January 31, 2012
Sir, Karel Lannoo, in “Rulemakers in Europe must flex muscles on Basel III”, January 31, gives a good description of many of the particular problems derived from the current capital requirements for banks, but is yet incapable of pinpointing the true core of what´s wrong with these… namely that regulators add their risk discrimination on top of the risk discrimination that already occurs in the market. But, of course, it is not only Mr. Lannoo, who fails to see that.
Recently John Reed, a former Chairman and CEO of Citicorp, a former Chairman of the New York Stock Exchange and currently the Chairman of the Massachusetts Institute of Technology's Office of Corporation, during an interview in a program of Bill Moyer titled “How Big Banks are rewriting the rules of our economy” said the following:
“It does not take a genius to see what happened … the presumption that you can capture risk by looking at historical volatility…. As soon as you say something appears not to be risky you get an overinvestment in it because the capital requirements are less, and then if something does go wrong the hurt is all the more because you do not have the capital to cover that risk”
But what does obviously not take a genius to see, even I saw it, and about which I have written hundreds of letter to FT, is something still totally ignored in the debate, and in the rewriting of the next Basel version. The useless and so dangerous capital requirements for banks based on perceived risks remain the main pillar of the Basel bank regulations. How come?
Ref: 17:40 to 18:15
January 26, 2012
Sir, Alan Greenspan is one of those responsible for the regulations which require banks to hold quite a lot of capital when lending to small businesses and entrepreneurs but allow these to lend to the government against no capital at all. As such he is de-facto one of the biggest market meddlers of our time, and has no moral right to appear in the Financial Times preaching us with “Meddle with the market at your peril” January 26.
As former chairman of the US Federal Reserve he must be aware that the whole world economy is flying blind, because of those capital requirements… like what would the rate on US treasury be if the banks had to treat citizens and government alike?
January 25, 2012
Sir, in “The world’s hunger for public goods”, January 25, Martin Wolf holds that extreme financial instability is a public bad; and which presumably has to mean that correctly understanding the reason for it, should be a public good.
Nonetheless, over many years now, the explanation that I give for the current crisis, as an individual who provided some of the clear and earliest documented warnings, even in FT, and which I thought I could make public through sending letters to FT, has been silenced. For what reasons, I do not know… but it could perhaps be explained in terms of crony journalism.
Nonetheless, here is an explanation again, for the umpteenth time.
If a banker after analyzing a borrower’s creditworthiness decides to limit the amount of the loan, and charge higher interests to compensate for the perceived risks, the borrower might try to renegotiate better terms, but he would not consider it unfair, as it would be the result of natural market discrimination.
But, when bank regulators also force the bankers to further limit their loan to the borrower, and increase even more the interest rate charged, all because they require the bank to hold more capital when the officially perceived risks are higher than when they are low, as they do, then we enter into the world of the nannies, the world of artificial regulatory risk discrimination; which only leads to the kind of unfairness that exasperates the inequalities.
As a result of this regulatory risk discrimination we now have a crisis of financial instability that threatens to take the Western world down; all because of excessive bank exposures to what is officially perceived ex-ante as not risky – for instance, triple-A rated mortgage-backed securities or “infallible” sovereigns and a growing bank underexposure to what is officially perceived as risky – for instance, lending to small businesses and entrepreneurs.
The parents need to discuss this issue urgently with their financial nannies, before it is too late and the economy has turned terminally sissy and terminally unfair.
PS. Occupy Basel! http://bit.ly/dFRiMs
Sir Martin Wolf’s “Yet another year of living dangerously” January 25 would have benefited from the subtitle “in the land of perceived safeness”. The world has in fact been living extremely dangerous, ever since the Basel II rules were approved in June 2004, and which set of a frantic race for whatever assets were officially perceived as not risky and that, just because of that, required the banks to hold extremely little capital.
Much of the global macroeconomic imbalances that Mr. Wolf obsessively insist on blaming for this crisis, were precisely financed by the fact that banks could lend or invest trillions against only 1.6 percent in capital or even less.
To save the world from the current dangers, we need to get rid of the nannies in Basel and help our bankers relearn how to take real bank risks and not just regulatory arbitrage risks.
January 23, 2012
Sir, when on markets´ and bankers´ natural risk adverseness, you stack on regulators´ risk adverseness, applying Basel risk-weights, you get too much risk adverseness, which naturally results in excessive exposures to what is perceived as not risky and equally dangerous underexposures to what is perceived as risky… precisely what has caused the current crisis. This is what unfortunately Mr. Martin Wolf cannot or does not want to understand.
When in “Seven ways to fix the system´s flaws”, January 23, Mr. Wolf calls for more bank capital, suggesting a leverage of ten to 1, he just ignores the fact that the higher the capital requirements, the larger will be the distortions produced by the perceived risk discrimination that result from the use of official risk-weights.
January 20, 2012
Sir, already a couple of years into this crisis Philip Stephen shows a surprising lack of understanding of it, in his “Downgrade the rating agencies”, January 20.
Suppose that human fallible credit rating agencies were able to produce absolutely perfect ratings, in terms of measuring the risk of default, and which are of course used by the banks to choose who to lend to, how much, and at what rate.
But consider the fact that regulators imposed capital requirements for banks that were also based on the same ratings, and which functioned therefore like a hallucinogen, a veritable LSD; increasing the banker’s sensitivity to risk, so that he perceived a good ratings in a much brighter light, and a not so good ratings took on an even scarier appearance.
As should have been expected by any independent regulator, not part of a incestuous group-think, the consequences were:
A growing excessive bank exposures to what is officially perceived ex-ante as not risky, like the triple-A rated securities and infallible sovereigns, leading to a dangerous overcrowding of the safe-havens and;
A growing bank underexposure to what is officially perceived as risky, like in lending to small businesses and entrepreneurs, equally dangerous, because of the lost opportunities to create the next generation of jobs for our grandchildren.
So again it was not primarily the rating-message’s fault it was the fault of those who ordered how those rating-messages were to be read. Downgrade those regulators!
Occupy Basel! http://bit.ly/dFRiMs
January 11, 2012
Sir, Vikram Pandit in his comment on “Capitalism in crisis” January 11 rightly refers to the capital requirements for banks set by the regulators based on perceived risk of default as a (arrogant) presumption of “clairvoyance no regulator can posses”. I totally agree with that, but then he suggests bettering the system by having the banks comparing the risk profile of their assets with some “benchmark” portfolio created by the regulators.
Ha! What would have happened in the building up of the current crisis? Those banks that had held the most of ex-ante triple-A rated securities and of infallible sovereigns would have certainly compared great against the benchmark, and be rewarded for that, but could then have been among those who turned into the worst nutcases when the ex-post realities set in.
And, if the banks already now shy away way too much from taking on the real risky but rewarding prospects we need them to take, such as lending to the small businesses and entrepreneurs, they would do more so, if subject to a new sort of “neutral” measurement tool.
Mr. Pandit and Mr. Regulator, we know you are looking to the safety of the banks, but, we other humans need to look at the safety of our economy and the prospects of creating jobs for our grandchildren, and neither capital requirements based on perceived risk nor a “benchmark” portfolio has anything to do with that… on the contrary these just make our prospects so much dimmer.
January 09, 2012
So capitalism is in crisis? Analysis, January 9. Would golf not be in crisis too if the handicap officers assigned more strokes to the good players than to the bad? Would horseracing not disappear if the bad horses had to carry more weight than the good? What would you say about a government that on top of the higher premiums the unhealthy pay, proposes to also tax them because they are riskier?
The banks are of vital importance for how capitalism functions, and Mark Twain reminded us with his the lending of an umbrella when the sun shines and taking it back when it rains, that bankers might be too risk-adverse. If they were that before, well now they are that a hundred times more.
Because now, thanks to our ingenious bank regulators, for a bank to finance 100 dollars of what is officially perceived ex-ante as risky, it needs about 8 dollars in capital, but, to finance100 dollars of what is officially perceived ex-ante as not risky, it needs only about 1.6 dollars.
Which means that when a bank lends to what is officially perceived ex-ante as risky, it can earn the risk and cost adjusted margins of those loans about 12 times for each dollar of bank capital, but, when lending to what is officially perceived ex-ante as not risky, it can earn the risk and cost adjusted margin of those loans more than 60 times for each dollar of bank capital.
The natural consequence of such stupidity, is that the lending to what ex-ante is officially perceived as risky, like the lending to entrepreneurs and small businesses, is in relative terms made much less interesting for the banks, while the lending to what ex-ante is officially perceived as not risky, like the triple-A rated and infallible sovereigns, is given extraordinary incentives.
And so the perhaps most important and dynamic participants of capitalism, the small businesses and entrepreneurs, are either not getting bank loans, or having to pay much more for these, all while, what is ex-ante officially perceived as absolutely safe-havens, and therefore already easily attracted cheap funds, are now, ex-post, turning into dangerously overcrowded havens.
A byproduct of such stupidity is of course also that an allowed bank leverage of more than 60 times, serves as the most potent growth-hormone for the too-big-to-fail banks and of the too-big-to be-decent banker bonuses.
What to do? Let capitalism be capitalism. Capitalism discriminates sufficiently on its own based on ex-ante perceived risks, so as to need further assistance from the excessively worried nannies in the Basel Committee for Banking Supervision.
More of this in the video