Barclay’s has and projects leveraging its equity 45-35 to 1 times. Would not 10-15 to 1 be sufficient?

Sir, I refer to Patrick Jenkins and Daniel Schäfer’s “European banks move to bolster equity level”, as well as to The Lex Column note on Barclays, July 31.

Both mention the current leverage ratio of 2.2 percent of Barclay and the recent goal of 3 percent established by global regulators.

Those leverage ratios, translated to usual historic equity leverage indicators, those used in the pre-risk weighting days of the Basel Committee, would be 45 to 1 and 33 to 1 respectively.

Sincerely, do you not believe these leverages to be somewhat on the high side? Would not leverages between 10 and 15 be more than sufficient?

Lex holds that having to move from 2.2 percent leverage ratio to 3 percent “has delayed the date when Barclay’s return on equity will beat its 11.5 per cent cost of equity by a year to 2016.”

And that also begs the question whether shareholder would not be happy with a lower return of equity, if that came hand in hand with much lower assets to equity ratio?

Is Mark Carney allowed not to tell the truth in order to make consumers and companies feel more relaxed?

Sir in “Mark Carney’s risky revolution” July 31 with respect to “forward guidance” you write that “Mr Carney believes guidance can provide extra monetary stimulus at a time when interest rates are already ultra-low. Consumers and companies will feel more relaxed about borrowing if the central bank reassures them it does not intend to hike rates soon.”

That begs the question whether Mark Carney or any other Bank of England governor must tell the truth and only the truth, or is he really allowed bending the truth, in order to have consumers and companies feeling more relaxed?

Is that why they hired a Canadian?

Ben Bernanke did not do well, because he has not understood how current bank regulations distort.

In banking, what is perceived as “absolutely safe” has always access to the largest loans, at the lowest interest rates and easiest other terms. And that is why all bank crises have resulted from excessive exposures to what was ex ante believed as absolutely safe but that, ex post, turned out not to be.

In the same vein what is perceived as “risky” always receives the smallest loans, at the highest interest rates and harshest other terms. And that is why no bank crisis has ever resulted from excessive exposures to what was ex ante believed as risky.

And therefore bank regulations, like the current, which allow much lower capital requirements for banks on loans to what is perceived as “absolutely safe” than for loans to what is perceived as “risky” are plain silly and do not make the banking system safe.

And worse, by allowing banks to make higher expected risk-adjusted returns on equity when lending to “The Infallible”, like to the sovereign and the AAAristocracy, than when lending to “The Risky”, like ordinary businesses, these regulations also completely distort the allocation of bank credit within the real economy, making it unreal, with awful consequences.

Sir, and since Ben Bernanke, being the one most responsible for all quantitative easing, has evidently not understood how broken the current financial transmission mechanism is, I cannot agree with the first part of the title of Mike Konczal’s “Bernanke did well, but the Fed must do better” July 30.

But, of course, I wholeheartedly agree with his plea for the Fed to do better... but that should begin by eliminating the regulatory discrimination against perceived credit risks which have already been cleared for in other ways.

More capital-equity against what is least likely to pose a risk to the bank system is the pillar of Basel II and III

Sir, Edward Luce in “Betting on start-ups can revive a tired presidency” July 29 writes “the effective equity cushion at the largest US banks is between 4 and 6 per cent of their balance sheet. For the small Main Street banks that still make “character loans” – lending money to customers they know – that cushion is 9 per cent. In other words, US regulators are twice as strict with those banks that are least likely to pose a risk to the system.”

That is not a US problem only as in Europe it is even worse. The Basel Committee is in this respect much worse than the US Federal Reserve, FDIC and the Office of the Comptroller of the Currency. The pillar of Basel II and III bank regulations are capital requirements based on perceived risk, which precisely forces bank to hold more capital-equity for what is perceived as risky and is therefore not that risky.

This is the problem that I have written about the Financial Times more than a thousand letters but which you have ignored, presumably because someone did not like something I wrote and decided I should be ignored-censored.

Europe is doomed to a wrong recovery with dangerous obesity

Sir, you write that “Europe risks a ‘wrong’ recovery” July 27. Wrong! Europe is doomed to a ‘wrong’ recovery. Any economy in which its banks are made to keep away from lending to small and medium businesses and in which only because these are perceived as “risky” stands no chance of getting on the track of a right and sturdy recovery.

You admonish Europe to “remember that how an economy expands is just as important as whether or not it grows.” And you are absolutely correct. An economy in which banks lend primarily to the “safe” only because regulators then require the banks to hold less capital and therefore then allow banks to earn higher expected risk-adjusted returns on equity, will only grow obese and fluffy, prone to a final and fatal heart attack 

Europe, pray: “God make us daring”

Nothing is more needed from the Fed, than some modesty and humility.

Sir, Richard McGregor in “Acrimony grows over Fed chair decision” July 27, quotes Bob Corker, a Republican senator saying “but we’d like to have someone that shows more modesty, from the standpoint of what the Federal Reserve can do, relative to spurring our economy on”.

That is absolutely correct, after all these years with bank regulators arrogantly thinking they can play risk managers of the world and allow for different capital requirements for different bank assets based on ex-ante perceived risks, all without even thinking about how this distorts the markets, there is nothing we need more than modesty and humility in our financial bureaucracy.

Just look at how much resources have been spread out by the Fed’s quantitative easing programs without caring about the financial transmission channels being all fouled and plugged up by these regulations.

How long will the young stand for the nonsense of the ageing baby-boomers?

Sir, Michael Stothard, in “Elderly set to ride to rescue of fixed income” July 26, writes “a ray of sunshine – the bond market pessimists are failing to factor in: the rapidly ageing population across the western world.” Those over 65 years old are 16 percent of population today and expected to be 25 percent in 2042.

The argument is that the elderly will abandon equities and turn to safe bonds. The equities for which there will still be some demand are safer dividend-paying stocks and those related to services to the elderly, including funeral operators.

“A ray of sunshine”? If we add to this that the current ageing baby-boomer bank regulators want banks only to make safe loans and not take risk on small businesses and entrepreneurs… who is then going to finance the new generation of jobs our young so urgently needs?… who is then going to provide the growth that will keep those safe bonds safe.

In the back of my mind, by the day looms louder the question of… how long will the young stand for this type of nonsense?

More than overzealous bank regulators, governments and we should fear dumb regulators.

Sir, what is that nonsense of “Let the regulators show their teeth” July 24. It is not the role of regulators to regulate by showing teeth, but to regulate in a smart way.

And when you write “British banks entered the recession short of capital, it is fair for them to be asked to shore up their balance sheets”, remember that only happened because regulators allowed for silly low capital requirements against any exposure ex ante perceived as absolutely safe, ignoring that it is precisely that type of exposure which, because of the size it usually takes, sets of a big crisis if ex post it turns out it was not that safe.

Of course the UK banks need more capital among other because some banks in some other countries are strengthening their capital ratios, and you would not like to be left with the weaklings.

But, if the government “fears overzealous regulators could put the recovery at risk” that would happen more as a consequence of the distortions produced by dumb regulators applying different capital requirements for different assets, based on ex ante perceived risks, than because of the overall capital requirements being too high or too low.

Now if only regulators allowed banks to be banks again.

Sir, Patrick Jenkins writes about “a small manufacturing company… looking for £150,000 of working capital. It is traditionally the kind of need that might have been met by a bank loan. But, in the post-crisis world of bank belt-tightening, it is now the bread-and-butter of upstart peer-to-peer (P2P) lenders. “Why peer-to-peer lending remains inherently unsafe”, July 23.

No, this is not the result of a “post-crisis belt-tightening” but of pre-crisis bank regulations, Basel II, June 2004, which required banks to hold immensely much more capital (equity) when giving loans as that described, than when lending to the sovereign or the AAAristocracy.

And Jenkins correctly writes “Banks might have done themselves and the world a lot of damage in recent years, but they are still better judges of lending risk than the average investor”. Indeed they are, and they would be the best at handling such loans, if now regulators only allowed the banks to be banks again.

All public intervention profits could later turn out to be just other can-kicked-down-the-road losses.

Sir, I refer to Andreas Utermann´s “Risky bailouts can deliver a hefty profit for central banks” July 23.

The article is based on the presumption that those interventions where the government has made some profits are good, and that those were it has lost, are bad.

Unfortunately it is not as simple. In effect some of the profitable interventions could easily turn out to be the most expensive if for instance they just kept in place some who should have benefitted from retiring.

Does this make me an enemy of all government interventions? Absolutely not! It all just stops me from being an automatic congratulant of these.

We should also remember that evaluating any current government action, when ordinary economic realities have been suspended by programs such as quantitative easing, is an extremely hazardous thing to do.

In short the truth is that all current profits derived from public interventions, could later just turn out to be other can-kicked-down-the-road losses.

What European banks need is not to de-leverage but more capital, lots of it

Sir, Christopher Thompson reports on a Royal Bank of Scotland analysis that states “Banks need ‘to shrink’ balance sheets, to shrink their balance sheets dramatically to ensure that the continent could withstand another financial crisis… But as European banks deleverage, such as by selling loan books, there are knock-on effects to the real economy… It’s a catch-22”, July 22.

Forget it! What Europe's real economy and European banks need is more bank capital, lots of it.

You cannot ring-fence banks to live safe, in a vacuum, independent of the real economy.

Sir, Michael Barr and John Vickers argue that “Banks need far more structural reform to be safe” July 22, but as most navel gazing regulators, they seem to think banks could remain safe, as in a vacuum, effectively ring-fenced, independently of how the real economy is doing. Banks are more than some beautiful fishes to be looked at in an aquarium.

And in that respect, as long as ex-ante perceived risk of assets will allow for different capital requirements for the banks holding different assets, these will earn much different expected risk-adjusted earnings on their equity on different assets; which results in than the banks stand no chance of being able to efficiently allocate resources in the real economy; which results in that the real economy will falter; which will results in that banks, at the end of the day, are made unsafe, in a terminal way.

How will markets react when informed that Deutsche Bank is leveraged 33 to 1?

Sir, Daniel Schäfer, on July 22, reports that Deutsche Bank is to cut assets for stricter capital rule aiming for a 3 percent loan to equity ratio. And “stricter” is there sort of laughable.

On January 2015, according to the Basel Committee, banks will have to report their straight leverage ratio. Can you imagine how Deutsch bank creditors, made aware they should not expect to be bailed out, will react when they read that Deutsch Bank is leveraged 33 to 1?

If 33 to 1 leverage is stricter, how flexible is it now?

We need self sustainable jobs not just “Brother, can you lend me a job?” jobs

Sir, that a bank is required to hold more capital against a loan to a small or medium business than against a loan to the state or to the AAAristocracy, and as a result earns much less expected risk adjusted returns on its equity when lending to “The Risky” than when lending to “The Infallible”, is utterly absurd in terms of bank credit helping out with the creation of jobs.

Though the US is not as bad as Europe discriminating the access to bank credit against those perceived as risky, that is something Jack Lew should concern himself more with instead of issuing self-congratulatory statement about the generation of jobs which, considering the fiscal deficit and the quantitative easing programs in the US, could only be labeled as borrowed jobs, “Put job creation at the heart of the global recovery” July 19.

By the way those bank regulations are also absurd from the perspective of the safety of our banks, since no major crises have ever resulted from excessive exposures to “The Risky”, these have always resulted from excessive exposures to what turned out to be not a real member of “The Infallible”.

My one and only question to Ben Bernanke in the Congress of the Home of the Brave

Sir I refer to Bernanke’s recent declarations as reported by Robin Harding.

If I had a chance to direct only one question to Mr. Bernanke, in front of the Congress of the Home of the Brave, that would be:

Mr. Bernanke how long do you think a nation can remain strong with banks that avoid what is perceived as risky?

And, if he asked me what the hell I meant with that, this is what I would explain to him about banks.

Sir, banks are currently allowed to hold less capital when lending to “The Infallible”, like the Treasury and the AAAristocracy, than when lending to “The Risky”, like the small and medium businesses and entrepreneurs.

And that translates in “The Infallible” being able to produce banks higher expected risk-adjusted returns on their equity than “The Risky”. And that of course makes access to bank credit by “The Risky” much scarcer and more expensive. 

And I ask of course because “The Risky” are those who operate on the margin of the real economy, those who keep the economy moving forward, generating jobs and assuring the existence of some of “The Infallible” tomorrow.

PS. And besides Mr, Bernanke, for your information, "The Risky", precisely because they are perceived as risky, have never ever caused a major bank crises. That honor corresponds entirely to some of The Infallible who turned out not to be, 

Avoiding producing global bads is a must for a good globalization.

Sir, between mid 2004 and end of 2007, about a trillion dollars of European savings, flowed into triple-A rated securities guaranteed with mortgages in the subprime sector of the USA. This was primarily the result of absurd capital requirements which allowed European banks to hold or to lend against these securities rated AAA holding only 1.6 percent in capital, which meant being able to leverage their equity 62.5 times to 1. And, of course, disaster ensued.

And all that happened because some bureaucrats, in this case those of the Basel Committee for Banking Supervision, were allowed to concoct regulations in splendid isolation without having to answer to anyone.

I mention this in reference to Martin Wolf´s “Globalisation in a time of transition” July 17, because, if we want globalization to produce global public goods we must find ways of decreasing the risks of producing global public bads.

When regulators layer on personal judgments on top of market judgments, it is a very dangerous affair

Sir, John Kay spiritedly defends that in accounting “prudence, truth and fairness are the product of judgment and personal responsibility, not the observance of particular procedures.”, “The market is not the best place to set a fair price for assets” July 17. And who is going to argue with that?

Unfortunately the other side of the coin is that the personal judgment could be wrong or applied not in substitution of the market but on top of it. For instance, when bank regulators ignored that ex-ante perceived risks were already being cleared for by the markets, and decided to also clear for these in the capital requirements, they created the greatest addiction ever to ex-ante perceived risks which resulted in the current crisis.

With capital requirements based on a perceived risk already cleared for, do not banks overdose on perceptions?

Sir, Tim Adams, in a letter on July 16 that comments your editorial “In praise of bank leverage ratios” (July 11) writes that “Given the lessons of the crisis, it would be unwise to rely on a measure that does not take into account the riskiness of banking assets…. Let’s focus on strengthening the existing framework and avoid incentivising firms to shift to the riskiest assets, which could only sow the seeds of another crisis.”

I do not understand. What crisis did Mr. Adams see, and what lessons did he learned? I say this because the crisis I saw was 100 percent the result of incentivizing banks to move excessively to the “safest assets”, those which allowed banks to hold the least capital, those which allowed the banks to earn the highest expected risk-adjusted returns on their equity.

Banks already take the ex ante perceived risk into account when setting interest rates, deciding the amount of the exposure, and defining any other term, and so why should banks also consider exactly the same perceived risk in their capital. Does that not guarantee that banks will overdose on ex-ante perceived risk?

I have posed that last question to the regulators for many years, and never received an answer. Maybe the President and CEO of the Institute of International Finance, Washington, DC, US could help me and the regulators providing an answer?

Our banks are in the hands of… may I say idiots?

Any bank regulator, looking at all history of bank crises, should be able to observe that, with the exception of outright frauds, all the crises were the result of excessive exposures to something perceived ex ante as “absolutely safe” but that ex post turned out to be very risky.

And so to allow banks to hold minimum capital (equity) against what is ex ante perceived as “absolutely safe” is sort of idiotic.

Sir, Adam Posen w rites “perhaps the new Fed chief’s main challenge will be to design and institutionalise a set of tools for targeted interventions in public and private credit markets”, “After Bernanke, make the unconventional the norm”, July 16.

If so let us pray that the Fed´s new chief is someone who understands how capital requirement regulations have produced extremely miss-targeted interventions in public and private credit markets. If not, chances are, we will all just be dug even much deeper into the hole we are in.

Mr. Posen also writes about “the more complex reality of how monetary policy is transmitted to the whole economy... In the euro area, low interest rates and commitments to government bond market intervention are failing to improve credit conditions for small and medium-sized businesses across southern Europe”.

Complex? Given the fact how current bank regulations discriminate against small and medium sized businesses, on account these being perceived as “risky” something for which they have already been discriminated for, I do not find that to be a “complex reality” but rather a quite simple result that should be expected.

The worst with some of Europe’s technocratic busybodies” is that they are just so dumb.

Sir Wolfgang Münchau in “The dangers of Europe’s technocratic busybodies” July 15, dares Europe to keep on testing that untested mother of all liquidity injection mechanisms that quantitative easing signifies… but not a word about daring our banks to give small short term loans at high interest rates to those perceived as risky, like the small and medium businesses and entrepreneurs, those operating on the margins of the real economy, those we most count on to come up with the next generation of jobs for our youth.

Because that is exactly what happens when regulators allow banks to hold much less capital against loans to those perceived as absolutely safe, and thereby allow banks to earn much higher risk-adjusted expected return on equity when lending to The Infallible, the sovereign and the AAAristocracy, that when lending to The Risky.

Talk about dangerously dumb technocratic busybodies!

Central bankers, more than setting targets and aiming, should make sure their objectives can be reached.

Sir Samuel Brittan wishes for the Bank of England to state their objective rate for nominal gross domestic product under which they will keep interest rates low, “The real target that Carney should be aiming for” July12.

That is all fine, if low interest rates were all it took to achieve that objective, but is it not! 

As is, with banks instructed by regulators to extract profits from the past, by lending to “The Infallible” against very little capital; and not lending to the future, “The Risky”, by means of requiring banks to then hold much more capital, the real economy will not be able to achieve non-inflationary growth, unless, miraculously, bureaucrats get all other incentives absolutely right.

Getting rid of these immoral and stupid risk-adverse regulations that is what Carney and his colleagues should be doing, but, admitting they were so wrong, might be requiring too much humility of these besserwisser bureaucrats.

A dense bank regulatory feedback loop infected western world’s economies with a dangerous risk aversion

Sir, Gillian Tett writes “Dense feedback loops have heightened risk of contagion” July 12.

And I ask could there possibly be any dense feedback loop that could cause contagion more than stupid bank regulations?

When nations decide they are going to live on yesterday´s risk taking, and avoid the risk taking they would need for a tomorrow, they are simply treating themselves as cash-cows, and they can only go down, down, down.

And this is precisely what happens when regulators do as they now do, which is to allow banks to hold much less capital when lending to “The Infallible” (many of the “risky” of yesterday) than when lending to “The Risky” (potentially the “infallible” of tomorrow); and that means banks will earn much higher expected risk-adjusted returns on equity when lending to The Infallible, the sovereigns and the AAAristocracy, than when lending to The Risky, the small and medium businesses and entrepreneurs.

And you can imagine what that does to the access to bank credit of The Risky.

And of course, helping too much what is perceived as infallible, and which is therefore already sufficiently attractive, will only put it at risk of turning into something extremely risky.

As I see it, the Basel Committee for Banking Supervision, is committing high treason against the economies of the western civilization, and which have obviously become what they are thanks to a lot of risk-taking by their banks.

God make us daring!

Our jobless youth is now paying for the meek aprės nous le deluge styled bank regulations

Sir, Mohamed El-Erian writes that “in the aftermath of the 2008 global financial crisis… governments and central banks interfered more in the functioning of the financial markets. By choosing where in the capital structure to intervene directly and what to influence, the official sector altered the risk-return characteristics” “Enter the sci-fi world of central banks and their zero rate action”, July 11.

He is correct, but that was not done only in the aftermath of the global crisis. Indeed, by allowing banks to hold much less capital for exposures to "The Infallible" than for exposures to "The Risky", and thereby allowing banks to earn higher expected risk adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”, they caused banks to overexpose themselves to some not so infallible infallibles, holding little or no capital, ergo the crisis.

Given the frequency with which “The Risky” of yesterday becomes “The Infallible” of today, and “The Infallible” of today can turn into “The Risky” of tomorrow, in words similar to those of Mohamed El-Erian, these bank regulators lived on the risk taking of yesterday without creating the opportunities of tomorrow. I short a shameful aprės nous le deluge strategy that our jobless youth is already paying for.

The standardized risk-weights of Basel II, provided the coverage banks needed to hold minimum capital

Sir, your “In praise of bank leverage ratios”, July 11, though I agree with its title, just shows how little you have understood about the underlying causes of the North Atlantic banking crisis.

You write “rather than imposing standardized risk weight, regulators have let banks use their own model. This undermines the credibility of the exercise.”

The standardized weight in Basel II, for holding for instance the AAA rated securities backed with mortgages to the subprime sector in the USA, or loans to Greece, was only 20 percent; which signified that banks could hold these assets against only 1.6 percent in capital; which meant banks could leverage their equity 62.5 to 1 with these assets.

In fact, without the guidance of these standardized weights, the banks would not even have dared to convince their regulators that so little capital could be needed.

Since you also hold that the leverage ratios needs to be combined with effective risk-weighted capital ratios, you also show not having understood how these distort when it comes to banks allocating credit to the real economy.

But, with respect to that macroprudential policy should be counter-cyclical, on that we agree completely, as I indicated in a letter to you in 2004.

Nonetheless most of this discussion will be a moot point in January 2015. The Basel Committee has instructed the banks to report their leverage ratio from that day on. And after all recent signs of “bank creditors, caveat emptor, you won’t be bailed out like before”, like in Cyprus, banks have to be truly insane not knowing they have to substantially raise their capital, in order to survive the coming stampede from banks leveraged over 30 to 1 to those leveraged 10 to 1, no matter the riskiness of the underlying assets.

And the USA, thanks to FDIC, is taking the lead lowering those ratios. Europe, beware!

Higher capital will soon turn into banks’ new competitive edge.

Sir I refer to Tracy Alloway’s and Patrick Jenkins’ “US banks face strict leverage proposals” July 10.

At this moment, when warning signs stating “bank creditors, caveat emptor, you won’t be bailed out like before” are being put up all over the world, starting in Cyprus, banks have to be truly insane not knowing they have to substantially raise their capital.

In this respect, though some dumb US banks are complaining that their regulators, are setting too high capital requirements for them, these might turn out to be a blessing in disguise… and perhaps soon all will understand that those even higher ratios favored by FDIC’s Martin Gruenberg and foremost Thomas Hoenig, make all sense in the world.

Just wait until the recent decision of the Basel Committee about having to publish the leverage ratio comes into effect. Then there is a lot of bank-running that is going to be happening from those banks leveraged over 30 to 1 to those banks leveraged 10 to 1, and this no matter the riskiness of the underlying assets.

Frankly, European banks should beware

Mr. John Kay, a clogged tube, not a “leaky bucket”, stops quantitative easing from helping the real economy.

Sir, I refer to John Kay´s “Quantitative easing and the curious case of the leaky bucket” July 10.

Kay fears that quantitative easing “may not benefit the non-financial economy much, but they are helpful to the financial services sector and those who work in it.”, and he is right.

But the allegory of the leaky bucket is not perfect, because what we, if plumbers, would have in front of us, is more a curious case of a voluntarily clogged tube.

And I refer of course to that tube through which bank credit is supposed to flow to the real economy, but which has now been clogged, on purpose, by bank regulators, by means of inserting a higher capital requirements cork, to assure that bank credit does not flow to “The Risky”, like to small and medium businesses and entrepreneurs.

When it comes to risk-weighing, much worse is the discretion the Basel Committee gives itself than that of the banks.

Sir, Patrick Jenkins referring to a study by the Basel Committee writes that “Banks are reporting capital ratios that may be 40 percent adrift from each other despite identical capital levels and underlying risks.” ,“Basel fuels bank safety metric fears” July 6.

So what? Does that mean we are better off with all banks reporting exactly the same with the Basel Committee’s standard weights; for instance that of only 20 percent when lending to sovereigns rated as Greece, or acquiring AAA rated securities; which means a bank needs to hold only a measly 1.6 percent in capital against those exposures; which means a bank can leverage its equity 62.5 to 1 with those exposures?

That the banks are allowed “significant discretion”… is that really so bad? Much worse is the discretion the regulator gave itself to decide, on the world’s behalf, that the sovereigns and the AAAristocracy are "absolutely not risky”, while small and medium businesses and entrepreneurs are. Shame on them!

Jenkins also writes “The Basel Committee last week called on banks to report leverage ratios according to a new formula by 2015”… is it really a “new formula”, or is it just basically the old traditional total assets to total equity?... and, why by 2015, what is wrong with now?

Bank should be ashamed feeling “bruised” by new capital ratios. Really bruised, still, are those borrowers perceived as “risky”.

Sir, Patrick Jenkins’ reports “Banks feeling bruised by new capital requirements” July 5.

Indeed banks may need to raise more capital, which will lead to reduced returns on equity, but they really have nothing to complain about, since never ever have banks been able to work with as little capital as they have been able to do during the last decade… as a result of the senseless risk weighting of their capital requirements.

If only bankers would ask themselves how much capital they would need, if they had to operate in a free market without regulations and without implicit guarantees, they would have to shut up and just count their blessings.

No, the really bruised ones, by old and new capital ratios, Basel II and III, are the small and medium businesses and entrepreneurs. Since they are unjustly perceived as “The Risky”, unjustly because they have never ever caused a bank crisis, banks are required to hold more capital when lending to them than when lending to “The Infallible”. And, as a direct consequence of that, they not only have less access to bank credit but must also pay higher comparative interest rates, than what would have been the case in the absence of regulations which discriminate against them.

So now Mario Draghi and Mark Carney want the huge tax on savings to be kept for a longer period

Sir, Michael Steen and Chris Giles, referring to declarations by Mario Draghi and Mark Carney, report that “Central Banks send clear signal on low interest rates” July 5.

So now these two gentlemen have publicly announced they think on behalf of the European Central Bank and the Bank of England respectively that the huge de-facto tax which low interest rates impose on savings signify, should be extended.

If only this tax could help, but, having with capital requirements based on perceived risk corked up the channels for bank credit to “The Risky”, like to small and medium businesses and entrepreneurs, it will not serve any useful purpose.

And did not Mario Draghi recently say “it is important to acknowledge that there are limits to what monetary policy can achieve”?

And now all us who worry that, as a consequence, the officially perceived safe-havens, “The Infallible”, will as a result become dangerously overpopulated, must take refuge in assets of almost any kind.

If the cost of a shirt goes up that is inflation and that is bad, while, if the price of assets, like a house or the P/E ratio of a stock, goes up, that is not inflation and that is held to be good. Sounds strange, eh?

I hope Mark Carney, one of the Financial Stability Board’s old men, listens to Martin Wolf, and gets it.

Sir, Martin Wolf is absolutely right reminding Mark Carney of what I have been reminding Martin Wolf for years, namely that “monetary policy works via the financial system [which if it] malfunctions, monetary policy will either not work or have lethal effects”, “Forward guidance for the Bank of England’s new man”, July 5.

I sincerely hope Mark Carney gets that, because as one the Financial Stability Board’s old men, he has not yet understood that capital requirements for banks based on perceived risk distorts and channels monetary policy the wrong way.

And I also hope Martin Wolf from now on remembers this caveat, when he also keeps pushing us on into unknown territories of fiscal and monetary expansion.

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 that has to do with “capital requirements for banks”… as he already knows it all, at least so he thinks.

Society is still unaware of the real costs of lessening risks and promoting the stability of its banking system.

Sir, John Gapper’s “Regulators are finally catching up with banks”, July 4, in reference to some possible new costs resulting from recent new regulations announced this week by the Fed, just shows how little it is yet understood what is the real “price society and the financial system pays from lessening risks and promoting stability.”

The first cost, is the current bank crisis. It resulted from allowing banks to hold exposures to what was perceived as absolutely safe against absolutely minimum equity, and so that, when some of the perceptions turned out to be wrong, banks were caught with their pants down holding no capital.

The second cost, which could be even larger than the first, are all opportunities lost because of the introduction of regulatory risk-aversion, and which has certainly impeded many small and medium business and entrepreneurs to assist in creating jobs for our youth.

Current bank regulations which still include discrimination based on perceived risk, do not promote stability in the banking system, but the stiffness that causes fragility. Also there is no banking stability worth to write home about, without a sturdy and healthy real economy.

Gapper also refers to Jamie Dimon, chairman and chief executive of JPMorgan Chase, once describing Basel III as “anti-American”. Indeed it is anti-American, but not for the reasons that Dimon probably refers to, but because, in “the Home of the Brave”, these regulations favor “The Infallible” and discriminate against “The Risky”.

As is, with Basel III, borrowers perceived as “The Risky”, will get even more squeezed by the leverage ratio

Sir, you refer to the leverage ratio always remember this only sets a floor to Basel’s bank capital requirements based on perceived risks, “UK bank capital”, July 2. And in that respect I would beg you to avoid referencing to it as a “safety standard”, because increasing the minimum level of water in the bank capital room, will more surely drown those closer to the ceiling, those borrowers perceived as being “risky”, and that is not safe but dangerous to the real economy.

It is amazing how often we read bankers stating the problem that higher capital requirements for could force them to reduce their lending, but never about how higher capital requirements for only some borrowers, can limit their access to bank credit.

PS. You might enjoy the following very short Q and A session on our banks

Q. What is the first worst that can happen to our banks, excessive exposures to the risky?

A. No, the “risky” never poses any risk of excessive exposures, The first worst is when something considered as “absolutely safe”, and to which therefore bank exposures could be huge, blows up in their face.

Q. What is then the second worst?

A. That when the first worst happens, the banks would not have the capital needed to cover for the losses.

Q. But, if then regulators, by setting quite decent capital requirements for banks for holding what is perceived as “risky”, but almost nonexistent for exposures to what is perceived as “absolutely safe”, make it more likely that the first worst and the second worst come together… is that not sort of dumb?

A. Yes, indeed, I take it back. The first worst thing that can happen to our banks, are dumb regulators.