March 28, 2013
Sir you write “it is deeply problematic that Basel capital rules permit the use of bank´s own models to risk-weight assets, in effect making profit consideration relevant to what risk model banks chose to use”, “A timid step in the right direction”, March 28.
Yes that is indeed a problem, but the real big problem is that the rules determine capital requirements based on perceived risks, which makes profit considerations, meaning return on equity, dependent on risk perceptions which are already cleared for by other means. This, allowing the banks to earn more much when lending to the “safe”, than when lending to the risky is what creates the distortion which causes the banks to lend less or more expensive to the “risky” small businesses or entrepreneurs.
And, before eliminating that distortion, the more pressures you put on banks to increase their capital, the more you will discriminate against the “risky”, meaning against those our real economies most need to get going.
You hold that “regulators must deliver on the promise to stop banks from meeting the capital ratio by shrinking the loan book” but, what about the not lending to the “risky”?
You agree with that new banks should be given a pass on the toughest rules… because they start out with “fresh balances”, but, in fact, those who might be in most need of it are the old messed up banks, so as to help them to, in a healthy way, to better diversify into “risky” assets.
It is amazing how hard it is for the Financial Times to understand and digest the implications that those assets that cause major bank crisis, are always found among those assets which have been perceived as absolutely safe, and never ever among assets perceived as “risky”.
At this moment Sir, I have no doubt that to temporarily lower the capital requirements for all banks on “risky” assets, is a much better direction for a first step.
March 27, 2013
John Plender writes “Distortions caused by capital controls is price of stability” March 27. Absolutely, but by the same token let us remember that a dumb search for stability also caused the distortions which resulted in these capital controls.
And I refer of course to those insidious capital requirements for banks concocted by the Basel Committee, and the Financial Stability Board in order to bring more stability to the banking system, all by giving the banks extraordinary incentives to hold exposures to what was perceived as “absolutely safe” and to stay away from what was perceived as “risky”.
The Basel II regulations required for instance the Cyprus banks to hold 8 percent in capital when lending to small Cypriot businesses and entrepreneurs, a reasonable leverage of 12.5 to 1, but required holding only 1.6 percent in capital when lending to Greece, a mindboggling 62.5 to 1 authorized leverage.
We have now read reports which indicates that Bank of Cyprus' chairman Andreas Artemis handed in his resignation, along with four other directors, but the bank's board rejected the resignations.
And this makes us ask: When are those bank regulators in the Basel Committee and the Financial Stability Board, like Mario Draghi, and who allowed banks from small Cyprus to lend to Greece as much as they did going to resign? I mean so that we too can reject their resignation and sack them.
March 26, 2013
The world does not need reckless bankers but neither does it need risk adverse bank regulating nannies
Sir, Michael Pettis, in “Why the world needs reckless bankers” March 26 writes: “Long-term wealth creation accrues most to societies in which the financial system most willingly funds risk-taking entrepreneurs. But the more a financial system is willing to finance risky new ventures, the greater the likelihood of banking instability”.
I agree with the first part, and that is why in our churches we often sing “God make us daring!”
But with the second part Pettis describes a false dilemma, since all bank crises, with the sole exceptions of when fraud is present, have never resulted from excessive exposures to something considered as “risky new ventures” but always from excessive exposures to something erroneously considered as “absolutely safe”.
And so what we most need is to send to their homes, in disgrace, those Basel Committee bank regulators who came up with the silly capital requirements for banks based on perceived risks already cleared for… and thought that they with their “more-risk-more-capital less-risk-less-capital” had it all solved. They only doomed the banks to dangerously with little capital overpopulate the safe havens, and to avoid like never before the “risky" new ventures.
And when Pettis asks for more brutal and ruinous competition among banks I could not agree more. In May 2003, as an Executive Director of the World Bank I told regulators during a workshop on Basel II: “a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”
Sir, in your “Europe gets real – not before time”, March 26, you write that Cyprus “chose a high-risk strategy of living off a banking system far bigger than the state could support…. A metastasized bank sucked in more funds than it could usually deploy at home… and made a big bet on Greek sovereign bonds… with the complicity of leaders and the acquiescence of a population content to live beyond its means”.
Sir, set in the context of the Basel Committee of Banking Supervision having allowed, by means of Basel II, those Cyprus’ banks to hold Greek bonds against only 1.6 percent in capital, meaning authorizing a mindboggling leverage of 62.5 to 1, your statement is frankly a disgrace and an insult to our intelligence.
And let me remind you that in Cyprus, many of the accounts over €100.000 hold the salaries of those who do not have €10.000 and who of course had not the slightest idea about what lunacy some self-appointed bank regulators were up to… as neither did the sophisticated Financial Times... or did you?
March 25, 2013
If it looks like a distortion, quacks like a distortion, and walks like a distortion then it probably is a distortion.
Sir, Brooke Masters, Tracy Alloway and Shahien Nasiripour report on how banks use “pricey credit default swaps to cut their capital requirements”, “Watchdog to close Basel loophole over use of pricey credit protection” March 25.
And yet these reporters even confronting the willingness of someone to pay “pricey default swaps” cannot seem to understand that must only be because someone has created a distortion, in this particular case that one introduced by Basel regulations which permit banks to hold some assets against less capital than others.
The unhappy Barings’ Bank trader Nick Leeson writes in his memoirs: “And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.”
And how I would like these three reporters to dare ask the regulators for the reason of having capital requirement based on perceived risks which are already cleared for by other means, and, of course, not settling for that fuzzy explanation of “more-risk-more-capital, less-risk-less-capital, does that not sound logical?”
I repeat, our banks are not moved by some invisible hand of the markets, they are moved by the invisible and completely unauthorized and dumb hand of the Basel Committee.
Sir, where have all the daring journalists gone? Worse, where have all the daring editors gone?
March 23, 2013
Sir, Gillian Tett analyses “The blind faith in wishful thinking” of bankers with respect to those securities baked with mortgages to the subprime sector which collapsed in 2007, March 23.
But again Tett refuses to refer to what having regulators allowing banks to leverage the expected risk adjusted margins of those AAA rated securities on their equity, a mindboggling 62.5 times to 1, must have done to feed any blind faith. Talk about hype!
The pillar of all Basel bank regulations are the capital requirements based on perceived risk, and which are crazy in that they clear for risks already cleared for.
Has Tett, as a journalist asked any of the regulators to explain to her the rationale behind those capital requirements, in terms beyond of what that fuzzy “more-risk-more-capital less-risk-less-capital, it sounds logical” provides?
Is she not curious? Or is it that she herself suffers from blind faith in the experts?
March 21, 2013
Sir, Howard Davies and Susan Lund write about the risks of “a system where nations rely on domestic capital formation and concentrate risk in local banking system”, "Three steps to stop global finance disintegration” March 21, 2013.
I disagree. The surreptitious global capital control system imposed by the Basel Committee, with their capital requirements based on perceived risk, concentrates bank exposures, everywhere, to what is perceived as “absolutely safe”. In other words it might be more correct to say “concentrate safety in local bank system”.
Even now, while Basel II is still in effect, a German bank can lend to a triple A rated borrower anywhere, holding only 1.6 percent in capital, meaning being able to leverage 62.5 to 1 its equity, while, if lending to a “risky” German small business or entrepreneur, it needs to hold 8 percent in capital, a leverage of 12.5 to 1. That makes it impossible for the banks to allocate resources efficiently in the real economy.
And so to me the most important step the banking system needs to take is to dismantle that odious Basel regulations which favor “The Infallible”, those already favored, and discriminate against “The Risky” those already being discriminated against. That, which can be done, will be no easy task as so many imbalances have already been built into the system.
But that most probably requires firing all current bank regulators who after more than five years since the mistake must have become apparent, are not recognizing it, and indeed, with Basel III and its liquidity requirements also much based on perceived risk, are digging us even deeper into the hole.
March 20, 2013
Europe, ask your bank regulators to explain why they did it, and you will not get an answer. They never knew!
Sir, Martin Wolf ends “Big trouble from a small country” March 20, with “Banking is dangerous everywhere. But it still threatens the eurozone’s survival. This has to change – and very soon”.
Yes indeed, its bank regulations have to change. All which finds itself under the influence of a tiny committee, the Basel Committee for Banking Supervision, is threatened, by completely failed regulations.
And these regulations have not been sufficiently questioned, this even more than five years after their failure should have become evident to all. Why is that? At this moment the only explanation I can advance, is that the ego of those behind it does not allow them to admit that, in fact... they never even understood it!
Banks, before the Basel era, cleared for perceived (ex-ante) risk, that which for instance was to be found in the credit ratings, by means of interest rate (risk-premiums), size of exposure and other term; let us call that “in the numerator”.
But Basel II, and now Basel III, instruct the banks also to clear, I would call it re-clear, for exactly the same perceived (ex-ante risk) risk, credit ratings, “in the denominator”, by means of different capital requirements, more risk more capital, less risk less capital.
And so ask the regulators, or your own Martin Wolf, to explain to you:
Why considering twice the perceived risk is something rational from a regulatory perspective.
Why that does not introduce distortions.
Why that, which allows the banks to earn so much more risk-adjusted margins when lending to The Infallible than when lending to “The Risky”, does not doom the banks to overpopulate safe-havens.
Why that will allow the banks to allocate economic resources efficiently, even to “The Risky”.
Why if all bank crises ever have resulted from excessive exposures to what was perceived as safe, but ex post turned out no to be, and never from excessive exposures to what was perceived as "risky".
If you get an answer different from “more risk more capital and less risk less capital sounds logical” please, I beg you, resend it to me. If not, you will begin to understand what I am saying. Yes I know, it is hard to swallow.
I now remembered a speech I gave to some hundred regulators in 2003, pre-Basel-II days, at the World Bank. It is in my book Voice and Noise, 2006 and where I said:
“Let me start by sincerely congratulating everyone for the quality of this seminar. It has been a very formative and stimulating exercise, and we can already begin to see how Basel II is forcing bank regulators to make a real professional quantum leap. As I see it, you will have a lot of homework in the next years, brushing up on your calculus—almost a career change.”
Little did I suspect then that what was really dangerous was that the complexity of what was being presented, stopped all of them from asking the questions which should have been asked.
Anat Admati and Martin Hellwig, have written “The Bankers’ New Clothes” 2013. It is in many ways an excellent book and I highly recommend it, although “The Regulators’ New Clothes” would have been a better title. But in one passage the authors write: “Whatever merits of stating equity requirements relative to risk-weighted assets may be in theory, in practice…”. My problem is that over many years I have not been able to find or hear anything that I feel could be included in the “Whatever merits”.
Martin Wolf also quotes from that book saying “Banks have so little loss-absorbing capacity that they stand permanently on the edge of disaster”. Not exactly. Banks have sufficient loss-absorbing capacity when lending to “The Risky”, it is when lending to “The Infallible” they don’t, and this the courtesy of the Basel Committee
PS. Sir, just to remind you again that I am not copying Martin Wolf more. He has told me not to send him anything more on “capital requirements”… he already knows it all, so he thinks. But, as I said, if he has an answer, I would appreciate hearing it.
March 19, 2013
Sir, Brooke Master’s reported “Regulators exposes big three rating agencies’ shortcomings”, March 19, referring to the European Securities Markets Authority’s (Esma) year-long examination of Moody’s, Standard and Poor’s and Fitch. Two comments:
First, when they hold that one agency was not giving the markets sufficient notice that it was reconsidering the ratings of a large group of banks, they should never forget that the credit ratings, when predicting the bettering or worsening of credit ratings, can also help to catalyze these.
In this respect I would suggest reading the US GAO Report in 2003, subtitled “Challenges Remain in IMF’s Ability to Anticipate, Prevent, and Resolve Financial Crises” It stated: “Internal assessment of the Fund’s EWS (Early Warning System) models shows that they are weak predictors of actual crisis. The models’ most significant limitation is that they have high false-alarm rates. In about 80 percent of the cases where a crisis was predicted over the next 24 months, no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.”
From that report it is easy to understand that one of IMF’s problems is that what it opines, becomes a political and an economic risk too. And the same goes for the credit rating agencies.
And please, let us also never forget that it would be just as wrong of a credit rating agency to underrate the creditworthiness, of for instance a bank, than to overrate it.
Second, worse than a badly awarded credit rating, is a badly used credit rating. And of that bank regulators are guilty. Let me explain, again.
Banks normally cleared for perceived (ex-ante) risk, that which for instance is given by the credit ratings, by means of interest rate (risk-premiums), size of exposure and other term; let us call that “in the numerator”.
But our current bank regulators, those in the Basel Committee and the Financial Stability Board told the banks they needed also to clear, I would call it re-clear, for exactly the same perceived (ex-ante risk) risk, “in the denominator”, by means of different capital requirements, more risk more capital, less risk less capital.
That was, and is, loony, and only guarantees the banks did and will overdose on perceived (ex-ante) risks.
And that only guarantees that when bank crises will finally occur, as they always only result from excessive exposures to what is believed “absolutely safe” but that ex-post turned out risky, we will find the banks standing their naked with too little capital to cover up with.
And that only guarantees that those perceived as “risky”, and which could in fact be those our real economy most need to keep it moving forward, and create jobs for our young, will have their access to bank credit made more scarce and expensive than ordinary.
And so much more important than having Esma examining credit rating agencies would be having Esma, and all others too, examining first how the bank regulators use the credit ratings.
Please, never forget, that even the most accurate credit rating is made wrong, when excessively considered.
In January 2003 in a letter published by the Financial Times I had written: “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”. Where was Esma then?
March 18, 2013
Sir, Martin Wolf has suddenly seen light as he now writes “A sophisticated mistake is the idea that capital can be properly ‘risk-weighted’. This has proved fatally flawed”, “Why bankers are intellectually naked” March 18.
I have over the last five years written more than a hundred of letters to the editor commenting on articles by Martin Wolf explaining that capital requirements for banks based on perceived risks which have already been cleared for, is sheer stupidity, and creates all type of distortions. But my arguments have been mostly ignored and Wolf has even qualified me as a monothematic bore… something which I accept might very well be true, but all for a good cause.
And so of course I will read “The Bankers’ New Clothes” by Anat Admati and Martin Hellwig, with much interest, to see with what arguments they finally convinced Wolf. That is of course as long as Wolf’s new found conviction is the correct one. I say this because why then did he not title his book review “Why bank regulators are intellectually naked”
Wolf writes the book reveals why “we have failed to remove the causes of the crisis”, and I wonder whether the arrogant besserwisser attitude of some financial journalists who think they know it all, might be included there.
PS. I have not read it yet, but if Admati and Hellwig’s suggestion of a 20-30 percent equity ratio is based on risk-weighted assets, then sadly they have not understood it completely either, and the distortions could be even worse. And, if that 20-30 ratio is for unweighted assets, then it would be very interesting to hear how they propose to raise the bank capital needed to fill the hole created by the zero percent risk-weighting of sovereigns.
PS. Sir, just to remind you that I am not copying Martin Wolf more. He has told me not to send him anything more on “capital requirements”… he already knows it all, so he thinks.
March 15, 2013
Sir, Gillian Tett asks us to “Remember the lessons of the rush into “junk” in 2007”, March 15.
Does she mean that ultra-safe AAA rated junk, which banks were allowed to purchase or lend against holding only 1.6 percent in capital, meaning they could leverage 62.5 to 1 their equity, or does she refer to other junk?
She writes “many banks are reducing loans to risky corporate names because of new capital regulations” and that is not correct. Banks have been reducing loans for a long time to what is perceived as risky, and this because of "old" Basel II regulations, which allowed them to have very little capital for what was perceived as safe. And now, when some of those perceptions turned out to be very wrong, and they were left with little capital, they just have no choice but to run away even more from "risk-land" into "safe-land".
She also writes “So far the short-term money that has gone into the corporate debt world does not appear to be associated with too much leverage; this makes the picture notably different from the asset-backed commercial paper market or repo sector in 2007”.
Yes, indeed there is a difference, and that is explained by the difference between “ultra-safe-AAA-rated-junk” and “risky-junk”. It is always the former which is the most dangerous, though our current sad crop of bank regulators just forgot or preferred to ignore that.
Guido Westerwelle, ask Stefan Yngves, Basel Committee, to explain “risk-adjusted regulatory bank returns” to you.
Sir, Guido Westerwelle makes a passionate plea for deepening the reforms in Europe, since “In some countries youth unemployment has risen to intolerable levels”, “Europe needs austerity and reforms – not spending” March 15.
Mr Westerwelle, the foreign minister of Germany, is unfortunately not aware that there is another sort of “unilaterally austerity imposed from the outside”, an “austerity curse”, which has been destroying the economies in Europe and impeding job creation for quite some time.
I refer to the capital requirements for banks imposed by the Basel Committee, I do not know with which authority, and that makes lending to those perceived as “absolutely safe” borrowers, immensely more profitable for the banks¸ than lending to the “risky” borrowers, like all the small businesses and entrepreneurs. And that has effectively castrated the banks and made it impossible for these to allocate economic resources efficiently.
May I suggest Mr. Westerwelle, that he picks up the phone and calls Stefan Ingves, the Chairman of the Basel Committee to ask him: “Stefan what are these “risk-adjusted (regulatory) returns” that you mention in your March 12 speech?
Here I explain more of this
PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more about these “capital requirements”… he already knows it all... so he thinks.
March 14, 2013
To get out of its crisis-paralysis, UK needs to give its "risky" risk-takers, more access to bank credit.
Sir, I refer to Chris Giles’s “Osborne’s strategy is too timid, not too austere” March 14. I agree completely with his titling, especially after he references the weak export patterns in UK, which clearly sheds new light on why UK’s economy is not doing well. And of course, because “weak business investments suggest continued uncertainty over economic prospects and impairments in getting credit to companies that need it” or as I would say, “that want it”, but are perceived too “risky” to get it.
It is vitally important to realize that in order to overcome the crisis’ paralyzing effect, one needs to get credit out to the "risky" risk-takers. And that is simply made impossible by capital requirements for banks which, when bank capital is as scarce as it is now, force the banks to retrench into what is considered to be safer trenches. In other words the UK, as all other Basel Committee followers do, instruct their toughest soldiers to sit tight, as if the war could be won by attrition.
Sir, in response to your “Britain needs an activist chancellor” March 11, I recommended temporarily lowering the specific capital requirements for banks when lending to “The Risky”. This would be helpful for the real economy, and this should signify little costs to the public sector, since the dangers of banks lending excessively to what is perceived as risky are always really minor.
That, as I told Martin Wolf after his, “Britain’s austerity is indefensible” March 13, is something that could be achieved by allowing, while the overall capital ratios of banks are rebuilt, that banks could lend to the “risky” with the capital requirement represented by their current not risk-weighted capital ratio.
Martin Wolf now agrees with me that risk-weighing for the purpose of setting capital requirements is wrong and creates distortions. But, for reasons of his own, which I do not understand, Wolf is not interested in pursuing the argument further.
I hope Chris Giles, you Sir, or anyone else in FT would understand how important that is and have a go at it. As is we have already wasted more than five years and a lot of precious scarce fiscal and monetary policy space.
March 13, 2013
Martin Wolf’s risk aversion, which favors bureaucrats over banks making investment decisions, is indefensible.
Sir, Martin Wolf writes: “What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross of gross domestic product retrenches as the private sector retrenches is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started”. And then Wolf repeats his beliefs that “the markets deem the government solvent, since they are willing to it at the lowest rates in UK history” and so therefore he concludes, in essence, that the UK Government should invest more, “Britain’s austerity is indefensible” March 13.
To me what is truly incredible is that Mr Wolf does not understand that while there is a severe shortage of capital in banks, and banks are required to hold immensely much more capital when lending to the private small businesses and entrepreneurs, than when lending to the infallible sovereign, those who are the first private line of responders in any crisis, will not have access to bank credit in competitive terms, while the government will find the demand for its debt artificially increased, and therefore the rates it pays subsidized.
Wolf ends with “we have to consider why the economy has proved so fragile and rebalancing so difficult”. I have tried to explain it to him many times. Once again, if you allow banks to earn immensely more expected risk-adjusted returns on their equity when lending or investing in what is perceived as “absolutely safe”, than when lending to what is perceived as “risky”, you are doomed to end up with a fragile and dying economy. It is the risky risk-takers those who most can make it move forward, so as not to stall and fall, especially in a crisis.
So Mr Wolf, why this insistence in favoring bureaucrats over bankers making investments decisions? What is needed instead is something like, while the capital ratios of banks are rebuilt, the banks are allowed to lend to both “risky” and “infallible” alike, with their current capital ratio.
PS. I just read again, I guess I could not believe it the first time, Wolf opining: “The rating of a sovereign that cannot default on its debt in its own currency means little”. I am amazed, as if it would not matter whether they repay you with something worth something or with something worthless.
March 11, 2013
Sir, in “Britain needs an activist chancellor” March 11, you so correctly state: “Mr. Osborne should shift more resources from inefficient subsidies to uses that can provide a greater stimulus to the economy… [and that] smaller companies are being squeezed by the low availability of bank credit”
And is there any more inefficient subsidy than helping those bank borrowers perceived as “absolutely safe” to get even better terms, at the cost of making access to bank credit more difficult and more expensive for those borrowers perceived as “risky”, like for all those smaller companies you refer to?
Sir, I cannot understand why you insist on keeping silence on this extremely serious issue that is distorting the common sense out of our markets. Is it that you are allergic to “The Risky” or just that you prefer sucking up to “The Infallible”?
There is a need for building up bank capital for all their lending, especially for that lending to “The Risky” which required too little capital. But, temporarily lowering the specific capital requirements for banks when lending to “The Risky”, would be very helpful for the economy, and at no cost to the public sector, since the dangers of excessive bank lending to what is perceived as risky are really minor.
Sir, Edward Luce writes “Bernanke: a good engineer who knows his own limits” March 11. I am absolutely sure Ben Bernanke has many good attributes and he most probably acted as good as anyone could, as a central banker, in order to kick the can of a serious recession down the road; because we all know that is the most we can considered achieved, at least for the time being.
But, if are going to have a chance of economic growth vigorous enough to absorb all the QE´s and then some of the fiscal deficits still to come, we need even better and even humbler bank regulating engineers.
I say this because it is quite clear, at least from what we could read in the recently released transcripts of the Federal Open Market Committee of 2007, that this particular engineer, Bernanke, was not even aware of or did not understand how capital requirements for banks, based on credit information already digested by the markets and the banks, causes immense distortions.
And those distortions, more capital when lending to "The Risky" than when lending to "The Infallible", is making it much harder than usual to access bank credit, for those extremely important economic agents who act on the margins of the real economy, and who almost as a norm belong to "The Risky".
Current bank regulators, with their not so humble expectations of being able to deliver “safe” bank lending are helping to turn the world into a more dangerous place. Their bank diet, which promotes bank lending to the AAAristocracy and to the “infallible” sovereigns, and constrains lending to "The Risky", can only cause economic obesity and none of the vigor and sturdiness we need.
And that Mr. Bernanke seems unable to understand, just like Edward Luce, and just like you Sir.
“Helicopter Ben”? We wish! At this moment it seems more like "Drone-with-a-bad-guidance-system Ben"
March 09, 2013
Spain, if you bail out banks, how can you be so stupid not allowing these to help bail out your real economy?
Sir, Tobias Buck quotes activist Ada Colau during a hearing of the Spanish parliament on Spain's mortgage crisis with respect to the many heavily indebted homebuyers. She stated the following: “It cannot be that the most vulnerable people are made to live with the consequences of their actions until their death, while the big companies take no responsibility and are bailed out with public money”, “Spain´s voice of indignation grows into influential political force”, March 9.
And of course she is absolutely right, and anyone unwilling to comprehend that deserves being ashamed by the whole society.
But, even though all Spaniards with a home mortgage would be allowed to stay in their house with a mortgage reduced to leave him at least 1 Euro in equity, or allowed to walk away from the mortgage, the problem of where to work and what to eat, and in the latter cases where to stay, will persist.
And here is what I really have the biggest problem with, and not only with Spain. If banks are bailed out, how can regulators be allowed to be so stupid as not to allow banks to help out?
Because that is precisely what regulators stop these from doing when they award the banks irresistible incentives to lend to what is perceived as "absolutely safe" and to stay away from what is perceived as “risky”. And because that is precisely what happens when you allow banks to leverage immensely more when lending to what is perceived as “absolutely safe” than when lending to what is perceived as “risky”, like to small businesses and entrepreneurs
Spanish youth please do not build a government coalition around the many justified grievances you might have, and do yourselves a big favor, build it around daring hopes for the future instead.... God make us daring!
March 08, 2013
McKinsey has fallen for the same groupthink as the Basel Committee and the Financial Stability Board.
Sir, I refer to the McKinsey report “Financial Globalization; retreat or reset?" March 2013 and on which Gillian Tett bases her comments in “Davos Man’s belief in globalization is being shaken” March 8.
As I see it that report, which measures the volumes of funds sloshing around the globe, lacks the information needed to comprehend not only the causes of the current crisis, but also what is keeping us from being able to work ourselves out of the current crisis.
I refer of course to the global capital controls so inconspicuously imposed by regulators on bank’s credit flows, by means of allowing these to leverage so much more the expected risk and cost adjusted net margins when lending to what is perceived as “absolutely safe” than when lending to what is perceived as “risky”.
If only the McKinsey had explored how, because of these regulations, the perceived safe-havens in the world have and keep on becoming dangerously overpopulated, while the perhaps more productive but more “risky” bays are not being sufficiently explored, that could have opened many eyes, including of course McKinsey’s own.
Instead it recommends staying firm on course implementing the regulatory reforms initiatives that are currently on the way, even though Basel III, by adding liquidity requirements based on perceived risk, could only increase the border controls and protectionism that separates “The Infallible” from “The Risky”.
And when the reports mentions “unlocking what could be a major source of stable, long-term capital and higher returns at lower risk for savers and investors” one can only wonder where on earth they intend to stock the risks of the real economy? Are they thinking about some risk-sink similar to what is used in carbon sequestration? Under which backyard are those toxic deposits to be deposited?
The report speaks about the importance for financial institutions and regulators to have access to better information about risks, like “more granular and timely information from market participants” and “standardized rating systems”. That is indeed important, but the problem is that when both financial institutions make use of the same information simultaneously, as they do now, the banks in the interest rates and amounts of exposure, and the regulators in the capital requirements, then the whole system overdoses on that information, and crashes.
And blithely ignoring what is most constraining the access to bank credit of “The Risky”, the “constrained borrowers”, like large investments projects, infrastructure and SMEs, the report suggests that their needs should be taken care by a full range of new “public-private lending institutions and innovations funds, infrastructure banks, small-business lending programs and peer to peer lending and investing platforms”, as “this can increase access to capital for underserved sectors”. In other words it says: “Keep those filthy “risky” away from our banks, these belong to the AAAristocracy.
Really, is that the way we want to go? Is that the way we the Western World became prosperous? No way Jose! God make us daring!
Sir, McKinsey seems to have been captured by the same groupthink that has captured the Basel Committee and the Financial Stability Board, and some other regulators and experts. And that groupthink, sadly, has our real economies stalling and falling, gasping for that oxygen that risk-taking signifies.
March 07, 2013
Sir, as you well know, and as Francisco Toro writes opposite you in “Chávez leaves a legacy of economic disarray”, “96 percent of Venezuela´s hard currency earnings pass through state coffers”, March 7.
And yet you title an editorial “After Chávez, a chance for progress” and subtitle it “President´s death marks the end of a retrograde era”. Sir, are you making fun of us? Do you think that the Financial Times could even remotely live up to its motto “Without fear and without favor”, if 96 percent of UK´s hard currency earning passed through your governments coffers?
Indeed, we citizens can have more or less luck with the quality of the oiligarchs and petrocrats we have to live with, but such a concentration of economic resources makes it absolutely impossible to break out of a retrograde era. Any evidences of it, are just temporary Potemkin illusions, and we certainly do not need FT lending support to the notion that just a change of government would suffice.
In a land like Venezuela, our only hope for getting out of our abyss is by diluting the power of our oil revenues, by sharing it out directly to all the citizens, and who of course can then be partially taxed on that income.
Sir, Sharon Bowles, the Chair of the Economic and Monetary Affairs Committee of the European Parliament writes: “We know from bitter experience that the size of bonuses induced overly risky behavior and the peddling of poorly understood products contributed significantly to the financial crisis”, “Bureaucrats are not behind bonus cap proposal”, March 7.
Wrong! Being able to extract some investor value, like an AAA rating, from something not at all that valuable, is a normal financial operation, which often provides benefits to all parties involved.
The problem this time was that the appetite for what detonated the crisis, the securities collateralized with mortgages to the subprime sector in the US, just went crazy, when suddenly banks were allowed, by their regulators, to hold these securities against only 1.6 percent in capital, only because they had an AAA credit rating, issued by some human fallible credit raters. An authorized mindboggling leverage of 62.5 to 1!
No one, except those receiving them of course, likes runaway or not merited bonuses. And perhaps governments should cap the tax-deductibility of bankers’ annual pay. But, to read, five years after the crisis detonated, bureaucrats believing that fixing banker´s bonuses problem should have a high priority that is truly saddening.
The EP should concentrate instead on eliminating how regulations favor so much bank lending to “The Infallible” and thereby discriminates against “The Risky”, and thereby creating huge distortions in the real economy, because that is what is really taking Europe down… and fast.
The EP should also ask itself whether is wise to keep on consulting with bank regulators which by any accounts should have been fired long ago. Hollywood would never be so dumb to allow someone who produced a Basel II flop, to go out and try Basel III, with the same scriptwriters
PS. To help EP better connect the dots let me remind it that when banks lent to Greece, they were also allowed to leverage 62.5 times to 1; and also that nothing perceived as “risky” has ever created a major banking problem, only Potemkin Infallible do that. Capisce?
March 06, 2013
Sir, Richard Milne gives a very interesting recount of the experiences of Sebastian Siemiatkowski, the founder of Klarna, when trying to establish the credit risk-worthiness of buyers in ecommerce, “A Swedish ventures’s new take on ‘buy now, pay later’” March 6.
I would though recommend Klarna to be very discreet about how it communicates facts like that “a purchase made at 3am is inherently more risky than one made at 3pm”. I say this because those genius regulators in Basel might then get the bright idea they should require Klarna to have more capital against guarantees issued to 3am buyers than for those issued to 3pm buyers.
And the final consequences of all that could be that either the whole ecommerce trade system clogs up by all buying occuring at 3pm, buyers’ time, or that Klarna goes belly up when some 3am buyers change their buying patterns, and commit fraud at 3pm, and Klarna then finds itself bare-naked without any capital to cover up with.
In banking, margins paid by big “infallible” guys are worth much more than those paid by little “risky” guys
Sir, Luke Johnson writes “Margins give the little guys a chance” March 6. That might be, but absolutely not when accessing bank credit.
Because of the capital requirements for banks based on perceived risks, the risk and cost adjusted margins paid to the bank by the little guys, “The Risky”, Luke’s entrepreneurs, are worth much less than those same margins paid by the big guys “The Infallible”, simply because the banks are authorized to leverage the latter many times more.
This distortion has castrated our banks. Our current bank regulators completely ignored the fact that our economies became prosperous, not by silly risk-avoidance, but by intelligent risk taking.
And as result our economies are ingesting more of what is perceived as “safe”, carbs and fats, while dangerously ignoring to take sufficient “risks”, that protein which helps it to grow muscles and become sturdy, and our economies are becoming obese and flabby.
March 05, 2013
Stop your fixation with bankers’ bonuses tree, and look at the forest of misallocated resources instead
Sir, I agree with much of what Andrea Leadsom writes in “Britain must do whatever it takes to nix the bonus cap”, March 5.
That said I wish he and you would all stop focusing on the trees and look at the forest instead. Much worse than unmerited bonuses are all those missed opportunities and misallocated resources which result from the current bank regulators having concocted dumb capital requirements for banks which favor “The Infallible”, those already favored, and thereby additionally discriminate against “The Risky”.
Sir, Patrick Jenkins argues a lot on the benefit of “clawback” in “The time has come to rehabilitate bankers’ bonuses” March 5. And of course, intelligent “clawback” of bonuses is much welcomed, especially for the shareholders who otherwise need to foot the full bill.
But, for the society as a whole, much much worse than unjustified paid bankers’ bonuses, are all those missed opportunities and misallocated resources which have resulted from the current bank regulators having concocted dumb capital requirements for banks which favor “The Infallible”, those already favored, and thereby additionally discriminate against “The Risky”.
And sadly, there is no way to “clawback” that. It is even worse, in this case the regulators do not even want to recognize their mistake, and instead are set on carrying on business as usual.
March 04, 2013
“In the short term, all you need to do to make more money for a bank is take more risk”. Not so fast Mr. Authers
Sir, John Authers titles absolutely correctly “Bonuses are only a symptom of banking’s true problem” March 4. But when he then writes, “in the short term, all you need to do to make more money for a bank is take more risk”, I am not really sure he´s got it.
First it used to suffice to talk “about making more money for a bank”, because all risk were evaluated using the same standard, meaning the same capital base, but, ever since different risks require holding different levels of capital, it is much more accurate to talk about the real end results, meaning that of producing higher returns on equity.
And also it is absolutely not true, even in the short term, that for a bank to make more money, it is enough to take more risks, as long as risk premiums are priced correctly and there are no distortions. What happened now was not really about banks taking more risks, but that the risk-premiums of what is perceived as absolutely safe, were by the regulators allowed to be leveraged many times more than the risk-premiums of what is perceived as risky.
In other words what applies in these Basel II days, and seems to be continued in Basel III is: In the short term, all you need to make more money to the banks, is to leverage more what is perceived as less risky.
John Authers is very correct though when he points out “Limit the leverage that banks can use, and require them to hold more capital, and … These measures [and other] might help create a banking system that can sensibly allocate savers’ capital to productive investment opportunities. The pay issue, to the extent there is one, is dealt with in the process”.
But, Mr. Authers, why did it take until March 2013 for you to ask for “a banking system that can sensibly allocate savers’ capital to productive investment opportunities”? Is that not a hundred times more important than what excessive banker bonuses might be?
Sir, there are two comments that I want to make in reference to Robert McFarlane’s and George Olah’s “Let the market determine the best energy sources”, March 4.
The first is that since OPEC is cast as a runaway producer cartel that distorts the market, it is again timely to remind the authors that in Europe, by means of taxes on petrol-gasoline consumption, the European taxman gets more income per barrel of oil than the OPEC members who sacrifice this non-renewable resource.
Secondly, because they argue their case so well, I would like to ask for their support on the issue of bank regulations. Currently bank regulators, by allowing banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky” are, in terms of energy, subsidizing oil and taxing methanol and ethanol, and that is of course pure lunacy.
March 02, 2013
Sir, here is what I would say to the members of parliament in the Strangers’ Bar of the UK House of Commons, if there when as Martin Wolf describes them discussing the European Parliament’s efforts to cap banker bonuses, “The curious case of Brussels and the bankers’ bonuses” March 2.
The main reason for high bankers’ bonuses is that they now do not have to share the revenues as much as they used to with shareholders, and the reason for that is that banks are now not required to have any substantial amounts of capital, that is as long as their exposures can be considered “absolutely safe”.
And so I would ask the regulators to increase the capital requirements, especially for what is perceived as “absolutely safe”, because there, as we all know, is where also the dangers of any too dangerously high bank exposures are always to be found.
But it seems the regulators do not want to increase those capital requirements, and the only possible explanation, besides of course that of them being daft is that they have been lobbied too generously by bankers and “infallibles” alike.
But much worse than causing high bank bonuses, is the way how those capital requirements distort the markets; and how, by favoring lending to what is perceived safe, whether for real or only Potemkin type safe, discriminate so odiously against the bank borrowings of all others de facto classified as “The Risky”, no matter how decent and worthy.
And so UK should state: We do not want to cap bankers’ bonuses the way the European Parliament currently suggests, because that just prolongs the distortion of the markets as well as the senseless regulatory favoring of the haves, the history, the old, “The Infallible”, thereby discriminating against the have-nots, the future, the young, “The Risky”.
And then for good measure, the UK should also propose that as one should perhaps not go too fast on tightening the capital requirements, one can meanwhile put a cap on how much in annual total compensation per banker is allowed to be a tax deductible expense… and that would take care of solving a couple of problems, while even reducing the distortions.
And then to wrap it up, going for the killing, I would ask: “European Parliament, given how banks have profiting the last decades, is it really so smart to reduce banker´s bonuses only to increase the dividends per bank share? Is it the interests of bank shareholders you are defending?
March 01, 2013
Sir, I refer to your editorial “Diplomatic fallout from EU bonus cap” March 1.
Solving the absolutely valid concerns about excessive bonuses paid in banks, by means of capping the bonuses to staff to a maximum percentage of their salaries as the European Parliament proposes, only introduces another distortion… on the road to overmedication
What I would suggest doing, and thought it might seem to be similar regulatory distortions to you, is in fact reducing other distortions that influence the bonuses paid.
First, since tax-deductibility is in itself a source of distortion that favors big bonuses, I would limit how much remuneration a banker can get in order for it to be a tax deductable expense,
And secondly, I would eliminate those extremely low capital requirements for banks for exposures to what is considered as infallible, since these impede the existence of sufficient shareholder´s compensation requirements which can keep the bonuses in check.
I would of course also do the latter as you know, because the minimalistic capital requirement for what is “safe” and which thereby discriminate what is perceived as “risky” is in fact, on its own, the greatest source of distortions which makes it completely impossible for banks to help allocate economic resources efficiently.
Why must UK say “No!” to EU on a bonuses cap, without presenting any decent counterproposals?