Yes, bank regulators must be held to account for the crisis

Sir, you are absolutely right in that “There has been no proper holding to account for the crisis” “Reckoning delayed is reckoning denied” March 17, as we have yet to see one single bank regulator parading down a 5th Avenue wearing a cone of shame. 

When the regulators allowed banks to hold extremely little equity when lending or investing to what was officially perceived as not risky, and thereby allowed banks to earn extraordinarily large return on equity, they doomed the banks to for them dangerous obese exposures to triple-A rated paper and infallible sovereigns, and equally for us dangerous anorexic bank exposures to what is officially perceived as risky, like to small businesses or entrepreneurs. 

You might be right in that Wall Street has closed ranks around Goldman against Greg Smith’s j’accuse, but you in FT have also closed ranks around the bank regulators, by silencing my over 600 j’accuse letters. Who knows, you might yourself be held to account for that one day!

Occupy the Basel Committee! http://bit.ly/dFRiMs

What we need to check is the bank regulators testosterone levels to see if it is sufficient.

Sir, I am not sure about the applicability to banks of Gillian Tett´s “Regulators should get a grip on traders´ hormones” March 16, since Mark Twain´s “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” would indicate that the testosterone level of bankers is far from being abnormally high. 

But what might behoove us is to test the regulators hormones. When these decided that even though banks were already clearing for perceived risks of default of borrowers by means of interest rates, amounts exposed and other terms, they should also consider those same perceptions for their capital requirements, they most definitely evidenced what would seem to be a severe case of lack of testosterone. 

As a direct consequence of the risk-adverseness of the regulatory nannies, we are now suffering from obese bank exposures to what was officially perceived as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what was officially perceived as risky, like the small businesses and entrepreneurs.

Lord Turner and his regulatory colleagues are to blame for the current obesities and anorexics of banks

Sir, I refer to Brooke Master’s “Alert on ‘shadow bank’ where she reports on Lord Turner’s recent speech at the Cass Business School in London, and in which he blamed others for “Myopic risk assessment and the delusion of low risk investments”. 

As a regulator Lord Turner should be ashamed of himself. By means of their capital requirements for banks that use weights based on the perceived risk of default; a risk which has already been cleared for by the banks by means of interest rates amounts of loans or investment and other terms, the regulators guaranteed that the banks were to become obese on whatever was officially perceived as not risky, and anorexic on whatever was officially perceived as risky. 

Lord Turner should in front of cameras try to answer the following two questions: 

1. If banks already look at the credit information provided by credit ratings when setting interest rates, amount to lend and other terms, is it intelligent for the regulators to also look at the same credit ratings, or similar risk perceptions, in order to define the capital requirements for banks? Is that not overdoing the nanny part a bit too much? Could that not lead to a dangerous overexposure to whatever is officially deemed as absolutely not risky? Like for instance to triple-A rated securities and infallible sovereigns? 

2. And is not the whole idea of lower capital requirement for banks when the perceived risks are low just a quite dumb idea to begin, knowing, as we do, that big systemic bank crises never ever occur because of excessive exposures to what is believed to be risky, but that they always occur because of excessive exposures to what was wrongfully believed as absolutely not-risky? 

Occupy Basel! Bank regulators should be made to wear cones of shame http://bit.ly/dFRiMs

Deleveraging is so much harder on those officially deemed as risky

Sir, in a world of capital requirements for banks based on perceived risks, the banks achieve the most deleveraging by getting rid of what is officially perceived as risky. For instance for every 100 a bank currently drops of triple-A rated assets it will only free about 1.6 in equity, compared to the 8 in equity it manages to free up by dropping 100 of loans to small businesses and entrepreneurs. 

That regulatory discrimination, based on perceived risks, is absolutely indefensible since markets and banks have already cleared for that by means of interest rates, amounts at exposure and other terms. 

It is truly sad to read Martin Wolf´s “A hard slog in the foothills of debt” March 14, as well as the quoted Mc Kinsey report “Debt and deleveraging”, January 2012, completely ignoring the regulatory discrimination against those officially deemed risky, which was already present when leveraging, but is also now, by far, the ugliest facet of deleveraging.

Professor Stiglitz, why do you not come down to earth and have a look at the so mundane bank regulations?

Sir, Professor Joseph Stiglitz writes that “The American labour market remains in shambles” March 13. Of course, but how could it be otherwise! We are suffering under the thumb of thick as a brick bank regulators who give banks huge incentives to lend or invest in anything officially perceived as not-risky, like triple-A rated securities and infallible sovereigns, and to avoid like pest what is officially perceived as risky, namely those most important new job creators of all, the small businesses and the entrepreneurs. 

In various occasions I have with no luck tried to explain to Professor Stiglitz that excessive bank exposures to what was erroneously ex ante perceived as absolutely not risky, does not really match up with excessive risk-taking, but is more the result of an excessive regulatory induced risk-adverseness. 

Much of our current problems derive from the fact that for the aristocrats of economic, such as Nobel Prize winners, bank regulations are something very mundane, almost low class, and to be treated with the same importance given to an Ikea sofa assembly instruction.

When demand for risk-free bank assets outstrips the supply, banks will load up on Potemkin like risk-free assets.

Sir, David K. Richards in his letter of March 13 “Think again about higher bank credits” blames all bank problem on bad bank assets resulting from “slipshod credit analysis by the rating agencies, by regulators, by securities buyers and by the banker themselves. That is correct but completely ignores that slipshod credit analysis was doomed to happen. 

When the regulators allowed banks to buy triple-A rated securities or lend to “infallible” sovereigns against only 1.6 percent in capital, giving the banks the possibility of leveraging their capital a mindboggling 62.5 to 1, the demand for these assets grew so immense that the market, unable to accommodate that demand with real AAA rated securities or real solvent sovereigns had to, in good old Potemkin style, produce falsely triple –A rated securities and false solvent sovereigns like Greece.

More but also much less risk discriminating banking equity is what really serves us better.

Sir, Prof Anat R. Admati and Mr Neil M. Barofsky hold that “More bank equity serves us all better” March 8, and I would have to agree, unless that more bank equity only means more regulatory discrimination based on perceived risks. 

What would happen if regulators required the banks to hold 20 percent in basic equity but still kept the zero risk weight when lending to the infallible sovereigns that translates into a 0 percent capital requirement, or the 20 percent risk weight when lending to triple-A rated borrowers that obliges only 5 percent? The answer is that the lending to the “risky” small business and entrepreneurs that would require the 20 percent in capital would receive its final deathblow. 

When are the experts to ask themselves why regulators have to discriminate their capital requirements based on the risk perceptions that banks have already used to set interest rates, amounts loaned and other terms?