February 28, 2013
Sir, Alex Barker in “EU poised to unveil revamped banking rule book”, February 28, quotes Barney Reynolds saying “The differences with Basel are relatively small. The spirit is more or less there”.
Indeed Michel Barnier, the European Commission and the European Parliament are, like the Basel Committee, intent on turning a blind eye to the fact that the current crisis was caused by those who perceived as "The Infallible” turned out to be Potemkin-infallible, and not by those correctly perceived as “The Risky” and will therefor keep on favoring the first and thereby mistreating the latter.
And so banks will be allowed to continue to leverage immensely more the risk-adjusted net margins paid by the AAAristocracy and the “infallible” sovereigns, than what they will be allowed to leverage that same risk adjusted margins when paid by anyone of “The Risky”, like medium and small businesses and entrepreneurs.
And that will of course mean “The Risky” will keep on having to pay higher interests and get smaller loans than what would have been the case without these bank regulations. And that will mean of course that the banks because of this distortion will be unable to efficiently allocate economic resources, leading to less economic growth and less jobs for our young.
Sir, are they discriminating and distorting because they really want or is it because they just do not know what they are doing?
Anyway, damn these regulating baby-boomers with their dangerous risk aversion and their aprės nous le déluge credo!
February 27, 2013
Current capital requirements for banks based on perceived risks using risk-weights allow banks to leverage more the risk adjusted margins when lending to “The Infallible” than when lending to “The Risky”; which means making a higher expected return on assets when lending to “The Infallible” than when lending to “The Risky”; which means that “The Infallible”, those already favored by markets and banks will be even more favored, while “The Risky”, those already discriminated against by banks and markets, precisely because they are perceived as “risky”, will be even more discriminated against.
And that of course creates the danger of excessive exposures to those of “The Infallible” who do not turn out to be really infallible, precisely those who have caused all major bank crises in history, as of course “The Risky” have never ever done that; in this case aggravated by the fact that bank then will have extremely little capital.
And that of course impedes the banks completely to perform their social function of helping us to allocate economic resources as efficiently as possible.
And so LEX, please explain to us why, in your column of February 27, you consider a straight leverage ratio inferior to a risk-weighted assets ratio?
And if you absolutely want to risk-weighed, because you cannot refrain from interfering, then why would not the capital requirements for banks for exposures to “The Infallible” be slightly higher than for exposures to “The Risky”, as all empirical data suggests?
Before allowing more fiscal deficits we need the wimpy baby-boomers to move out and let the future take over.
Sir, Martin Wolf writes about “The sad record of fiscal austerity”, “Tens of millions of people are suffering unnecessary hardship. It is tragic” February 27.
Indeed, he is right, but, you do not consume scarce fiscal space if you had not corrected what has caused the problem, and that has not happened. Most probably because as Albert Einstein said it “no problem can be solved from the same level of consciousness that created it”
Specifically Martin Wolf includes among the major changes required: “The banking sector must come clean on losses and accept recapitalization so that it starts lending again” and repeats the mantra of “government must recognize that current rates of interest provides a once in a lifetime opportunity for higher investment”.
What bank lending? The same type of lending that caused the crisis? Bank lending to “The Infallible” where banks are allowed to leverage the most their capital? Forget it! If the regulatory distortion that different capital requirements based on perceived risks creates is not eliminated, new carb-fat-rich and protein-poor bank lending will not help. Those we most need for banks to lend to at this moment, “The Risky”, are those who regulators are giving the banks all the incentives in the world to stay away from.
And what low current interest rates on public debt? Those rates are subsidized, precisely by bank regulations that especially favor any “infallible sovereign debt”. If to those rates you add the hidden tax other more risky bank borrowers need to pay in order to compensate for not being treated as favorably, and all the opportunity costs because of “The Risky” not having an equitable access to bank credit, then they might not be low at all.
No! What we must first realize is the sad record of risk-taking austerity imposed by wimpy baby-boomer bank regulators, and which day by day increases the gap between the past, the old, the haves, “The Infallible” and the future, the new, the have nots, “The Risky”.
February 26, 2013
Sir, Gideon Rachman quotes Professors Daron Acemoglu and James Robinson in their book Why Nations Fail, writing that countries “such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were more broadly distributed”, “Italy´s vote, America´s cuts and why nations fail” February 26. And therein he also quotes Professor Ian Morris, a reviewer, summarizing their argument in that “It is freedom that makes the world rich”.
What then if you Sir came to understand what I have been saying over the last decade, namely that some powers were taken over by new global entities which only seem to be accountable to themselves, like the Basel Committee for Banking Supervision, and the Financial Stability Board. And these entities imposed capital requirements on banks which dramatically favor bank lending to “The Infallible”, those already favored by banks and markets, and thereby dramatically discriminate against the access to bank credit of “The Risky”, those already sufficiently discriminated against by markets and bankers precisely on account of that perception. And with that these entities basically imprisoned market freedom.
In Basel II, pounds, dollars or Euros, paid to the bank as net expected margin by an AAA to AA rated client, can be leveraged by the banks 62.5 times to 1, while the same money, if paid for the same concept by an unrated or a not so good rated client, can only be leveraged 12.5 times to 1 by the banks.
Would you Sir call that freedom? Would you Sir call that equal opportunity? I would call that unbelievable dumb regulatory cowardness running amok. Dumb, because it is always some of “The Infallible” who prove not to be infallible which causes bank crises, and never ever “The Risky”.
Yes, there are many reasons why nations fail. "The complacent worship" of utterly failed regulators is one of them, and excessive risk aversion another.
Besides a necessary U-turn, we must also get rid of those currently responsible for bank regulations reform
Sir, by the tone of Elemér Terták, the Principal Advisor to the Director General for Internal Market and Services, in “Bank reform is gathering pace: no U-turn necessary”, February 26, the European Commission seems to be extremely upset by some recent remarks made by Sony Kapoor in “Europe must reset bank rules to restore investor faith”, Insight, February 14. How dare Kapoor criticize for instance “state of the art framework for bank recovery and resolution”?
But I certainly do want a U-turn in bank reform, and which Kapoor did not even refer to:
Right now the fundamental pillar of bank regulations is the capital requirements for banks based on perceived risk. Much more capital for exposures to what is perceived “risky”, than for exposures perceived “safe”.
And that means that banks are able to obtain a much larger expected return on equity leveraging much more the risk-adjusted interest paid by “The Infallible” than what they are allowed to do with the risk-adjusted interest paid by “The Risky”.
And that amounts to favoring those already favored by banks and markets, and thereby discriminating against those already discriminated against by banks and markets.
And that is so dumb because since bank crises only results from excessive exposures to “The Infallible” who were not so infallible after all, and never from excessive exposures to “The Risky”, that only guarantees that when disaster strikes the banks will have too little capital.
And that is odious, not only since it increases the gap between “The Infallible” and “The Risky”, but also because it creates distortions which make it completely impossible for the banks to allocate resources efficiently and help to create the jobs which are so much needed, especially by our young.
Come to think of it, since that regulation is so bad, and since the current regulators can’t even seem to understand that, not only is a U-turn required, but we must also get rid of them all.
No problem can be solved from the same level of consciousness that created it.
February 25, 2013
Eliminate the loony regulatory risk-taking austerity imposed on banks, and you will help the real economy
Sir, Wolfgang Münchau writes that “If you are serious about structural reform it will cost you upfront money, and so therefore “Austerity is the obstacle to real economic reform” February 25.
Indeed there might be many much needed reforms that might require increased fiscal spending, but not all of them do.
The reform that I most advocate is eliminating the negative effects on the real economy that bank regulators’ runaway risk-taking austerity is causing. That would not cost the tax-payer money today, and that will actually save the tax-payer money tomorrow.
The lunacy of allowing banks to earn a much higher expected risk-adjusted return on equity for exposures to what is perceived as “safe”, than for exposures perceived as “risky”, only guarantees ineffective resource allocation by banks, and the dangerous and very expensive overcrowding of today’s “absolutely-safe” havens.
The children in the Basel Committee and Financial Stability Board, they indeed need adult supervision
Sir, you hold that “Washington needs adult supervision” February 25. You might be right, but as far as I am concerned what Washington most needs, Republicans and Democrats alike, as indeed also Europe most need, is to make sure that there is some adult supervision of what their bank regulators are up to.
Read the two most important documents where the Basel Committee describes the theory behind different capital requirements for banks based on risk and how those risk-weights are calculated.
From these you will see that in no place did these regulators consider the possibility that by allowing banks to leverage their equity immensely more with the risk-adjust returns on exposures perceived as “safe” than for exposures perceived as “risky”, they could completely distort the financial markets. And, if that is not childish, what is?
PS. Here are the documents I refer to:
“An Explanatory Note on the Basel II IRB Risk Weight Functions”, July 2005, Bank of International Settlements
“A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules” by Michael B. Gordy a senior economist at the Board of Governors of the Federal Reserve System, October 22, 2002.
Does FT really want to impede banks to help out, so that we must rely on government? I pray it is not so.
Sir, “Moody’s grows nervous at Britain’s extension of austerity” reports Sarah O’Connor, February 25.
But what Moody really should be nervous about is the fact that bank regulators allow banks to make so much higher expected risk-adjusted profits when lending to someone with a good rating than when lending to for instance someone unrated. That will of course dampen the risk-taking a nation needs to move forward. And, if Moody and the others don’t know that, then they should lose their credit rating quality ratings.
And in “British credit fears” you hold Sir that “ratings decisions can sometimes have real effects because of the wrong-headed way investment mandates and capital rules are designed to rely on them”. And that leads me to ask you, if you believe it “wrong-headed”, why have you then been so silent about it? Might it be because you are too hard-headed?
You write “As this newspaper has long argued, there is room to shift resources from inefficient subsidies to uses that can stimulate the economy [and] to unclog banking and tilt Britain away from over relying on finance”. But Sir, if there is a real clog that stops banks from helping us to efficiently allocate resources in our real economy that is precisely imposing different capital requirements for banks based on perceptions of risk.
Sir, you sometimes leave me feeling very uneasy. Could it really be that you want to impede banks to help out, just so that we must rely more on government? I do pray I am wrong.
February 22, 2013
Sir, Alex Barker and Caroline Binham report on how “Brussels turns up pressure over Libor-rigging scandal”, February 22, They write “a bank implicated in all three investigations could, for example, face fines of up to 30 percent of revenues”.
Has the European Commission no idea of whom, at the end of the day, somehow somewhere, is going to have to pay these fines?
Just for a starter, depending on whether the borrowers are perceived as risky or not, since paying the fine will result in less bank capital, the guilty bank will have to shrink its lending between 10 and 50 times the amount of the fine. And of course the issuing of fresh bank capital that is so needed will be more expensive as a result of these fine-risks. And of course the margins charged by the guilty bank on its lending business will have to increase.
And those who will suffer the most, are the bank borrowers who because they are perceived as “risky”, by order of the bank regulators, currently generate higher capital requirements for banks, like small and medium businesses and entrepreneurs.
Fines and other sentences should be applied directly to the bankers responsible for misbehaviors, but, if they insist on the fines being paid by the banks, the least they should do is to require these to be paid, for example, through the issuance and delivery of new bank shares for the amount of the fine at market prices.
Please, we must stop this foolish and immoral flogging of “The Risky” bank borrowers, as if it were not already hard enough on them to be perceived as “risky” having to pay higher risk-premiums, getting smaller loans and often having to accept other harsh terms. When the going gets tough, that is when we most need “The Risky” to get going.
And please, bank regulator, wake up to the reality that “The Risky” has never ever been the root of your problems, that dubious honor belongs exclusively to the “Potemkin Infallible”
February 21, 2013
Sir, John Gapper writes “The City’s freewheeling culture contributed to excessive risk-taking”, “Europe finally takes its bite from the City of London” February 21. That is incorrect and highly misleading.
All recent bank problems, like most in bank history too, derive from excessive exposures to what is perceived as absolutely safe, and not from excessive exposures to what is perceived as “risky”. What made this crisis particularly bad, was the fact that bank regulators now allowed banks to hold so little capital against assets so dangerously perceived to be absolutely safe. And so, what really happened, could be better described as an excessive regulatory safe-taking.
“Oh but the bankers should have avoided those dangerously huge 'safe' exposures” you might say. Yes, in theory. But, in practice, the fact that banks were allowed to leverage more than 60 times on some assets, and only 12 times on other, created irresistible competitive pressures which doomed the banks to dance, until the music stopped… and anyone not knowing this does not really know of banks, or of any other business for that matter.
Sir, at the end of the day, somewhere somehow, one bank customer is going to pay for what the banks pay in tax. And so, if you want real transparency, eliminate the taxes on banks, because whoever really ends up paying these should have his full tax representation.
The way you go at it in “Let the sun in on banks’ tax affairs”, February 21, and like so many others go at it, unnecessarily make the banks stand out as villains; and, the publication of “how profits and corporate profits are allocated across countries”, would also unnecessarily breed animosity between the citizens of the world.
But that said, if you cannot do anything about it, because politicians like taxing banks so that they can be lobbied by banks, then at least help to eliminate some distortions. For instance any payments in salaries plus bonuses to any individual banker that exceeds more than £300.000 per year should not be allowed as a tax deductable expense. That would help to cap those banker bonuses in a way that creates much less distortions than other proposals we have read.
February 20, 2013
Mr. Anders Borg, what democratic legitimacy has bank regulators to distort and discriminate, and to be so dumb?
Sir, Richard Milne, in “Sweden attacks bloc fiscal union”, February 20, quotes the Swedish finance minister Anders Borg opining with respect to the European Union, “I do think that you’re overstretching the democracy legitimacy when you’re pushing more resources and more powers to Brussels”.
This is a concern I could identify myself with, but, in that respect, much more worrisome is how the bank regulators in the Basel Committee, and the Financial Stability Board, have adjudicated themselves so much powers so as to decide who our banks should lend to. Let me explain.
In a world free of bank regulators, banks and markets would lend to those borrowers who offered them the highest expected net margins of return, after adjusting for differences in perceived risks and transaction costs. That way they maximize the returns of their shareholder’s capital, simultaneously helping to allocate the financial resources in the most equitable an efficient way, so as to help the real economy grow.
But, that is in an ideal world, because now, in this world, loony bank regulators have told banks that if they lend to those qualified as “The Infallible”, then they are allowed to leverage those net expected margins many many times more than what they can do if they lend to “The Risky. And of course, that completely distorts the resource allocation mechanism.
And it is also highly inequitable, because one dollar or one euro paid in interest by a borrower belonging to “The Infallible” will, as it can be leveraged so many times more, then be worth much more than a dollar or an euro paid in interest by a borrower perceived as “risky”.
Mr. Anders Borg, who authorized the regulators to do such thing, you and your ministers of finance colleagues? Do your other Swedish minister colleagues now that? Does your parliament know that? Do the citizens know that?
PS. By the way, besides distorting and being inequitable, those regulations are plain silly. Never ever have “The Risky” detonated a major bank crisis, that dubious honor belongs exclusively to those falsely perceived as members of “The Infallible”, precisely like in the case of the current crisis; and also because those who operate on the margins of the real economy, and might be best suited to get us out of the crisis, and get our young ones their jobs, are quite often “The Risky”.
Sir, I have lately been rereading some of Martin Wolf’s comments and predictions of 2006-08, and I understand perfectly well why he, even when so very knowledgeable about many important economic issues, was then off the mark. Why should he really be aware of the dramatic distortions that were introduced by regulators into our banking system, through capital requirements for banks based on perceived risks already cleared for in other ways?
But, that now, February 20, 2013, years after the crisis detonated, he is able to write “Why the euro crisis is not yet over” and completely ignore that the eurozone, in fact all western world, finds it still trapped by regulations which holds them to the past, to what is perceived as “safe, and hinders them to bet on the future, on what is perceived as “risky”, well that I simply do not understand. What is wrong with him?
Wolf has complained on my writing excessively on this issue, and he could be right, but, frankly, when I see how much someone who has been granted the possibility to exercise so much influence so completely ignores how current bank regulations distort, and destroys our economies, what else can I do but to keep on writing?
Sir, Mr. Rod Price is correct in his assessment that “Models make for higher risk not lower” February 20,meaning of course, when wrongly or excessively applied.
Price writes “any model adopted by the regulator should really be making sure that all participants have completely different models, but in doing so, must accept that some of them won’t be very good and that it must not intervene to correct this”. Mr. Price adds “Regulators do not appear to understand this point, and thus do not know how to use models.”
Of course they do not how to use models, and, as I explained to you in a letter you published in January 2003, long before Basel II was approved, neither do they know how to use credit ratings.
Regulators should not use credit ratings unless they prohibit the banks to use credit ratings, because otherwise they are just leveraging the information contained in credit ratings too much, and condemning the banks to overdose on these.
Mr. Price’s letter contains arguments that I have been writing to you about for years now, and which you decided you preferred to ignore, probably because of such a little petty thing that you just did not like the messenger.
But so let me ask you again, should it not be of our concern that bank regulators do not know what the hell they are doing? Or do you perhaps believe that it is too important we keep full faith in them, no matter what? And, if so, why did you now publish Mr. Price’s letter.
February 19, 2013
Sir, you are not being consistent. In “Bonus cap is a bad omen for Britain” February 19, you rightly argue that “politicians are a poor substitute for the markets… A cap on the ratio of variable to fixed pay… removes a tool for managers to control risk”.
But when regulators allow different capital requirements for banks based on perceived risk, and thereby are effectively substituting for the markets, and capping the returns on bank equity for assets perceived as risky when compared to assets perceived as infallible, and thereby discriminating against borrowers perceived as risky favoring those as safe, then you keep totally mum about that.
With that attitude are you not favoring bankers more than their shareholders or their borrowers and, if so, is that really living up to your own motto?
For the health of our banks, much more important than more capital, is less capital distortion by the regulator
Sir, Tom Braithwaite writes that “Regulators will have to be watchful that banks do not dream up new risky products that evade high charges… but… safer businesses such as advisory work or retail brokerage are being preferred because they are ‘capital light’ and hence good for overall ROE”, “Quest for profit in high-capital world can make bank safer” February 19.
Is advisory work or retail brokerage what our banks should all be about now? What about their vital function of helping to allocate economic resources efficiently? Tom Braithwaite might have a job, for now, but what about those millions of unemployed counting on banks to finance those who could create jobs?
And Braithwaite ignores that dreaming up new risky functions to evade high charges and obtain high ROE has been made a competitive necessity, by the sheer fact that the regulators allow there to be some “capital light” pockets.
I have not read The Bankers New Clothes by Anat Admati and Martin Hellwig, yet, but if it holds that “Bank’s obsession with return on equity is at the root of the problem…this makes the whole system more fragile”, would that not precisely indicate the dangers of capital requirements which, quite arbitrarily, allow some bank bets to make a larger ROE than others? If a regulator I would for instance much prefer banks having diversified exposures to “The Risky” than having to trust the infallibility of some monumentally large exposures to “The Infallible”.
And, if that is not in the book, then I must say that Sir Mervyn King unfortunately still does not understand “what is wrong with banks and what needs to be done to make them safe”. Yes, more capital is needed, but that capital should primarily be required as a result of eliminating differences in capital requirements, and not feeding these.
“There is far more capital in the banking system than there was in 2007” it is written. That could indeed be true, I do not have the figures, but it could also be a very devious half-truth, if the increase in capital is just the result from banks exiting “capital heavy” in order to, quite dangerously, overpopulate some “capital light” pockets.
February 18, 2013
The Basel Committee’s nanny-cartel’s truly colossal bribery of global bank business must be stopped.
Sir I refer to “Banks’ risk tactic under fire” by Shahien Nasiripour, Brooke Masters and Tracy Alloway, February 18.
I sincerely cannot understand how supposedly intelligent people, acting as regulators, can allow themselves to be dragged in by bankers into such silly discussion as to the adequate length of the periods to be used in VAR.
Can’t they get it into their heads that they do not have to concern themselves much with credit risk models, or credit ratings being correct, and concentrate on what to do when these prove to be wrong? This is just like the fire brigade worrying excessively about the quality of the fire detectors installed in homes, while forgetting to maintain the engines of their fire-trucks.
But of course, the real problem with current bank regulators is that they do not understand the magnitude of the distortions they have created. For instance a rule that “could force some banks to increase sharply the amount of capital they hold against trading assets” will immediately make bank capital much scarcer and thereby dramatically impact negatively the lending to what requires higher levels of capital.
The fact that banks were allowed to hold silly little capital for what was ex ante perceived as safe resulted into that, ex post, when some of it turn out to be risky, they had little capital to cover for it. Also let us not forget that whatever capital they had left came mostly from those requirements imposed on them when lending to the "risky". And it all meant then that banks had to retrench from lending to the “risky”, which is what they will now be forced to do even more.
Huw Van Stenis, a Morgan Stanley analyst, is quoted praising the Basel committee “harmonising some inputs makes a lot of sense”, but that of course ignores the fact of life that the greater the harmonization the greater the dangers of a catastrophic systemic risk.
Sir, you have an editorial today titled “Beating bribery in global business”. Since the Basel Committee’s nanny-cartel fixed the game, bribed the bankers, with their capital requirements based on perceived risk, and got us the crisis it paid for, I sincerely hope Sir you one day accept that is a colossal bribery of global business that must be stopped... and not covered for.
February 16, 2013
Sir, I refer to Mr. George Osborne’s, Mr. Pierre Moscovici’s and Wolfgang Schäuble’s “We are determined that multinationals will not avoidtaxes” February 16, and which unfortunately does not seem to imply that the “smaller businesses paying up to 30 per cent” will now be able to pay the 5 per cent the authors indicate multinational pay.
Yet all corporate taxes will, no doubt, at the end of the day, one way or another, be paid by a citizen somewhere. And therefore that citizen’s payment will occur without the governments being held accountable to that citizen, allowing instead that citizen’s tax-paying-representation powers to be exercised by the corporations.
Also, since the final real bill for a corporation’s tax might hit someone earning or having absolutely nothing, these corporate taxes can de facto also be extremely regressive.
I therefore hope the ensuing discussions and determination of this powerful trio, gets to be oriented toward lowering or better yet eliminating all corporate taxes. Of course, a zero corporate tax would imply that all investment income had to be taxed at the same level as all other income.
Down with corporate taxes! The only ones who should have the right to cover for a government expenses are the citizens, and that right should not be diluted in any way.
PS. This is not the moment, but if you have time, I would like to refer you to My Tax Paradise, because nothing is more powerful against sinful tax-havens than a virtuous tax heaven.
February 15, 2013
Sir, Gillian Tett in “FISH becomes the European conundrum of US investors” February 15, refers to “a longer term sense of deep unease about the fundamental growth story, not just in the periphery of Europe, but in the core of eurozone too.”
And of course there are reasons to be much concerned. If bank regulators are allowed to stupidly clog the arteries of the financial system, and so that “The Risky”, those actors who operate on the margins of the real economy find it more difficult than usual to access to bank credit, the economy will stall and fall.
Lending to “The Infallible”, fiscal stimulus, quantitative easing or similar, are all great to make the economy grow, but that growth is based on fats and carbs and, in the absence of “The Risky”, those who provide the proteins,it will only lead to a flabbier and ever weaker economy.
Some colleagues of Gillian Tett will surely some decades from now pose the question: How come the western civilization suddenly became so panicky risk adverse so as to accept regulations which though it might give it a couple of more years of marginal growth, definitely doomed it to shrink away? How come this was not even discussed by the media?
I think they will find their answers in the prevailing dominance of a baby boomer generation flying irresponsible après nous le deluge colors.
Sincerely if the millions of unemployed European youth really came to know about the stupidity that is blocking so much of their future, I would not like to be in a bank regulators shoes, or in the shoes of those hushing it all up for that matter.
February 14, 2013
What was now devalued in Venezuela was the official exchange rate of the bolivar, not the much less valued real rate
Sir, I need to point out a certain lack of preciseness in my friend Moises Naim’s “Venezuela’s devaluation is another desperate Chavez move” February 14. What was now devalued was the Venezuelan official exchange rate, since Venezuela’s “real” exchange rate, the result of dividing all the bolivares paid for all dollars purchased, has been suffering much larger devaluations for a long time. Just the fact that in Venezuela it is prohibited to make reference to a FX rate other than the official, does not mean it does not exist. Here you find for instance a link to the Green Lettuce.
In fact devaluing the cheap official rate for accessing dollars can in some circumstances could even help to revalue the “real” rate, at least initially, for a short while.
And in reference to domestic gas prices I also I believe it is important to point out that the current government, which calls itself socialists, has used up more value giving out gas basically for free, than the value in all their other social programs put to together, and, be amazed, this fact was not even an issue in the recent elections… the opposition has kept mum about it too, for about a decade.
Pray for a mea culpa by a bank regulator, or extract a confession from them by force (no waterboarding)
Sir, in “Europe must reset bank rules to restore faith”, February 14, Sony Kapoor writes “Five years into the crisis and it is still not clear where EU financial regulations are heading” and that “EU needs to reset its approach to financial reform” and suggesting “launching a high-powered public inquiry [to] help hold public officials and bankers to account so that public trust can restore”.
Good luck with that! I have over a number of years, starting even before the crisis, in perhaps a hundred of venues, asked regulators some simple questions they refuse to answer. That they do because doing so would reveal the monstrous regulatory mistake they made when, thinking themselves able to be the risk managers of the world they created, especially in Basel II, their capital requirements for banks based on perceived risks, which is completely against common sense.
The reform process is indeed paralyzed, especially when they now even begin to understand that their new concoction in Basel III, liquidity requirements also based on perceived risk, can only make things so much worse.
What to do? Our best chance is finding a daring political leader that can pull out with force an answer from the regulators; the other possibility is that a courageous important regulator or ex-regulator, like for instance Mario Draghi steps forward with a strong mea culpa. Fat chance!
As just one example of the unanswered question here is a link to a post in the IMF blog from August 2010.
February 13, 2013
Sir, there is little so dumb, so indefensible and so damaging to the economy, as capital requirements for banks which are much lower for whatever is perceived ex ante as “absolutely safe” than for what is perceived as “risky”
That ignores completely that the origin of all major bank crises lies entirely among those deemed “The Infallible” but which ex-post turn up to be quite fallible, and never ever among those who were ex ante correctly deemed to be “The Risky”.
And, by favoring what is already favored by the banks and markets, and discriminating against what is already discriminated against by banks and markets, that introduces distortions that makes it completely impossible for banks to perform their vital social function of an efficient economic resource allocation.
Just as an example those loony regulations, Basel II, required banks to hold 8 percent in capital, a leverage of 12.5 to 1 when lending to “The risky”, like small businesses or entrepreneurs, while allowing banks to hold only 1.6 percent in capital, a leverage of 62.5 to 1, when lending to a sovereign like Greece or investing in a security rated AAA to AA.
And among those regulators we find names like Lord Turner and Mario Draghi, names upon which heaps of praises have been poured on by FT over the years, names who have not been criticized by FT one iota for their regulatory stupidity.
That is why, in this the 125th year of FT, I would like to know when you adopted the motto of “Without favor and withour fear” and what that motto signifies.
I ask this, because I do agree with Nigel Lawson in that in this world “the FT has a unique role to play as a fount of reliable information and informed comment”, “No print rations, no clubby City – but the FT’s role endures” February 13.
And I ask this because your refusal to spell out these arguments allows the regulators to dig us even deeper into the hole when they, in Basel III, also want to introduce liquidity requirements based on the same ex ante perceived risks.
Sir, John Kay gives us the image of a central bank governor flying across the country in a helicopter, a “deranged grin on his face as he showers money on a grateful populace”, “…and the argument for keeping the chopper on the ground”, February 13.
That image is great but wrong. Inasmuch the central banker also believes himself to be a Basel inspired bank regulator, he would only shower money on the financial aaaristocracy, like the AAA to AA rated securities or the “infallible” sovereigns, and avoid like pest giving any money to “The Risky” populace.
The most important argument for keeping the chopper on the ground is that it would be much more useful to eliminate the capital requirements for banks which discriminate based on the perceived risk of the assets of the banks, and not on the risk of the banks. That would allow banks to once again perform their vital social function of allocating economic resources in as an efficient way as possible.
If that cannot be done, because that would require the bank regulators to be sufficiently courageous as to admit they were totally wrong, the helicopter might be our best possibility, but that only as long as no bank regulator is piloting it.
Sir, imagine being a director in an old fashioned bank board which approves all credits, one at the time. And then think about how you and your colleagues would proceed if, in a corner of the board room sat a regulator who ordered you to allocate a certain amount of capital for each credit, depending on the risk of the borrower, as perceived by a credit rating agency. It would of course be impossible for you to allocate the bank credits in such a way that maximizes economic growth. But that is in essence what happens today, and so we have a banking system that has become completely dysfunctional.
But this regulatory intrusion in the credit allocation system of the banks, and which among other allows banks to create money when lending to “The Infallible” against almost nothing of their own capital, and which de-facto penalizes the lending to “The Risky”, is still much ignored, perhaps even on purpose.
For instance when Martin Wolf asks: “Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending?”; and follows up with a “the case for using the state´s power to create credit and money in support of public spending is strong”; he is arguing his point based on the premise that our banking system is irreversibly damaged. And based on that he suggests we should leap into a system where government bureaucrats substitute for private decision making, and “discussions between the ministry of finance and the independent central bank substitutes for markets, “The case for helicopter money…” February 13.
Yes Mr. Wolf “Cancer sufferers have to undergo dangerous treatments”, but these have to be the correct treatments. And the most correct treatment of our banking system is to help our banks to get rid of those obnoxious regulatory intruders (like Lord Turner) who so stupidly, and odiously, favor those already favored and discriminate those already being discriminated against by the markets.
Many years ago, I set up a blog titled the AAA-bomb, and where in jest I described how a disgruntled unemployed former Kremlin bureaucrat sat out to destroy the “enemy” by planting the idea of capital requirements based on perceived risk in the middle of its banking system.
But when Martin Wolf writes about fiat money promoting public spending in terms of morality, and ignores the fact that the banks’ boardroom intruders already allow banks to lend to the infallible sovereign without holding any capital, I get that uncomfortable sinking feeling that perhaps there is more of a conspiracy to it than what I ever thought possible.
Does this mean I am an extremist set against any government stimulus or deficit? Of course not! But I do believe we must see to that our economic resources are efficiently allocated by the banks, before we waste whatever fiscal and monetary space we might have available.
PS. Wolf begins by quoting Mark Twain saying “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”. That is something that clearly describes the sheer stupidity of capital requirements for banks based on trusting too much ex-ante perceptions of risk to hold up ex-post.
PS. Lord Adair Turner in the “Debt, Money and Mephistopheles” lecture referenced, speaks about “pre-crisis financial folly – above all the growth of excessive leverage”. But there is not one word about his shameful role, as a regulator, in creating the crisis. Not a word about that he thought it was ok for a UK bank to hold 8 percent in capital, a leverage of 12.5 to 1 when lending to a “risky” UK small businesses or entrepreneur, while allowing banks to hold only 1.6 percent in capital, a leverage of 62.5 to 1, when lending to a sovereign like Greece or investing in a security rated AAA to AA.
February 12, 2013
Sir it is with amazement I read Barney Jopson, Benedict Mander and Miles Johnson reporting on how “Venezuela devaluation dents big companies”, February 12.
I understand the locals are prohibited from even thinking in terms of a different foreign exchange rate than what the current oilygarchs in power allows them to, though even so, most of them do, at least in the shadows.
But that grown-up foreign companies hang on to a rate that drives only a part of the economy, and have not created reserves to cover for this and other adjustments of the fx fiction to come, is astonishing. It sort of falls in the same category of naiveté as bank regulators believing that an AAA to AA rating has so little implicit risk so that they can allow banks to leverage over 60 times to 1 on such exposures.
Honestly, something is terribly wrong if auditors can ok balance sheets based on a known Bs. fiction.
February 10, 2013
Sir, on November 2, 2004 Charles Batchelor wrote in FT a short piece titled “Basel II favours high quality borrowers”. In it Batchelor describes how the new capital requirements for banks will be very much based on credit ratings, and quotes Kim Olson, the managing director of Fitch saying “banks have an incentive to sell poor quality debt and buy high quality”.
And, as a saying in my country goes, “the child that cries and the mother who pinches him”, of course the banks sold too much poor quality debt, like loans to unrated or not so good rated borrowers, like medium and small businesses and entrepreneurs; and of course bought too much of what has always been most dangerous for banks, namely what was perceived as “absolutely safe”.
And now, soon 5 years after the crisis detonated, precisely because of excessive exposures to those perceived as “The Infallible”, and when now regulators in Basel III, with their liquidity requirements based on perceived risk, are set on giving even more incentives to banks “to sell poor quality debt and buy high quality”, the Financial times stubbornly, I can’t figure out why, remains silent on how the Basel regulations distort the markets and odiously discriminate against “The Risky”.
February 09, 2013
Sir, John Gapper writes “banks do not have the capital to spare but institutional investors and some wealthy countries do”, but that “such investors are not risking money on entrepreneurs”, and so “the bulk of current dealmaking has little or nothing to do with the real economy”, “Money, money everywhere – except the real economy”, February 9.
Obviously, in a world with very scarce bank capital, the result of banks having been allowed to hold very little capital against what was erroneously perceived as absolutely not risky, whatever lending which requires the banks to hold more capital, like to the “risky” the real economy, will be the most affected. As a result, more than lack of capital, it is bank regulations that are keeping banks out of the real economy.
And this can become much worse if the loony regulators, with their Basel III, are now allowed to also impose liquidity requirements on banks based on preferring “The Infallible” and avoiding “The Risky”.
What I cannot understand is how John Gapper, who must very well know of this, can write his article without even mentioning this fact of overriding importance. Might he be one way or another censored by someone in FT? If so I urge him to rebel, "without fear"
February 08, 2013
Sir, ‘Day of shame’ sparks call for a revival of ethics, writes George Parker, February 7, with respect to many loud and outspoken demands from politicians to hold the financial sector to higher standards.
But though Andrew Tyrie, the Tory chairman of the Commons treasury committee rightly said "that high-quality regulation was not just morally right but would attract business to the UK”, there is not one single of them urging the bank regulators to come clean on their outright immoral (and dumb) concoctions.
Because it is indeed immoral to impose on the banks capital requirements which favor bank lending to those who already find themselves favored by banks and markets, “The Infallible”, while odiously discriminating against bank lending to those already discriminated against by banks and markets, The Risky”.
Because the regulators with those regulations have in fact, without having been authorized thereto, castrated the banks, and, with it, blocked the will of a nation to take the risks it needs in order to move forward, so as not to stall and fall… and that my friends, might not only be immoral, but it might even be an outright act of high treason, even if unwittingly committed
Oh please, don’t come with that never ending BS of banks taking excessive risks by creating excessive exposures to what was perceived ex ante as “risky” and which therefore required the banks to hold any substantial amount of capital against it. Give me just one example of that, or shut up!
Nothing as unethical as bank regulations that unethically discriminate against those perceived to be “risky”
Sir, Neil Barofsky lets his heart all out, when complaining about unethical behavior in banking, and most especially about the lenient judicial treatment of all those many banks and bankers involved in various unethical actions, like for instance in the Libor rate manipulation, “The Geithner doctrine lives on in the Libor scandal” February 8.
And I don’t want to argue against him, but also need to remind him that, when it comes to unethical behavior in banking, nothing is so unethically as when bank regulators decide to impose capital requirements for banks which favor those perceived as not risky, those already favored, and discriminate against those perceived as risky, those already discriminated against.
These besides odious so dumb regulations, helped to create the excessive bank exposures to what was believed to be safe but turned out not to be, which caused the crisis, and stops many of the most important actors in our real economy from having access to bank credit, which keeps us in crisis.
The truth is that the Libor rate manipulation, in terms of unethical behavior, is pure chicken shit when compared with the interest rate manipulations by bank regulators in favor of “The Infallible and against “The Risky”
Financial Times, what would happen if you had to charge those you do not like five times more for FT than those you like?
Sir, “what on earth can anyone do to get loans flowing to small business”, asks Gillian Tett in “Big corporate cash piles can help fund small businesses”, February 8. (Since I have explained it to her in so many letters, I might soon think she has a fundamental problem in understanding, and give up on her, but, since I am a very patient teacher, here it goes again.)
Tett argues that some economists blame the decrease in bank lending to small businesses on “tighter capital rules”, This completely fails to describe the argument correctly. The problem is “tighter capital rules” for banks when lending to the small businesses than when lending to what is perceived as much less risky.
What happens now is that a bank can leverage its capital with the net expected margins produced by “The Infallible” much more than what they can leverage those same margins when lending to “The Risky”. For instance Basel II allows a bank leverage of 62.5 to 1 when banks lend to someone with an AAA to AA credit rating, but only 12.5 to 1 when lending to for instance a small business without a rating.
And so when Tett writes “if the capital adequacy rules we loosened, banks themselves would provide loans to small companies” she ignores that what really needs to happen is that capital requirements on “The Infallible” must be brought to the same levels as those of “The Risky”. That is the only way to eliminate what from all points of view is simply a distortive, stupid and odious discrimination against those already discriminated by banks and markets on account of being perceived as “risky”.
In fact that discrimination is something akin to the Financial Times being forced by some authority to sell FT at a price which is FIVE times higher for the readers FT does not like, or know, than the price it normally charges its “friendly FT readers”, and all this according to what some few officially empowered “Worthy of FT´s friendship” raters rate. Would not some FT subscriptions simply disappear?
February 07, 2013
In June 2004, there was an unwitting but de facto terrorist act against the good corporate governance of the credit rating agencies.
Sir, of course we fully agree with John Gapper in that “Credit rating agencies must beware of the law” February 7. But!
Let us say you had a credit rating agency and which with some mistakes here, and some there, some worse than others, had been able to reasonably prosper over the years. And then suddenly, in June 2004, with Basel II, bank regulators decided that if a security was rated AAA or AA by your company, banks could hold these against only 1.6 percent in capital, meaning banks could leverage their capital with the expected risk-adjusted returns of that instrument an amazing 62.5 times to 1.
Anyone who does not understand what a de facto tsunami sized terrorist act against good corporate governance that meant, does not know what he is talking about, or is just out selling himself on a holier than thou basis.
Sir, Kara Scannell and Brooke Masters quote some of the shameless exchanges that took place among traders with respect to the manipulation of Libor, Tibor and what have you. “Trail of casual trader talk comes back to haunt RBS”, February 7
I wish they would be equally willing to find and publish the certainly much more sophisticated sounding arguments which led bank regulators to allow banks for instance to hold securities with an AAA to AA rating, or lend to Greece, against only 1.6 percent in capital, meaning authorizing a 62.5 to 1 leverage on those exposures.
It would also be interesting reading how they defended a concept like that when a German bank lent to a German entrepreneur it needed to hold 8 percent in capital, but when lending to the German government it could do so against zero capital.
I ask all this because, without the slightest doubt, this most certainly totally unwitting interest rate manipulation carried out by the bank regulators, has de facto caused immensely more damages than all other scandalous interest rate manipulations we have been reading about lately, put together.
Sir, I refer to Chris Giles “The five important questions that Carney must answer”, February 7.
As you very well know there are some questions that though they seem unimportant to you, are very important to me. Therefore I would very much appreciate it if, given a chance, “without fear”, you could forward to Mr. Carney the following two questions. Though quite simple and straightforward they seem strangely to have become, at least for those in charge of bank regulations, two completely unanswerable questions.
Current bank regulation’s rest on capital requirements for banks based on perceived risks.
What is perceived ex ante as absolutely safe, and therefore already benefits from lower interest rates, higher loans and more lenient terms¸ is benefited by causing lower capital requirements for banks, which produces higher risk adjusted returns on bank equity, leading to even lower interest rates, even higher loans and even more lenient terms.
What is perceived ex ante as risky, and which therefore already has to pay higher interest rates, receive smaller loans and under harsher terms¸ is discriminated against by means of causing higher capital requirements for banks, which produces lower risk-adjusted returns on bank equity, leading to having to pay even higher interest rates, receive even smaller loans and under even harsher terms.
Therefore Mr. Mark Carney, since you are the Chairman of The Financial Stability Board, I would like to ask: Do these capital requirements for banks not fundamentally distort economic signals and make it impossible for our banks to perform their vital social function of allocating economic resources in an efficient way.
As a result of the previously mentioned capital requirements, bank lending to what is perceived as an “infallible sovereign” causes virtually no need of bank capital. And this of course means that the “infallible sovereign” needs to pay a much lower interest than would otherwise have been the case in the absence of these regulations.
Therefore Mr. Mark Carney, since you are an experienced central banker, could one not say that the interest rates to the “infallible sovereign”, a rate often used as an approximation of the all important risk-free rate, is now being subsidized, leading us, and you, to not knowing where the hell we find ourselves?
February 06, 2013
Sir, Jean Pisani-Ferry writes “Bribery is no way to reform Europe’s economy” February 6.
Absolutely! Continuing with the policy of bribing the banks with lower capital requirements for what is perceived as “absolutely safe” so that they don’t engage with what is perceived as “risky”, as the Basel Committee proposes to do with Basel III does, is no way to reform Europe, or the US for that matter.
But, if dropping money on the real economy, don’t let Lord Turner or any of his regulatory colleagues pilot the helicopter
Sir I refer to your “Helicopter lessons” February 6, where you analyze some favorable comments made by Adair Turner on “helicopter money”, meaning “putting newly minted cash irreversibly into the economy". In it you write giving “cash to the private sector rather than to the public treasury [has] the advantage it keeps intact market discipline on budgetary choices”.
You are absolutely right. But in the same vein let me also remind you that if you drop money on the economy by helicopter, make really sure this one is not piloted by Lord Turner, or any other of his bank regulating chums. I say this because these are those who have seen it as their mission in life to make certain that banks only lend to “The Infallible” and not to “The Risky”
And when doing so, they seem to never care about the fact that bank exposures to “The Risky” have never been large enough to create a major bank crisis, only excessive exposure to “The Infallible” do that; and neither do they want to listen to that “The Risky” include many who make a living on the margins of the real economy, and who extremely important for making it moving forward, so that this one does not stall and fall, and bring all of us down, including the banks.
The regulatory distortion produced by these runaway regulators, is directly responsible for that our banks can no longer perform an efficient allocation of economic resources.
The fiduciary duty of financial journalists includes drawing attention to violations of the bank regulators fiduciary duties… capisce FT?
Sir John Kay writes “The reputation of finance has been degraded by the actions of few. But the few have been running the show” and I totally agree with him, though let me be clear, he refers to some few bankers, and I refer to some few bank regulators, “A Swansea ballboy¸ a union leader and the duty of bankers”, February 6.
If “fiduciary standards describe how people should behave when they manage the affairs of others” and if “in a sector as extensively regulated as financial services [where] the main determinant of behavior is the rule book”, is it not so that the absolutely highest fiduciary standards should then have to be expected from those who write the rule books for banks?
The whole package of Basel Committee bank regulations is in my mind in total violation of a regulators' fiduciary duties. Not only does it give banks immense incentives to create excessive and exposures to what is perceived as absolutely safe and which has always been the source of bank crises, but also, by discriminating against “The Risky” it hinders the banks to perform their most important societal duty of allocating economic resources efficiently.
And let me also remind you that one very important fiduciary duty of financial journalists is to, “without fear and without favour”, draw their readers’ attention to violations of bank regulatory fiduciary duties… capisce John Kay, and all you others in FT?
Sir I refer to the several writings in FT on Standard and Poor’s being sued by the US Department of Justice, February 6.
In a normal world one would name and shame the raters who got it so wrong, and their bosses. In this world the Department of Justice sues Standard and Poor’s which only means now that credit rating agencies will either stop giving ratings or that the cost of their opinions must increase, as a consequence of now having to carry insurance against the raters getting it so wrong again… something which we know will happen… sooner or later, they are only human.
In a normal world, our failed bank regulators would have been held accountable for what they did. Because much more interesting and relevant would be: Where can we sue bank regulators for recklessly having empowered the credit rating agencies too much?
Because what the regulators did was to empower the credit rating agencies to such an incredible extent that an AAA to AA rating issued by them, sufficed to allow banks to hold only 1.6 percent in capital and leverage their capital a mindboggling 62.5 times to 1.
And that created of course an insatiable demand for AAA to AA securities and the market, as a market normally does, if it runs out of good ratings, it delivers Potemkin ratings.
Sir, and do not start mentioning black swans or in any other ways try to excuse the regulators recklessness: They, by accepting to be bank regulators, should have known what was going to happen. Here are but 3 of my many warnings:
In the Financial Times, a letter I wrote in January 2003 states: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”
In a formal written statement delivered in April 2003 as an Executive Director of the World Bank I held: “Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on a limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.”
In an Op-Ed of May 2003 I wrote “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators, we find it so strange that the Basel Committee delegate, without any protest, so much responsibility in the hand of so very few and so very fallible credit rating agencies”
And please Sir, do not tell me that regulators had no inkling about weaknesses in many of the risk models being used to evaluate the credit worthiness of instruments. If even I who am not directly involved in financial risk manager, and again as an Executive Director of the World Bank, could in October 2004 formally warn that “much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions” should not the regulators, paid for being regulators not have intervened.
Frankly to me the way regulators have managed to evade their responsibility to the extent of even being promoted, is the mother of all the lacks of accountability… and, for the time being, I am sorry to say that you Sir in FT are, knowingly or unwittingly, assisting them in the cover up.
February 05, 2013
Sir, Alistair Darling, the former UK chancellor of the exchequer, refers to the Vickers proposal of bank capital of 4 percent, a lending ratio of 25 to 1 and to George Osborne’s proposal o 3 percent, a lending ratio of 33 to 1. He also rightly “suspects” that a requirement to hold more capital is a far greater buffer against calamities than a ringfence. “In a crisis, it will take a firewall not a ringfence” February 5.
And I must ask, how on earth have we ended up discussing bank lending ratios of 25 or 33 to 1? Don’t we all realize these lending ratios are sheer lunacy? Even if a bank loans are solely to “the absolutely infallible”? What funny thing happened on the way here?
No! Banks need to hold more capital, I would say between 8 or 10 percent, and, if they don’t have that capital, then help them get it for Pete’s sake, by for instance introducing special tax-exemptions on dividends produced by any banks willing to hold a basic 8 or ten percent in capital against all its assets.
That would not only help to make our banks safer, it would also reduce the distortions produced by different capital requirements based on the perceived risk of the bank asset, and it could also lead to attract a new set of shareholders, like some widows and orphans, who would be willing to accept lower bank returns in exchange for a much lower risk.
Sir, the simple truth is that the real economy cannot afford paying off those speculative shareholders who could be attracted to banks allowed to leverage 25 to 1. It is as easy as that!
Sir, Patrick Jenkins refers to Barclays’ $3bn issue of contingent capital bonds “which simply wipe out investors if the bank’s core tier one capital ratio falls below the new 7 percent minimum specified by international rules”, “Coco’s flavor raises investor appetite for wipeout bond”, February 5.
But the big wipe out could also happen because of changes in regulations, like for instance if regulators decided to require the banks to hold some more capital when lending to “infallible sovereigns”, in order to decrease the distortions in the market and the discrimination of “the risky”. What would happen in that case? Would the investors sue the regulators? Have the regulators now been painted into a corner by the Cocos?
Sir, in your “Slow but certain progress on banks”, February 5, you write “Being timid is riskier than being bold”. Frankly for someone who has so stubbornly refused to admit my arguments that the introduction of capital requirements for banks based on perceived risks dangerously exasperated the timidity that has always existed in banks, and taken away much of that boldness in bank lending that the real economy needs in order to thrive, you have no right trying to sell yourself now as a sort of macho man.
Again, what good does ringfencing our banks do if you persist in applying loony regulatory policies within the rings? The whole basis of current Basel bank regulations is precisely giving the banks incentives to go excessively for what is perceived as safe and to stay away, excessively from what is perceived as risky; like paying Columbus to explore his bathtub instead of go looking for India, and as if staying in your bathtub, all the time, does not also entail serious risks.
You write “A reset requires changes in attitude as much as rules” Absolutely! The attitude reset which is most needed is that of the regulator’s, and so that they stop favoring with their regulations “The Infallible”, those already favored by bankers and markets, and stop discriminating with their regulations against “The Risky”, those already discriminated against by bankers and markets.
February 04, 2013
FT, instead of standing by “expert infallible regulators” who failed, you should try to stand beside “The risky”
Sir, in your “Stand by Liikanen” February 4, you write that “Making retail banks safe is a precondition for prosperity”. This is wrong for two reasons.
First, in order to make the system of retail banks safe, what you might really need is to make it much riskier for the retail banks, so that they fail more rapidly and do not accumulate too much bad assets on their balances.
And second, if you look for making the retail banks too safe, then you might very well kill all your chances of prosperity.
In this respect I would recommend you to read John Kenneth Galbraith’s Money: Whence it came, where it went” (1975). In it Galbraith speculates on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.
Galbraith also refers to the banks’ function of democratization of capital as they allow entities with initiative, ideas, and will to work although they initially lack the resources to participate in the region’s economic activity. In this respect Galbraith holds that as the regulations affecting the activities of the banking sector are increased, the possibilities of this democratization of capital would decrease. There is obviously more risk in lending to the poor.
And clearly, current capital requirements for banks which are much higher for what is perceived as risky than for what is perceived as absolutely not risky, do without any doubt discriminate against those “risky” who usually act on the margins of the real economy, and is thereby really killing our chances of prosperity.
So FT, wake up! Don’t you find it curious at least that someone like me who has openly criticized current bank regulations for over a decade, even calling the regulators dumb and stupid, has not seen even one little effort by the regulators to refute my arguments?
February 02, 2013
Sir, in 2004 I published in Venezuela an Op-Ed titled “Real or virtual universities” and in which I discussed imaginary ongoing heated budget debates in the universities, between those who wanted better classrooms and those who wanted better servers.
When now reading Gillian Tett’s “Welcome to the virtual university and budget learning” February 2, I get the feeling that soon many university campuses might retire by being acquired by chains specializing in retirement homes for the baby boomers, and where perhaps many retiring professors can remain feeling at home.
Really, if the incentives of the physical universities are not better aligned with the future income realities of their student, their current business model is bound to break. Perhaps the professors’ retirement plans should be based on a percentage of the future earnings of the graduates, at least so as to decrease the risk they will be sued by their former students for failing to deliver what was implicitly promised them.
Excessive risk allergy is much more dangerous for the society than the risk addiction of some bank trader gamblers
Risk-taking is not something easy to comprehend. A serious family man can make a million one quid bets on flipping a coin and nothing happens, though if he makes a single one million quid flipping a coin bet, and it goes wrong, all hell breaks loose. But, is the society better served by one million family men making a million one quid bets on flipping a coin, than by one who is capable of gambling one million quid on one single flip of a coin? Who is to tell?
Sir, Lucy Kellaway in “The risk addicts” February 2, quotes a repentant trader gambler being in favor of zero tolerance with respect to recreational gambling in the City. I just don’t know if that is so. With a policy like that, would one not risk eliminating part of the biodiversity of a financial center that makes it thrive? I believe I would favor the imposition of more effective gambling limits instead.
And by Lucy Kellaway placing “risk-taking” in the perspective of our banks, as many do these days, she is further feeding the false notion that the current bank crisis was the result of excessive risk taking. Let me say it loud and clear, much more dangerous for banks than overconfident addicted gambler traders, are bank regulators with a “superiority complex” who think themselves able to expulse risks from banks in a safe way.
The Basel Committee bank regulators, thinking they were very smart, allowed the banks to hold much less capital to what was perceived as “absolutely safe” than for what was considered “risky”. And with that they gave the banks the incentives to bet excessively on what was, ex ante, perceived as “absolutely safe”, precisely what has caused all other bank crises in history. Their risk allergy did not cost billions, it cost us trillions, and that without including the opportunity costs for the society of its banks betting less and less on “The Risky”, like the small businesses and entrepreneurs.
I firmly believe that the last thing a society can afford to do is to undervalue the worth of its willingness to take risks. The Western World was build upon risk-taking, and a lot of it plain crazy risk-taking… and which is why in our churches we can hear psalms begging “God make us daring!”
February 01, 2013
Sir, Meredith Whitney writes “Higher capital levels are here to stay. Sure, they make operating a bank a lot less easy than it has been over the past 20 years.”, “US bank bosses must live up to their pay cheques” February 1.
First, I am not sure that operating a bank has been in anyway easy over the past years, with bankers having to produce the returns on equity that keeps you from being eaten up by the ones on route to too-big-to fail status. And second, I do not think that higher capital requirements will make it harder for the banks, except of course that they will now have to find themselves new shareholders willing to accept lower returns as the price for lower risks.
Whitney also writes that Banks will have to distinguish themselves through back-to-basics operating results. This will mean a welcome return for the sort of basic analysis by investor they apply to other companies”. She is way too optimistic. While there are regulations that require banks to hold different capital for different assets based on the ex ante perceived risk, it will always be very hard and confusing to analyze banks trying to figure out what will happen, ex-post.
Can you imagine how it could confuse the life insurance industry if insurance companies were forced to hold more capital when lending to the unhealthy than when lending to the healthy, even after they have cleared for those risk differences by means of the premiums charged and amounts insured?