetime. 

And those who keep silent about The Basel Affair, the  greatest interest rate manipulation ever, are accomplices of it, some unwitting and some quite conscious. 

PS. Example 

Q. “Can you give me a specific example of what you mean with an interest rate manipulation carried out in The Basel Affair? 

A. Easy. Do you believe sovereigns like US, UK, Germany would be paying the same interest rate they currently pay on its public debt if banks had to hold as much capital against that debt as they need to hold when lending to an unrated citizen? No? Well that is an example of interest rate manipulation!

And the whole Libor Affair, is perhaps just an example of a very clever distraction maneuver carried out by those regulators guilty of The Basel Affair. 

PS. My 2019 letter to the Financial Stability Board (FSB)

Well over 50 percent of Chavez’ charisma is made purely of oil revenues.

Sir, in “Chavez departs” December 11, you write that “Chavismo will struggle without its charismatic leader”. Indeed, he has charisma, but let us also note that when over 97 percent of all the export revenues of a nation, in this case of oil, lands in the centralized coffers of the State, this provides any leader with quite a bit of that charisma. In Chavez case I would say well over 50 percent. 

And in the same vein let us not forget that the continuation of the Venezuelan citizen’s struggles, against any of their leaders, will be based on that same insane concentration of powers.

http://theoilcurse.blogspot.com/

Well done Janan Ganesh! Perhaps now you’d be willing to go after bank regulators

Sir, Janan Ganesh’s “Politicians are failing to grasp the point of business” December 11 is an example of clear writing “without fear and without favour”. Well done!

I wonder why no one, in the same vein, has been willing or daring enough to produce a similar “Regulators are failing to grasp the point of banking”.

In such a piece its author could denounce that the role of the regulators is not to act as a risk manager for the banks, like when handing out exaggerated and distorting incentives for the banks to dangerously embrace too much what is considered as absolutely safe. 

And this not only because risk-taking is the oxygen of any development but also, as regulators should have learned in any bank-regulations 101 course, that it is only what is perceived ex-ante as absolutely not risky, which produces the kind of exposures that can result in truly major bank crises.

Bank regulatory obscurantism makes it impossible for Europe (and America) to see light at the end of the tunnel.

Sir, Olli Rehn writes “The eurozone is living through lean times, but there is light at the end of the tunnel”, “Austerity is working – Europe must stay the course”, December 11. 

Forget it, Europe and America have been placed by bank regulators into a tunnel of obscurantism which preaches the belief that development and economic growth can be achieved by avoiding risks. 

As an expression of that, banks are required to have much more capital when lending to those considered as “The Infallible” than when lending to “The Risky”. And, since that effectively signifies blocking the intakes and the escapes of the tunnel, there is just no light to be seen. 

And I refer of course to free market driven risk-taking, and not to any government sponsored risk taking, and which is what regulators would seem to favour when allowing the banks to lend to governments against much less capital than when lending to the citizens. 

In other words Europe, and America, in order to stop stalling and falling, need regulators who know about the importance of praying “God make us daring!”

And what about the plan we need to deal with the too dumb, or too wimpy, or too communist to regulate regulators?

Sir, Brooke Masters and Chris Giles report in “US and UK unveil plan to deal with failed banks” December 10. Of course we need an action plan to deal with failed too big to fail banks, those banks which were fed by the regulators with the growth-hormones of ultra small capital requirements. But, just as important, or even more so, is a plan to deal with the too dumb to regulate regulators? 

As I have argued for years, any regulators who have not understood that what is perceived ex ante as risky does not pose any major dangers for the banks, because where the real threats always lie is in what is perceived as absolutely safe, are just too dumb to regulate… that is unless, with their high capital requirement for banks when lending to the “risky” citizens, and almost non-existent capital requirements for banks when lending to the “infallible” sovereigns, they are not bank regulators at all, but only communist infiltrators, and in which case we need of course to get rid of them even faster. 

We need regulators who understand that there is nothing safe without the risk-taking of the risky. In other words we need regulators who know about the importance of praying “God make us daring!”

Now banks do not just search for yields, but for what these yields produce in returns on their equity.

Sir, Tracy Halloway, in “US banks in fresh structured finance spree”, Monday 10, refers to analysts saying “that banks have been snapping up higher-yielding structured securities to offset the effect of low interest rates.”

That is not entirely correct, what banks are searching for is just not higher yields, but higher yields in relation to the bank capital they need to hold. In other words they are searching for the highest possible returns on equity, and that is why unrated borrowers like small businesses and entrepreneurs have such a rough time competing for access to bank credit.

You see even though these “risky” borrowers have never ever really caused a bank crisis, the regulators decided that the banks needed to hold much more capital when lending to them than when investing, for instance, in structured securities sometimes very difficult to understand. Sounds crazy? Yes, it absolutely is!

Basel II to Basel III is just one “the more things change, the more they stay the same" charade.

Sir, Simon Rabinovitch in “Beijing sets timetable for Basel rules”, December 8, refers to Basel’s “9.5 percent capital adequacy ratios” for the banks. And quite often do we find in FT other references to that which I consider truly devious terminology. 

It is devious because it conveys a message of banks having some "adequate" 9.5 percent in capital against assets, while in truth that percentage can be highly inadequate, as it is in reference to the risk-weighted assets, and, if the risk-weights are wrong, then of course everything is wrong. 

In this respect the term, for better transparency, should read “the 9.5 percent capital adequacy ratios for banks based on the assumption of the risk-weights being adequate”. I am sorry if it makes it a bit long, but that is the way it is, and it is certainly not my fault. 

The current crisis, and why Basel II turned out to be such a disaster, had very little to do with the basic 8 percent requirement, and all to do with loony subjective risk-weights applied by bankers and regulators alike, which distorted and diluted the real bank capital required. 

Basel III should have been about eliminating the distortions and the dilution in bank capital produced by the risk-weights, but it does not. Basel III is therefore a charade perfectly described by Jean-Baptiste Alphonse Karr’s "Plus ça change, plus c'est la même chose" sort of "The more things change, the more they stay the same". 

And you in FT, you better make up your mind about if you really want to keep on being complicit of that charade or, if really “without fear and without favour”, you dare start asking the following: 

“Since it is immensely more dangerous for a bank when something perceived as absolutely not risky, turns out to be risky, than when something perceived as risky, is confirmed to be risky, what is the logic in allowing banks to hold less capital for what is perceived as absolutely not risky? And do not different capital requirements, for different bank assets, produce distortions that hinder banks from allocating economic resources efficiently”.

The best help Britain’s Financial Conduct Authority can give on payday lending is to diminish the need for payday borrowings.

Sir, in “Payday lending”, December 7, you refer to Britain’s new Financial Conduct Authority to be given powers to cap the cost and duration of loans that target the low-paid and vulnerable. 

But the truth is that in terms of the accumulated amounts of excessive interest all vulnerable have to pay, nothing beats what the normal bank borrowers perceived as “The Risky” need to pay in extra interests to the banks, just in order to make up for the fact that bank regulators, for no particular good reason at all, allow banks to hold less capital when lending to “The Infallible”. 

If these regulatory discrimination which make access to bank credit so much scarcer and onerous that they would ordinary be for ‘The Risky”, those which includes small businesses and entrepreneurs, is eliminated, then they would perhaps not be so much need for payday loans. 

In July 2012 I registered a complaint on this with the Financial Ombudsman Service in UK, so I guess I might need to re-register it with the Financial Conduct Authority.

FT, John Plender, it was FIVE years ago that I told you “Simplicity in banking should always take precedence”

Sir, John Plender writes that Deutsche Bank’s net equity in 2007 amounted to just under 2 percent of total asset, meaning an over 50 to 1 leverage, while “its tier one core capital under the Basel weighted capital was 8.6 percent” which implies a lower than 12 to 1 leverage, “Simplicity in banking should always take precedence” December 7. 

As a consequence of not reading up sufficiently on what Basel II really was about you were duped. On my TeawithFT blog you can find hundreds of letters that tried to explain the Basel distorted bank leverages to you. You ignored these and even kept on again and again comparing the Basel risk-weighted bank leverages with the historic un-weighted bank leverages. 

And this amounts to a quite sloppy journalistic job and a general lack of questioning capacity in FT. 

And now on “simplicity” 

On December 19, 2007, John Plender, in “Investors pray for acts of God but even they come at a cost”, asked, what is the right level of capital for today´s financial world? 

And here is the answer to that that I wrote to FT, and to John Plender, five years ago: 

“Since it is in fact impossible to calculate the right capital then the best thing would be to be humble about it and require one single capital requirement on assets, instead of arrogantly trying to outwit the market as the regulators did when they created their current minimum capital requirements that differentiates based on how risks are perceived, primarily by the credit rating agencies. 

It is when the regulators themselves start acting like God that they really set us up for the big systemic disasters.” 

Does FT really have the "without fear and without favour" in it itself to recognize those who have been right all the time, even though these do not belong to FT’s own crony intimate circle?

“We should not be starting from here” has no real meaning if you do not know where “here” is.

Sir, John Plender writes about “the question of how banks can be encouraged to play restore a wider role in restoring economic growth” and states “There is no doubt that part of the problem lies in the inadequate cushion of capital”, “Welcome to Japanese-style financial crisis management” November 5. 

But he does not analyze the why of that inadequate cushion of capital, and therefore does not really understand that the misallocation of credit is not a “growing potential” but already a de-facto reality. 

Let me see if I can get him to understand. It is not that difficult. The banks do not have adequate capital not because something risky went wrong but because something ex-ante perceived as absolutely safe, and for which the regulators allowed banks to hold very little capital, ex-post turned out to be very risky, among other reasons, precisely because banks lent too much to “The Infallible” 

If bank or markets set the required risk adjusted returns for loans perfectly, these will be made wrong if regulators allow those perfect risk-adjusted returns to be leveraged differently and therefore provide higher risk-adjusted returns on bank equity for lending to “The Infallible” than when lending to “The Risky” and this distorts complete the resource allocation function of the banks.

Is this so difficult to understand? Apparently, since no one in FT is able (or allowed) to recognize the distortions produced. Plender ends with the old Irish joke “We should not be starting from here”, but the sad fact is that he does not even really know where “here” is.

Yes we need young who understand that “risk” is the Yin of the Yang “safe”.

Sir, Luke Johnson writes “Europe cannot afford to become a theme park for ageing baby boomers obsessed with nostalgia dreaming of glory day… ruled by cadres of old men who cling to power and wealth like grim death” and “We all need an infusion of youthful vigour” December 5. 

Absolutely! And where we should start is by removing those completely senile regulators in the Basel Committee who believe you can make our banks safer by avoiding what is perceived as risky, failing to understand that “risk” is the Yin of the Yang “safe”, and that for banks, what has always been most dangerous, is almost exclusively what is perceived as absolutely safe. If you really wanted to inject some vigour into Europe, think more in terms of capital requirements for banks that are higher for “The Infallible” and lower for “The Risky”. 

On what I totally disagree with Luke Johnson is on wanting “the Rolling Stones… greedy sexagenarians, to leave the stage”. In their case they are not there, except for us wanting them to be there, just like we love our well worn old warm slippers. 

PS. By the way there are some real rusted oldies in FT too, blocking ideas, and it could benefit all of us if they were to sit down and have a chat with Luke Johnson about this topic.

A 62 years old male

Banks earning higher risk-adjusted returns on equity lending to “The Infallible” than lending to “The Risky” is plain crazy.

Sir, William H. Saito, in “Embrace failure to nurture entrepreneurs”, in your “Japan Technology & Innovation Special Report” December 4, writes “The opposite of success isn’t failure, it’s not doing anything. Fear of failure is stifling entrepreneurship”.

This is precisely what I have been arguing with you in relation to current bank regulation, but that you in FT seem incapable to comprehend. The opposite of safe banking is not taking risks with “The Risky”, but lending only to “The Infallible”. In trying to make the banks avoid lending to “The Risky” allowing them in that case lower capital requirements, bank regulators doom our banks and our economies to suffocate because of lack of the oxygen of risk-taking on the shores on some supposedly very safe and shallow beaches.

Just as Saito wants a Japan that needs “to embrace weakness and failure” Europe and America once again must want to embrace risk-taking, “God make us daring!”, and put an end to that utter nonsense of allowing banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible” than when lending to “The Risky”

But IMF never said a word against the mother of all capital controls.

Although I have been a long opponent on capital controls for outgoing flows, I am a great believer in capital controls on inflows, the Chilean type, which helps small economies in their small bathtubs not being drowned by global financial tsunamis. And so of course I welcome the International Monetary Fund´s less dogmatic standing in respect to this sort of “Capital controls” December 4. 

But to say “As far as intellectual shifts go, the turn by the IMF on capital controls is remarkable” is in truth a big exaggeration. 

I say this because with respect to the greatest and most subtle and harmful capital controls ever, namely that of capital requirement for banks based on perceived risks, I have never heard one iota from IMF opposing it. That control helped to channel trillions of dollars to “The Infallible”, most especially the “infallible sovereigns”, and away from “The Risky”, like small businesses and entrepreneurs. And the saddest part is that the overwhelming capital in the world is not even aware of that control.

But FT, are you now not happy with ECB wanting to shrink the City?

Sir, you seem to be complaining about ECB wanting to shrink London´s importance as a financial center, “Trading places, the City and the ECB” December 4.

You have me a bit confused, was that not what you wanted to happen? In your editorial “Gain the advantage” of November 16, 2009 you certainly seemed not mind the City shrinking and on May 22, Martin Wolf, in “Why Britain has to curb finance” spoke about UK regulators having “an influence on the world economy out of proportion to the country´s size”.

Change of hearts eh? Or is it that you suddenly remembered your name?

Sometimes a citizen, within his human rights, has a moral duty of not paying his taxes.

Sir, I agree with your “Taxing problems” on the “war against aggressive tax avoidance”, December 4. That said I think we should also remember, as a “taxing problem”, the case of aggressive tax income squandering. 

Of course I do not want other governments or nations to help fellow citizens to avoid paying the taxes they legally owe, but, if the tax collector in your country has to rely on other countries to collect his taxes, then we tax -paying citizens are being placed on a very slippery slope. 

The first and absolute principle must be that each country is responsible for collecting its own taxes, and that the most fundamental principle on which such collection is based, is that the governments earn the taxes they collect in a way that is acceptable to its citizens. 

If a nation squanders completely away your taxes, not leaving anything, it is a human right and a moral obligation of the citizen not to pay those taxes. 

The real truth is that on a global scale more taxes might be wasted away by inefficient of even corrupt bureaucracies, than all the taxes that are not paid… and, if we citizens do not hold our governments responsible on both fronts we are doomed. 

And so if someone is thinking about setting up a United Nations of tax collectors, with the sole objective of collecting taxes, no matter what, then we will have no other option than to seek shelter in the shadows… Forest of Sherwood, here we come!

By the way, nothing is as powerful against tax-havens as a tax heaven.

FT finally says “Basel Committee, screw you!”

And suddenly, out of the blue, without really explaining your reasons, you hold in relation to bank capital that “the Bank of England is right to argue that banks should not meet their capital shortfalls by simply pulling back from their domestic loans. This surely means setting absolute capital requirements not ratios”, “A warning flag for Britain’s banks” December 3. 

Though of course you cannot mean "setting absolute capital requirements" that has nothing to do with any ratio, whatever you now mean with all that of which I have been trying to illuminate you on for years and  around 900 letters, and which by the way could make interesting material for a “Me and FT” book, the fact is that the only real pillar of current bank regulations coming out from Basel in I, II, and III is capital requirements based on perceived risks. 

And so therefore, if I take the liberty to edit what you write, you are effectively saying “Basel Committee, screw you!” Welcome to the club FT! This is sort of new territory for you eh? Though I guess some of you will be saying you always thought so! 

PS. The Leveson Report is about how government should control media. Might not we also need a report on how media should control media?

PS. False hopes... more than 2 years later FT is yet not speaking out about the distortions produced by risk-weighted capital requirements.

Not only Mark Carney needs to get out of the City in order to explore and learn.

Sir, Adam Posen holds that “Mr Carney has to absorb substantive structural knowledge of the British economy, from the nature of its regional divergences, to the strengths of its labour market practices, to the deficiencies of its domestic business lending”, “Get out of the City, Mr. Carney, and explore Britain” December 1 

Absolutely, but just the fact that Mark Carney is not from Britain does not imply he needs that any more than any of his predecessors, or any of his colleagues, in Britain and in other countries. 

I do not know about central bankers but, with respect to bank regulators, if there is any special characteristic that seems predominant it is that they have never walked the main streets of their respective nation. For instance they have no idea of how difficult it can be for small businesses and entrepreneurs to access bank credit having to negotiate with Mark Twain’s risk adverse bankers. 

Had they known that, they would never ever have come up with something as foolish as the current Basel regulatory paradigm of capital requirements for banks based on perceived risk; which allow “The Infallible” to access bank credit in more generous terms than ordinary, even dangerously generous, and makes it so much harder and expensive for “The Risky” to do the same. 

And because our bank regulators were so clueless now our banks have extremely risky and dangerous over-exposures to what is ex-ante, in lieu of better alternatives, considered “absolutely not-risky”… and we, especially our youth, are stuck without jobs, as banks lock out small businesses and entrepreneurs.

Regulators bully banks, banks bully “The Risky”, and “The Infallible”, they just have a blast.

Sir, Brooke Masters, Claire Jones and Patrick Jenkins report “Big banks’ capital needs under microscope” November 30. 

"Regulators suspect banks have understated possible losses and need a 'material' amount of extra capital"

Of course I favor more capital in the banks, at least for their exposures to ‘The Infallible”, which are seriously under-capitalized as a result of overly generous capital requirements. 

But what regulators must remember is that while different capital requirements for different assets exists, their pressures on banks to increase their capital, will be mostly felt by those who generate the largest capital requirements, namely “The Risky”, like small business and entrepreneurs. 

Regulators bully banks, banks bully “The Risky”, the small businesses and entrepreneurs, and “The Infallible”, sovereigns and triple-A ,they just have a blast getting even more bank funds at even lower interest rates.

PS. Could these type of capital adjustments not trigger the conversion into zero clause of Barclays' recent $3bn contingent capital notes deal?   

Mr. Mark Carney, what are you thinking to do about Britain, keep on making it wimpy, or making it great?

Sir, and FT’s experts and journalists, this is the letter that I would send to Mr. Carney 

Dear Mr. Carney. 

As a chairman of the Financial Stability Board, and a bank regulator, you share the responsibility for imposing on banks, capital requirement that are much lower for assets ex-ante perceived as not risky than for those perceived as risky. 

And you must of course understand this allows the banks to earn a much higher expected risk adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. 

And you must of course understand this means too much bank credit will go on too generous terms to “The Infallible”, and that “The Risky”, like all small businesses and entrepreneurs, will see their access to bank credit made much more difficult and expensive than without your intervention. 

And so, is it your intention to keep these capital requirements and have Britain little by little go wimpy, withdrawing more and more into a falsely perceived safety, like a young boy who stays in his room with his computer and never dares to walk the streets of his hometown, or are you going to put an end to this nonsense and thereby at least allow Britain the chance to remain great? 

And just in case you have not had time to think about the fundamentals lately, let me remind you of the fact that nations grow great thanks to risk-taking; and also of that all bank crisis in history have always resulted from excessive exposures to what was considered ex-ante as absolutely- not- risky, and never ever from excessive exposures to what was ex-ante seen as risky. 

By the way Mr. Carney, just out of curiosity, has a conservative government hired you to keep the capital requirements for banks when lending to the government much lower than when lending to the citizens, or, hopefully, to get rid of that odious pro-state regulation? 

Oh, and before I forget, Good Luck! 

Sincerely 

Per Kurowski 

A former Executive Director at the World Bank (2002-2004) 

Currently censored by the Financial Times

We must rid ourselves of the incredibly vicious regulatory centrifuge that will make our economies implode.

Sir, David Pilling writes about inflation being a tonic that grows the size of the nominal economy and keeps the ratio of public debt to gross domestic product more manageable, “Japan, too, needs outside thinking at its central bank”, November 29. So that's the trap! What a horror story... at least for those who have saved for their retirement investing in government debt.

First the bank regulators appointed by governments, declare that it is so much safer for banks to lend to the government than to lend to a small business and entrepreneur, and so banks need to hold 8 percent in capital when lending to “The Risky Citizen”, but can lend to “The Infallible Sovereign” holding zero or little capital (Basel II).

As a result banks will expect earning a much higher risk-adjusted return on equity when lending to “The Infallible Sovereign” than when lending to “The Risky Citizen”; while some lucky banks will also be able to grow into desirable “too-big-to-fail-banks”, by leveraging their equity more.

And as a natural consequences of this regulation “The Sovereign” gets saddled with too much debt, and since this could threaten its infallibility, they contract “outside thinking”, which suggests to them they use inflation so as to inflate themselves out of the problem.

And simultaneously, the most cooperating courtiers, the “too-big-to-fail banks”, get knighted as Systemic Important Financial Institutions, which will of course allow them to keep up the cycle of lending to the still "infallible sovereign".

What an incredible vicious regulatory centrifuge they invented. It will make our economies implode. Sincerely, I do not think they did it on purpose, because, otherwise, instead of just wanting the regulators out, I would want them shot.

As a central banker Mark Carney might be great, but, as a bank regulator, like the rest of that bunch, he stinks.

Sir, I do not opine on Mark Carney´s qualifications as a traditional central banker, these are probably fabulous, but, as a bank regulator, like Mario Draghi, Lord Turner, Michel Barnier, the Americans and the rest of the current bunch, he is not qualified.

Anyone who does not understand that lower capital requirements for banks on assets perceived as “The Infallible” than on assets perceived as “The Risky”, artificially elevates bank returns for the first and makes the other uninteresting, cannot be a good bank regulator… and this is simply so because a good bank regulator also thinks about the purpose of a bank, primarily that of allocating efficiently resources in the economy.

To me all current regulators are also non-transparent statists, since only statists could think of requiring a bank to have some capital when lending to “The Risky”, like the small businesses and entrepreneurs, while allowing the banks to get away with zero or very little capital when lending to “The Infallible”, like to “infallible” sovereigns, and to their courtiers, the triple-A rated.

Well, the result of all their badly concocted risk-adverse regulations, Basel I, II, and III, will be that we are all going to see our banks and our savings drown into oceans of absolutely worthless “absolutely safe assets”; and only then will the regulators perhaps remember that the actions of “The Risky” are in fact through history those that most have contributed to our economic well being.

That they´ve learned their lesson? Forget it! Basel III only doubles down on their mistake. Now on top of capital requirements based on perceived risk, we are also going to have liquidity requirements based on perceived risk; and the too big to fail their regulations helped to grow, have now been promoted into "Systemic Important Financial Institutions", leaving the rest of the banks in the unimportant segment.

I assure you that history will not be kind on these regulators (nor on their collaborators)

PS. This mostly references Brooke Masters´ and Claire Jones´ “Outspoken and innovative, Carney enjoyed a good crisis” November 28.

For Mark Carney to guide the economy to the "least intolerable destination”, is that not a too low expectation Mr. Wolf?

Sir, I have not seen any heartfelt intention on behalf of The Financial Stability Board, FSB, to throw out the window that paradigm of capital requirements for banks based on perceived risks, and that so distort the market and impedes the bank to fulfill efficiently their important economic resource allocation function. 

Therefore I can see no reason why congratulate Britain for having chosen Mark Carney, the current chairman of FSB to head Bank of England. Time will tell and let us pray for Britain´s sake it was a wise choice. 

Martin Wolf, in “Welcome to Britain, Mr Carney it needs you”, November 27, defines the task of the new governor of BoE as being that of “to guide the central bank and the economy towards the least intolerable destination.” 

I do agree with the importance of not creating too high expectations but those, even for someone like I who except for a deep feeling of admiration for Britain has very little to do with Britain, seems to be a bit too low. I think Britain needs and deserves more than "the least intolerable destination".