Bank regulations are possibly the biggest barrier to break through there is.

Sir, Robin Harding begins his “Barriers to break through”, a title which is very adequate to the theme, mentioning someone who wants to drive a taxi in Milwaukee, but that, in order to do so, has to, on top of the cost of the vehicle, pay $150.000 for the license, February 23. 

In precisely the same vein, though much less transparent, all those who are officially perceived as risky, on top of the higher interest rates they already have to pay banks because of that perception, need also to pay the bank an additional margin so as to produce a similar risk-adjusted equity return as those perceived as not risky. 

This is so because the regulator, stupidly ignoring that those perceived as “risky” have never ever caused a major and systemic bank crisis, only those perceived as absolutely not-risky do that, impose higher capital requirements on banks when they lend to the “risky” than when lending to the “not-risky”. And that, in terms of barriers to break through, is as big as they come.

The sad result is there to see. Banks have huge and dangerous overexposures to triple-A rated securities and infallible sovereigns and, equally or even more dangerous, underexposures to small businesses and entrepreneurs.

Do not allow regulators to hide behind “unintended consequences”.

Sir, where do you draw the line between unintended consequences and sheer stupidity? That is the question we should make after reading an article such as “The tough challenges to revive the global economy” written by George Osborne and Jun Azumi, the finance ministers of Britain and Japan, February 23.

Privileging bank lending to what is officially perceived as not risky, by means of extraordinarily low capital requirements, just had to create excessive and dangerous bank exposures to triple-A rated securities and infallible sovereigns. That I repeated over and over again, even while being an Executive Director of the World Bank 2002 -2004. So that should not be allowed to fall into the category of unintended consequences. 

It behooves us to hold regulators very accountable for how they regulate, most especially if they regulate on a global scale. In this respect we must see to that those regulators are not allowed to hide behind “unintended consequences”… or Black Swans for that matter.

The best bank regulator knows absolutely everything about banking… or nothing at all.

Sir, Patrick Jenkins, in “Bank of England needs more than a new governor”, February 21, comments on how much a governor might need to know about banking in order to understand the banks it will soon have to regulate. My answer is either all or nothing at all. Let me explain. 

If bankers knew what they were up to and their risk perceptions and risk models were perfect, then there would be no problems. Therefore the regulators should never ever bet the house on the bankers being correct, as they currently do with their capital requirements for banks based on perceived risk, but always prepare for the consequences of the bankers being wrong. 

And those best positioned to do so are either the ones who know absolutely nothing of the risk perceptions and risk models, and therefore do not want to have anything to do with these, or those who know everything about risk perceptions and risk models, and therefore also do not want to have anything to do with these. 

The truly dangerous ones are those who know a little about risk perceptions and risk models but who do not want to admit to any ignorance. In other words the truly dangerous bank regulators are precisely those we have.

Naïve trust was what caused Greece’s illness.

Sir, Tony Barber titles his article “Malignant mistrust threatens to be the death of Greece” February 18 and speaks about “the slow uncoiling of malignant forms of mistrust in Greek society”. 

Hello, where has Mr. Barber been! I have never ever known a Greek who has expressed trust in his government, has he?, and, if something really caused the death of Greece, that was the bank regulators’ incredibly naïve trust in Greece which they shown by allowing all European banks to lend to its government holding only 1.6 percent in capital. 

The Greeks meanwhile, knowing the Greeks never thought of doing something as stupid as lending to their government so much money at so low rates, and so instead they took a couple of hundred of billions Euro out of Greece and lend it among others to the German Government. 

And so now we have for instance German banks with billions of Greek debt, and Greek citizens with billions of investments in German debt which sort of leads us to the question of… who seem to be better off? 

The reason the Greece problem has not been solved, is not because Greece can’t pay, everyone knows that, it is because Europe is left holding the bag.

Who’s really shortchanging who in India?

Sir, David Pilling in “India’s ‘bumble bee’ defies gravity”, February 16, writes: “By selling the licences on the cheap, the telecom ministry is accused of shortchanging the exchequer to the tune of $39bn.” 

Indeed, but, one could just as well argue that if selling the licenses for $39bn more, the exchequer would then be shortchanging the mobile telephone users, to the tune of $39bn plus expected returns more in fees, and over a very long time. 

In other words the $39bn are equal to taxes collected in advance,to be paid by users that are not even aware of it, meaning something which is not an example of transparency. 

In other words the $39bn will have to be repaid at the rate of return required by the telecom investor, rather than at the usually lower interest paid by the government on its public debt, meaning something which is not an example of economic rationality.

The first lesson from Greece for the eurozone… the existence of loony bank regulators!

Sir, Martin Wolf asks “What does Greece…this small, economically weak and chronically mismanaged country…tell us about the eurozone?”, “Much too much ado about Greece”, February 15. 

Well, the first thing it clearly tell us, is that the eurozone banks have been in the hands of loony regulators… who allowed the eurozone banks to leverage with Greek public debt 62.5 to 1. Without it, Greece would not have been able to ramp up as much debt, no matter how bad and fraudulent its accounting. 

And the second thing it tells us, is that the accountability and good-governance within the eurozone is basically non-existent. It is basically the same regulators who produced the failed Basel II, which are now in charge of producing Basel III with only minor changes in the script, except of course for those regulators that have been promoted. There has not even been the slightest hint of the bank regulators having been Sarbanes-Oxleyed. 

PS. Europe, if doctors can be sued for malpractice, why can’t bank regulators?

There´s no reason for any risk-weighting of bank assets, after risk-adjustment has already taken place in the price and terms of these

Sir, Brooke Masters, your Chief Regulation Correspondent writes: “capping total leverage has a disproportionate impact on banks that provide basic services to the wider economy such as financing overseas trade. Because these are low-risk activities, they require very little capital under the risk-weighted-assets system, but under the leverage ratio they are treated exactly the same as high-risk derivatives and speculative loans.”, “Leverage ratio has the power to help banking tree thrive” February 14. Let me make the following comments. 

First, and as this crisis has so clearly proven, let us be crystal clear on the fact that “they require very little capital” does not by any means turn these into “low-risk activities”. 

Second, in terms of capital requirements, what is wrong with “low-risk activities” being treated “exactly the same as high-risk derivatives and speculative loans”? Have not the banks already cleared for differences in perceived risk by means of different interest rates, amounts exposed and other terms? It is precisely the double dipping into perceived risks, that have saddled our banks with excessive exposures to what is has officially been perceived as not-risky and created equally dangerous underexposures, like for instance in lending to small businesses and entrepreneurs, only because the latter have officially been deemed more risky by some wimpy bureaucrats. 

Basel Committee, please stop infantilizing our banks!

Greece’s infantilization is nothing when compared to that of our banks.

Sir, you write that the eurozone’s approach to help Greece has been to infantilize it, “Let Greece stand on its own feet”, February 11. This is absolutely correct and very worrisome but, why do you in FT insist on ignoring the much more tragic and serious infantilization of our whole banking system? 

In essence by means of the interest rate and the size of the exposure, grown up bankers should be able to act on what they perceive as the risk of default of borrowers without any interference. But, the regulators, in a sublime nanny-like effort to keep the banks out of trouble, imposed capital requirements which allow the banks to hold much less capital when the perceived risk are low than when these are high. 

As a direct result, we now have our banks drowning in dangerous excessive exposures to what was perceived as not-risky, like triple-A rated securities and infallible sovereigns (like Greece); and maintaining equally dangerous underexposure to what is perceived as risky, like in lending to small businesses and entrepreneurs. 

A Western world which has prospered because of its willingness to take risks is now shivering in fright and huddling taking refuge in whatever safe-ports are left… and these safe-ports are of course becoming more and more dangerously overcrowded.

FT wake up!

India, whatever you do, do not forget that risk-taking, not risk-aversion, is the oxygen of development.

Sir, Martin Wolf in “Crisis must not change India’s course”, February 8, would perhaps like to make clear to his green readers that when he writes “India can generate rapid growth by catching up on the world’s richest countries, almost regardless of the global environment” that it was not that “global environment” he was referring to. 

Wolf then recommends carefully watching the financial system and adopting the emerging global norms, because “Huge crisis may be socially manageable for high-income countries. They would be grossly irresponsible for a country like India”. I completely disagree. 

Global banking norms, which have emerged in the developed world, are designed to encourage banks to invest in what is not risky, completely ignoring the efficient capital allocation purposes of a bank, and that, though sad and not good, might be something acceptable for a high-income country that wants to hold on to what it’s got, is completely unacceptable for a poor developing country. 

A country like India cannot afford to forget that the cost of keeping its banks safe could be much larger than a bank crisis, because of all the developing opportunities foregone. Someone ought to have asked Mr. Wolf how his country developed and what banking norms were in place in his country before the current ones.

What is most appropriate, cones of shame or tarring and feathering?

Sir, in “Banks at risk” February 7, notwithstanding that you, at long last, write about the incestuous relations of banks with national government and admit that many countries see banking as an extension of the state, you mention only the taxpayers subsidies to banks, but ignore the immense subsidies governments collect, in terms of more public debt and at lower interest rates that what a free market would allow, as a result of being able to borrow from banks without generating, when compared to other borrowers, as much capital requirement. 

Current bank regulations, produced by our banking central planners, decided that the only thing that matters is that banks do not default, and this set our banks on the course of creating huge excessive exposures to what is officially deemed not risky, and to equally dangerous underexposures to what is deemed as risky. 

That our banks are now at risk? Ha! The whole Western world is at risk 

How are these regulators now best shamed, having them parade down Trafalgar Square wearing cones of shame, or would tarring and feathering be more appropriate.

We should also strip the Financial Times of its honorable motto

Stripping someone of his honorific title does seem to be a quite civilized way to shame those who seemingly have done society wrong… and society really needs to recover, urgently, some serious shaming powers. 

That said, in order for shaming to really work, it should not be seen as singling out someone to shame, like in the case of Fred Goodwin, especially when it is well known that others should be on the list.

Independently of what regulators say, the banks and the markets consider the perceived risk of default, such as that information contained in the credit ratings, when it sets the interest rates, the amounts and the other terms of a financial exposure. 

That is why, when the regulators decided to use the same information for setting the capital requirements for banks, they guaranteed an excessive bank exposure to what is officially perceived ex-ante as not risky, like the triple-A rated securities and infallible sovereigns, and an underexposure to what is officially perceived as risky, like lending to small businesses and entrepreneurs… and that was the primary cause of this systemic financial and bank crisis.

I have written literarily hundreds of letters to the Financial Times during the last seven years about this almost unbelievable mistake committed by the bank regulators, and these have all been ignored. Now, if truth is silenced, we should not be surprised to see many pseudo-truths prosper, which is one reason that banker bashing has achieved its current levels of popularity and why regulators have not even come close to being held to any real account.

Therefore I am of course in total agreement with Martin Dickson´s “The burn-a-banker frenzy is tempting – but wrong”, February 4, when he reminds us of perhaps also burning “those meant to police the credit system”. 

But, to that, I would also add the need of stripping the Financial Times of its honorable motto “Without fear and without favour”, since obviously its silence, can only be explained in terms of journalistic or media cronyism... which is a public bad.

http://www.teawithft.blogspot.com/search/label/subprime%20banking%20regulations

Let us hope we are not ordered to do or not to do something because of long term central-bank projections.

Sir, Charles Goodhart in “Longer-term central bank forecasts are a step backwards” February 2, writes: “If official predictions contain additional information beyond that implied by market forecasts of the term structure of short-term interest rates then well and good. If not, then all central bankers are doing is exposing that they are as clueless about the future as the rest of us.” 

That is correct, but at least a long-term central bank forecasts is, for now, not being pushed down the throat of a market which has already considered that information, like happens when the bank regulators, with their capital requirements based on perceived risk, and as primarily perceived by their outsourced official risk perceivers, the credit rating agencies, push that information again down the throats of the banks. 

But, who knows, any moment, someone could order us to do or not to do something based on those long-term central bank forecasts.

A market distortion error is much worse than a model error

Sir, as you might guess from my hundreds of letters to you over the last 5 years and which were ignored, I completely agree with Pro Johan Lybeck that we should “Forget Basel III and head straight for Basel IV” February 2. I have though two differences with him. 

When he suggests “fixed risk-weight for all assets, so as to eliminate “model error”, I much prefer the same risk-weight for all assets, so as to eliminate the much worse non-transparent market distortion error. 

The second difference is that he suggests that the changes in capital requirements should be implemented now, even though that could mean banks could be partially owned by the state because they cannot raise new capital in time. My suggestion is to allow banks to keep the original capital requirements on any assets booked previously, since there is no need to cry over spilled milk, and allow the banks to use whatever new capital they can raise for the new business we so sorely need.

Martin Wolf, it is the risk-taking austerity we’ve really got to be scared of

Sir, Martin Wolf writes that “Europe is stuck on life support” February 1, and concludes that only shifts in competitiveness between the members will give the latter the opportunity to survive disconnected. Who would not agree, the issue is how to achieve that. It starts by better understanding what caused this mess we’re in and, in that debate, much more important than discussing the dangers of fiscal austerity, is realizing the dangers of risk-taking austerity.

The banks, courtesy of the Basel regulations and the capital requirements based on perceived risk, have now all been painted into the corner of what is officially perceived as not-risky, and where of course any real shifts in competitiveness do not normally reside.

Take for instance Italy, in many ways it has survived in spite of its governments, and, nonetheless any European bank is currently required to have much more capital when lending to an Italian small businesses or entrepreneur than when lending to the Sovereign Italy.

Mr. Wolf, at this moment, much more than a Heinrich Brüning, who we really must fear, are the sissies in the Basel Committee, in the Financial Stability Board and in the UK’s own FSA.