Force bank regulators to answer the question they do not dare to discuss.

Sir, Henny Sender asks: “As the disconnect between the rising prices of financial assets and the real economy continues, is it possible that even the most aggressive easing has its limits?”, “End point for runaway stocks rally comes in sight”, November 30.

The answer is… Yes! Moreover its limits have already been shown. I am sure that if the Fed only researched how much of all QEs and fiscal stimulus has translated into more bank credit to those on the margins of the real economy, and who are most in need of credit, like small businesses, entrepreneurs and start ups, they would be shocked at how little they would find.

But they won´t do that because if so they would have to ask themselves “why?” and that would lead to having to admit how seriously flawed or outright dumb the capital requirements for banks based on perceived risks are.

You see the question that the regulators dare not to discuss is:

If the perceived risks are cleared for in interest rates, size of exposure and other terms, does not re-clearing for the same perceived risk cause a serious distortion in how bank credit is allocated in the real economy?

It just compensates bankers´ love of chocolate cake (the safe) with ice cream, and their loathing of broccoli (the risky) with spinach.

Why and how are medium and small businesses, entrepreneurs and start ups, and normal citizens, ruled to be a systemic danger to the financial system?

Sir, Gina Chon reports that some senators are questioning how the Financial Stability Oversight Council might rule some non-bank financial institutions to represent a systemic risk to the financial system; and which among other could lead these to face higher capital requirements, “Senators warn over non-banks regulation”, November 29.

And again I must ask, for the umpteenth time, why and how are the medium and small businesses, entrepreneurs and start ups, and normal citizens, ruled to be a systemic danger to the financial system?

And I ask this because all higher capital requirements demanded from any financial institutions, when subjected to risk-weighing, naturally impacts the most those against which businesses the most capital is required, and which is of course those who have a high risk-weight.

Others, like the sovereign and the AAAristocracy, are often even favorably impacted by these higher capital rulings since, as the song goes, when capital gets to be scarce the low risk weighted get going.

Chon comments that “the senator’s criticisms could delay the council’s assessment of asset managers, giving them more time to lobby for the regulation to be watered down”. How sad no senator, in the home of the brave, seems interested in watering down the completely unwarranted and odious discrimination against those though correctly perceived as risky, have precisely because of that, never ever caused a major financial crisis.

If I were an asset manager, I would remain in the shadows. But, if one of “the risky”, I would scream my heart out.

Sir, Gillian Tett, referring to the opinion of Helena Morrisey, the head of Newton, writes “Asset managers told to come out of the shadows” November 29. 

And Ms Tett agrees with it, though I do not understand why. If I were an asset manager, having been saved from utter disgrace by generous quantitative easing programs, as so many of them have been, I would probably lay very low… hiding even deeper in the shadows.

No! If there is anyone who should come out of the shadows screaming their hearts out that should be all The Risky. And I refer to those who because they are perceived as risky, and are therefore already naturally being discriminated against by banks and markets, are now also being odiously discriminated against by bank regulators, by means of capital requirements for banks based on perceived risk.

But, perhaps since these “risky” are never invited to Davos and similar high strung places, Ms Tett might not have the same interest in them. And this is sad, and dumb, because if these “risky” were given a fair access to bank credit, they might very well turn out to be the safes of tomorrow who can provide Ms Tett´s pension fund with the income needed to keep her in style, in older days.

No! Anjana Ahuja, academicians can be completely flawed too…like those used by the Basel Committee.

Sir, Anjana Ahuja writes that “Academics know precisely what it means for a study to be ‘flawed’”, “Politicians have learnt to lie in the language of scientists” November 28.

No, not always! When I see capital requirements for banks based on studying the failure rates associated with the assets of a bank and not on studying what made the banks fail, then I simply cannot be so sure about the quality of the academicians, at least not those used by the Basel Committee or the Financial Stability Board.

FT if this is the way European banks “derisk”, there is no doubt that Europe is getting to be much riskier.

Sir, Patrick Jenkins writes “banks have derisked since the crisis, cutting loans to companies and individuals…amplified their investment in sovereign bonds” “Time to force banks to kick their easy money habit” November 28.

To me anyone calling a reduction in loans to citizens and private sector and an increase in loans to the sovereign as a process of “derisking”, is either a communist or has no idea what he is speaking about.

And the “Funding for Lending” schemes that Jenkins refers to as a way of solving the “weak supply of credit to smaller business”, will not make a dent to a problem which derives from those insane capital requirements for banks where these, in marginal terms, under Basel III, need to hold 7 percent in capital when lending to a European, but zero percent when lending to its sovereign.

No Sir, if European banks are “derisking” this way, there is no doubt that Europe is getting to be a much riskier place.

Don´t you find something to be very wrong when banks are given so many incentives by the Regulator of Nottingham to lend to King John and not to Robin Hood?

Is not a failed planet earth worse than a failed bank? Do not hinder banks from financing green growth only because it is “risky”.

Martin Wolf´s “Green growth is a worthwhile goal” November 27, is a non strident account about how the world seems to be entering a very critical stage with respect to climate change, and it just can´t seem to get its act together. And this type of balance approach are much needed since climate change political activists, and rent seekers, are blocking action just as much as extreme climate change skeptics are.

I have no complete solution, but one thing I am certain of. If we are going to stand a chance, we must allow banks to be able to allocate bank credit efficiently to projects which could help us, and not be kept from doing so only because of higher capital requirements based on that these projects could be riskier from a financial perspective.

Let me just give one example. Currently when banks lend to projects like the failed solar panel producer Solyndra, they need to hold much more capital than if they lend to the government so that it in its turn lends to the Solyndras out there. And that does just not make any sense… unless you are a communist off course or in other ways a fanatic believer in the capacity of government bureaucracy.

On a personal level I have been trying to sell the concept that if bank regulators absolutely feel they must distort in order to earn their keep, they should at least align better the incentives to some social purpose. One way would be to allow banks to hold slightly less capital when lending to projects which meet certain sustainability (or job creation) standards.

I have sent out the proposal above to the UN’s Sustainable Development Solutions Network, and I hope it gets there… and is understood there. But since the fact that different capital requirements for banks for different assets distorts the allocation of bank credit in the real economy is not even something debated, I hold no major expectations that will happen.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

The question is not whether SMEs are risky but whether risky SMEs pose a threat to banks. They don´t!

Sir, Patrick Jenkins, on the issue of the SME not getting sufficient access to bank credit writes: “Compounding is the reality of global capital regulations which makes it far more costly to lend to smaller businesses. Bankers say a typical SME loan may absorb $5 of capital for every $100 of loan, compared with about $1.50 for an average mortgage”, “Policy makers need to refresh their approach to SMEs” November 26.

What “realities of global capital regulations” is he talking about? Those are not God given realities, those are regulations made by human fallible regulators and, if these had been forcefully questioned, among other by your journalists, these could have been changed years ago.

After so many letters over so many years I have written to you, and Jenkins, how come it is only now that Your Banking Editor acknowledges that “Global regulators should look again at the system of risk weighting ascribed to SME lending”? And why did it take a “Bundesbank research paper…convinced that SME default data are not as bad as everyone thinks” for him to do that?

And besides, that is not even important. The real question to be answered by bank regulators is not whether the SMEs are risky or not, but whether the SMEs ever pose a threat to banks? The answer to that is of course they do not, precisely because SMEs are perceived as risky.

If fighting groupthink, start with the worst, with bank regulators, Basel Committee and Financial Stability Board

Sir John Authers asks and answers “Can globalized capital markets coexist with democracy and the nation state? It is reasonable now to fear the answer is “no”, and that means reforming the investment industry should be a far higher priority”, “Fund management reform will help avert groupthink” November 25.

I have no idea why Authers goes after the fund management’s groupthink first and not after bank regulators’ groupthink which has been so much more perverse.

Let me just ask:

What kind of smartass idea is it to require banks to hold capital based on the same ex ante perceived risks which have already been cleared for by markets and banks by means of interest rates, size of exposure and other terms? Could the group of regulators not figure out this dooms the banks to overdose on perceived risks and the risk-price equation to go haywire?

And what democracy approved that for instance a bank in Spain needed to hold 8 percent in capital when lending to a Spanish medium or small business, entrepreneur or startup but could lend, for instance to the government of France, holding zero capital?

No! Globalized market cannot coexist with the dumb groupthink produced by that small mutual admiration club comprised by the Basel Committee and the Financial Stability Board.

Good for you, Commodity Futures Trading Commission

Sir, Tracy Alloway writes that “last week the Commodity Futures Trading Commission upset many traders when it announced it would require cash to backstop Treasuries used as collateral for derivative trades, “Asset price ‘security alerts’ can mask complex risk”, November 23.

And Alloway follows up on that opining that “if the markets cannot agree on the value of one of the most liquid and relative safe assets in the world – an $11tn – then it is tempting to believe than even the most basic assumption are open to interpretation”.

This is an opening to clarify precisely what has gone wrong with bank regulations. In a nutshell, the Commodity Futures Trading Commission is NOT the market, it is the regulator, and should therefore always be open to believe in that all assumptions in the market are open to interpretations.

Stupid were the bank regulators because, in their capital requirements based on perceived risk, they followed the opinions of the same credit ratings market and banks followed.

Yes the Homeland Security Advisor System, with its different colors ranging from green to red to indicate risk levels that Alloway also refers to, might indeed be “A classification system that offers little differentiation provides only limited information value”… but the nightmare would not be much the passengers relying on the colors, but Homeland´s security personnel doing so too.

And, by the way, an $11tn market, of just one borrower…might very well be the systemically most important and therefore the most dangerous market in the world.

Mario Draghi has no moral right to speak about discrimination among Europeans

Stefan Wagstyl reports that Mario Draghi, reacted against “nationalistic undertones” and stated “We are not German, neither French nor Spaniards, nor Italian: We are Europeans”, “Draghi hits at rate policy critics”, November 22.

Sir, Mario Draghi has no moral right to speak about discrimination among Europeans. As the chairman for many years of the Financial Stability Board, he approved of that banks need to hold much much less capital when lending to an “infallible” European than when lending to a “risky” one.

That caused of course banks to avoid lending to those were they could leverage their equity much much less, and thereby not obtain the high expected risk-adjusted returns on their equity the “infallible” offered them.

Talk about exclusion! Talk about increasing inequality gaps! Go home Mario Draghi! Europe was not built upon risk-aversion!

FT, perhaps you should incorporate “and with humility” in your motto, just as a reminder

Sir, in “After Rev Flowers”, November 20, you write that “UK bank’s woes have lessons for politicians and regulators”. You forgot to include financial journalists in that list. 

For instance, you write that Mr Flowers “overestimated a key capital ratio by a factor of two”. Do you really want me to list all of your journalists who at the outset of this crisis wrote of bank capital ratios seeming to be in line with historical ratios, ignoring that the current were based on risk-weighted assets and not as previously on total assets? Doing so your own journalists (and politicians and regulators), often underestimated European bank capital ratios by a factor of five. 

Be sincere… when did you yourself discover that in fact European banks had real asset to capital leverages of way over 30 to 1 sometimes even over 50 to 1? 

John Gapper was one of the very first to understand what was happening with his “How banks learnt to play the system”; but it took a long time for many others to do so, and some might not even have done so yet. 

But Sir, do not be ashamed, you are not alone. Other actors like the IMF reported on Iceland in December 2008 the following “The banking system’s reported financial indicators are above minimum regulatory requirements and stress tests suggest that the system is resilient.” And that clearly shows IMF had no real idea either about what risks risk-weighing could be hiding or causing. 

But, Sir, perhaps you should incorporate “and with humility” in your motto, just as a reminder.

Regulation ordering brutish and silly risk avoidance by banks, only guarantees a sluggish future.

Sir, when you allow banks to hold much much less capital when lending to The Infallible than when lending to The Risky, this allows banks to earn much higher risk adjusted expected returns on equity when lending to the former than when lending to the latter.

And so those actors who we find on the margins of the real economy and who we most need to have access to bank credit, namely medium and small businesses, entrepreneurs and start ups, will get the least of it. And since the future is built upon risk taking and not upon risk avoidance that is the most important cause for “Why the future looks sluggish”. 

That does of course not diminish some of the other explanations put forward by Martin Wolf on November 20. When Wolf correctly writes that we need to “facilitate capital flows to emerging and developing countries” he shows he has failed to understand that there are many emerging opportunities waiting to be developed in developed countries, only because of these bank regulations.

Sir, when Wolf concludes “It will be better to risk mistakes than accept the costs of an impoverished future” he shows some indications of being on the right track but, in his world, he clearly prefers the public sector to take risks, for instance with “a surge in public investments”, before banks doing so.

And I do not. I firmly believe in the banks being the prime agents appointed by society in order to, with reasoned audacity, take the needed risks on its behalf.

But in order for our bankers to take risks on The Risky, we must of course get rid of regulation which de facto prohibits them to do so.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he has already understood it all… at least so he thinks.

I may be right, and I may be wrong. But do you not find it in at least curious that what I argue is not even discussed?

Sir, Henny Sender writes “Five years after the meltdown, it is clear the Fed´s quantitative easing is not about a real economic recovery, it is only about generating the liquidity that gives rise to incomes for the rest of us are not rising at all”, “Fed easing fuels growth in wealth over real economy”, November 19.

As you know very well I hold that is because the financial transmission channel is totally damaged. Capital requirements for banks based on ex ante perceived risks, more risk more capital, less risk less capital, make it completely impossible for banks to allocate credit efficiently in the real economy.

I may be right and I may be wrong, but do you not find it curious somehow that the possible distortion these capital requirements might produce is not even discussed?

And that is not because I am a complete loony. As you know very few, much less in high places, like as an Executive Director of the World Bank, warned in such clear terms about the problems.

Boy you sure seem like a very complacent bunch of journalists to me.

The quality of its unemployed is also vital for the strength of a nation

Sir, Janan Ganesh refers to the relative political tranquility that has prevailed in Britain over the last years, even in the face of 21 percent unemployment among young people, and other hardships resulting from the current crisis/recession, “The British have met crisis with understatement”, November 19.

That is of course extremely valuable and commendable, as long as it is of course much more the result of stiff upper lips, than of a feeling of resignation or sheer apathy, especially in coming generations.

In June 2012 in an Op-Ed I wrote “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, at least in the sense of these not interrupting those working.”

Can we have some more trigger-happy bank regulators please?

Sir, Alex J Pollock, of the American Enterprise Institute, comments on John Kay’s article “The design failures that lead to financial explosions” saying that when Kay holds that “attempt to design a system for zero failure is impractical” that he would suggests it being “a mission impossible”. And as an argument for this, Pollock correctly writes “The greater the belief in their success grows, the higher the probability of their failure becomes.

And I would also have to add that the larger and more dangerous those failures also become.

In 2003 addressing some hundred bank regulators who were learning about what was being planned by some few regulators for Basel II, I said: “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.”

What Europe and America need is to return to straightforward conventional bank regulations

Sir, I refer to Wolfgang Münchau’s “Why Europe needs to try unconventional policy” November 18.

In it Münchau writes, with respect to a further cut by ECB of the interest rate that “We are in a situation of diminishing marginal returns”. And later he observes that “Since small and medium-sized companies in the eurozone are heavily reliant on bank finance, they are beyond the direct reach of a [QE]”.

Why is it so hard for some to connect the dots? Are they afraid of the picture they might find?

Those who can provide the highest marginal returns are the small and medium-sized companies, entrepreneurs and start ups, and who are in fact heavily reliant on bank finance, more so in Europe than in USA. And so the reason the returns are dropping, in Europe and in USA, is that those previously mentioned and who are in fact heavily reliant on bank finance, more so in Europe than in USA, have seen their access to bank credit seriously cut off by the risk-weighted capital requirements for banks.

Risk weighing capital requirements, which translates into banks being able to earn much much higher risk adjusted returns on their equity when lending to what is perceived as “absolutely safe” than when lending to what is perceived as risky is a loony unconventional concept that has only been around for about three decades but that really went crazy with the approval in 2004 of Basel II.

What Europe and America most need is instead return to what is really conventional, namely allowing the banks to discriminate on their own based on perceived risks, without the regulator reusing the same perceived risks for the purpose of determining the capital requirements.

No Europe! Don’t listen to FT. Your only chance is to explore more productive bays, even risking more hitting hidden rocks.

Sir, you write “Steer Europe away from hidden rocks”. November 16… and there you hold: “The tide of cheap money that is lifting all boats will soon be on the ebb. Britain and Europe should navigate their economic challenges now, or risk being beached on the same shore.”

First the tide of cheap money has not and is NOT lifting all boats. “The Risky”, like medium and small businesses, entrepreneurs and start ups, those Britain and Europe most need to get into action, are immobilized for the lack of bank credit, only because bank regulators require banks to have more capital for exposures to them.

Second you are NOT risking being beached on the same shore, you are risking dying gasping for oxygen in the same dangerously overpopulated safe havens, those to which banks can have exposures to against minimum capital.

Britain and Europe, your only chance is to explore more productive bays, even though you risk more hit hidden rocks. Future is only built upon risk-taking, never ever on risk avoidance.

We need capital requirements for banks based on saving our planet and creating jobs ratings

Sir, Jeffrey Sachs writes “the system of financial intermediation is broken” and therefore the financial needs for the many infrastructure investments required to face climate change challenges, cannot be satisfied. “We risk more Haiyans if we ignore climate change” November 17.

I agree. For more than a decade I have argued that capital requirements based on perceived risks, only distorts the allocation of bank credit in the real economy, favoring “The Infallible” and odiously discriminating against the risky. And to top it up, for no purpose, since never has a major bank crisis resulted from excessive exposures to what was perceived as “risky”, they have all originated in excessive exposures to what was perceived as absolutely safe.

And in this line I have proposed that if bank regulators must distort (to earn their keep or satisfy their egos) they should at least try to do so in favor of what society needs, like safeguarding our planet earth (and creating jobs).

And that the regulators could to that by allowing banks to have less capital when financing based on an assets project’s sustainability (or potential-of–job-creation) ratings.

Because that, would allow the banks to earn their highest-risk adjusted returns on equity, where they can be the most helpful to the society.

I have sent out my proposal to the UN’s Sustainable Development Solutions Network, and I hope it gets there… and is understood there

http://ourpiedaterre.blogspot.com/2013/10/if-regulators-absolutely-must-distort.html

European savers, leveraging only once their capital, stand no chance to compete with banks for good rates on “safe” savings

Sir, I refer to Alice Ross’ “Central bankers seeks to quell rate anger” November 14. In it she refers to the problem of German savers finding extremely low returns when placing their money, into what is supposedly very low risk.

Jens Weidmann, the president of the Bundesbank, argues that there is no discrimination among European savers and that they are all equally affected. That may be… but there is an underlying regulatory distortion that discriminates strongly against all individual savers, in favor of the banks.

When European banks are allowed to leverage their capital 60 or more times for exposures to absolutely-safe havens, rates will be very low in these. And the poor individual saver, leveraging his own capital just once, stands no chance to compete for a decent rate.

We need much less incestuous processes for determining bank regulations

Sir with respect to bank regulation, you write: “As the crisis showed we should be humble about the limits of our knowledge. Excessive faith was invested in abstract mathematical models, while insufficient effort was made to link these to real-life experience…The recital of laws and ritual genuflection towards mathematical models may lend the subject a certain intellectual respectability but much of this is spurious. Substituting a little humility for pretention would be a welcome step”, “The new economics”, November 13.

Indeed, but what it mostly describes is the absolute necessity of stopping members of a mutual admiration club, who do not dare to criticize colleagues, or are to spineless to confess they do not understand one iota, from engaging in incestuous thinking processes, and then having the right to impose not duly vetted regulations on the whole world. I say this because the mistake that caused the crisis and stops us from getting out of it, is of a much deeper nature than trusting too much abstract mathematical models.

Here I go again: Banks and markets clear for ex ante perceived risks of default by means interest rates, size of exposure and other terms, like duration. Therefore to clear for the same perceived risks, like regulators do with risk weighted capital requirements, more risk more capital less risk less capital, is more than wrong, it is dumb.

First it upsets the whole risk-price equation and distorts all common sense out of the process by which banks allocate credit in the real economy. Banks make much higher risk adjusted returns on equity when financing “The Infallible” than when financing “The Risky”… and so banks stop to finance the future and mostly refinance the past.

And second, it is all for nothing since never ever have bank crisis resulted from excessive exposures to what was ex perceived as safe, these have always resulted from excessive exposures to what was perceived as absolutely safe.

We are now 5 years into the crisis and the distortion that risk weighted capital requirements for banks produce in the allocation of credit in the real economy… is yet not even recognized as an unforeseen consequence, much less is it on the agenda. And that by itself Sir, is an extremely serious problem.

By the way, the fact that you in FT decided to ignore the hundreds of letters I have written to you over years spelling out the mistake; and that you now champion The Institute for Economic Thinking, where failed regulator Lord Turner is now a Senior Fellow, as "charged with the task of restoring academic economics to its standing", only indicates that you might be a member of the same club and therefore also part of the problem.

Basel regulations make banks solely finance what is ex ante safe, and not what ex post could be vital.

Sir, Martin Wolf writes “If the ECB had moved rates decisively towards zero in 2010, it might have avoided at least some of today’s difficulties”, “Why Draghi was right to cut rates”, November 13. He is wrong.

What caused this crisis and keep us from resolving it, are the capital requirements based on perceived risks. That makes banks finance what is ex ante perceived as “absolutely safe” and stops them from financing what, ex post, could have been vital.

Wolf writes about unconventional measures. There is nothing more stupidly unconventional than for bank capital requirements reusing the same perceived risks that have already been cleared for by the markets.

And Mario Draghi, having been the chairman of the Financial Stability Board, is much responsible for it all.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Bank regulators, the Basel Committee, created a nuclear bomb, Basel II, the AAA-bomb, which exploded,

Sir, John Kay writes with respect to financial regulations that “Shorter, simpler, linear chains of intermediation are needed, and loose coupling that gives every part of the system loss absorption capacity and resolution capability.”, “The design failures that lead to financial explosions” November 13. I could not agree more.

And with respect to his nuclear simile let me just note that in 1999, in an Op-Ed, I wrote:

“The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system”.

And indeed, with Basel II, they fabricated a bomb; I have called it the AAA-bomb.

The Help to Buy scheme, has also something of a Help to Sell Expensively flair about it.

Sir, Janan Ganesh opines that “Britain’s flawed Help to Buy scheme is smart politics”, November 12. And this because it allows the Tories, to “connect with the many young to middle age voters priced out of the housing market”.

Yeah, yeah, that is as long as no one informs those many young to middle age voters that they are priced out of the housing market, precisely because of this type of assistance.

Was the government not helping or hindering with permits the housing market in any way, houses could actually be quite affordable. As is, it looks more like a diabolical design to help aging baby boomers get rid of assets, at great prices, sticking those to the generations after them.

FSB's rule is no deterrence for a bank wanting to become, globally, the most systemically important bank.

Sir, Tom Braithwaite reports “China’s ICBC joins banking risk list”, November 12. It should have been expected, as surely the Chinese government must have complained about not having one bank in the exclusive list of Global Systemically Important Banks.

Also in reference to JP Morgan Chase and HSBC, Braithwaite categorizes the 9.5 percent of capital based on risk-weighted assets as “punitive” and mentions the current empty10.5 percent capital bucket as “a deterrent to any banks that may think of getting bigger or engaging in riskier activities”. He is wrong.

First, as we all should now 9.5 percent or 10.5 percent of capital does not really mean anything if the risk-weights do not mean anything. And second… would a bank stop trying to be the globally most systemically important bank, just because of a risk-weighted capital requirement?

Forget it! If FSB really want to see some serious containment of the too big to fail they should require 9.5 percent of capital on all assets. Frankly the naiveté of FSB trying to frighten the banks with such a feeble bogeyman is just mindboggling.

PS. By the way the list just published is based on 2012 year end data. Does that sound speedy enough?

Europe, and the Western world, is spiraling down to its death, embraced by crazy "risk" adverse bank regulations.

How on earth can Europe regain internal balance with bank regulations which are based on the principle that the safer you ex ante look, like the more surpluses you have, like Germany, the less will the banks need to hold in capital lending to you, and so the more will banks expect to earn in risk-adjusted returns on equity when lending to you, and so the less will they lend to those perceived as riskier?

That is a death spiral that will make Europe and the whole Western world implode, as it only guarantees that banks will, naked with no capital, die because of lack of oxygen, in dangerously overpopulated “safe-havens” like Germany.

If you really want to have a future, then you need to give banks incentives to finance it, and not only like now, give these especial incentives to refinance the safer past.

Sir, Martin Wolf, again, in “Germany is a weight on the world” November 6, in spite of my so many letters to him on that issue, does not make a reference to this problem described above. 

Edward Dolnick, in “The Forger´s spell”, when looking to explain how those big experts that had considered some fake Vermeer paintings original, hang on to their beliefs until death, “despite incontrovertible proof to the contrary”, quotes the psychologist Leon Festinger saying: “A man with a conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point”.

I believe that applies perfectly to Martin Wolf, but, then again, it could just the same really apply more to me. What do you think?

PS. In the article Wolf writes “just as others had a right to complain about past US regulatory failures”, but it is hard to figure out what he means with that.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

FT, don't you get it, there is absolutely nothing so far away from laisser-faire, than capital requirements for banks based on risk weights

Sir, in “Save business from the businessmen” November 6, you write “More intrusive regulation should be reserved for special cases such as banking”, and you refer to “the laisser-faire approach of the past three decades”. Are you out of your mind?

We have bank regulations which, by means of using risk weights, allow banks to earn much higher expected risk adjusted returns on equity on assets that are perceived, ex ante, as absolutely safe, than on assets perceived, ex ante, as risky. And those regulations are de facto capital controls which direct the allocation of bank credit. Have you ever seen regulations so far away from laisser-faire than this?

I am sorry to say it but, FT, when history catches up to this you are certainly going to look like fools.

Damn you, you so risk adverse, baby boomer bank regulators

Sir, Satyajit Das, states clearly the fact that, if things go on the same, “Over time, financing will become concentrated in official agencies, the ECB and national governments or central banks. Risks will shift from the peripheral countries to the core of the eurozone, especially Germany and France”, “Debt crisis has left German economy vulnerable” November 5.

Of course, how could it be otherwise, with bank capital requirements that so much favor banks going to the “safe harbors”?

Unfortunately, what Satyajit Das, and the Financial Times, do not get is that the greatest cost of it all, for the eurozone and for the whole Western world, is all that adventurous, quite risky, but potentially extremely productive bays that were not explored, only because of such regulations, produced by such risk adverse bank regulators... and who only concern themselves with banks and not one iota with the real economy.

Will there be a real ECB audit of European banks, or just another nail in the coffin of a lost generation?

Sir you write: “By some accounts [the ECB audit] is expected to reveal that eurozone banks need between €50bn and €100bn”, “ECB needs help on its big bank audit” November 4.

No! That would be what European banks might need if they are just to survive, treading water, refinancing some of Europe’s at least for the time safer sovereigns. But, if banks are going to help to put Europe’s future on their books, like loans to medium and small businesses, entrepreneurs and start ups, then they need new regulations, and many times that amount of capital.

Frankly any ECB audit that does not also include understanding and calculating what also needs to be on European bank balances, will just amount to another nail in the coffin of a generation of young Europeans, lost by an insane and extremely risky regulatory risk aversion

And Sir, FT, for whatever reasons, withholding the truth, shares the responsibility for that tragedy.

Tim Harford, be very careful, regulators might wish to regulate baking more

Sir, Tim Harford ends his splendid “Why can´t banking be made more like baking” November 2, with, “I wonder if even Mr Carney will be able to make the market for pensions work like the market for croissants”.

Harford should be much more careful, because other regulators might be lurking in the shadows with desires to regulate baking. For instance they could come up with a tax on low fiber content in bread, in order to help the British people digest better, which would result in, sooner or later, in the British people only being offered fiber.

I say this because bank regulators, like Lord Turner, and like Mark Carney, the current chairman of the Financial Stability Board, considered that the only socially “useful” activity that a bank could engage in was to make certain it would not default. And, to that effect they concocted capital requirements for banks based on perceived risks.

And that regulation allows banks to earn much much higher risk adjusted returns on equity when lending to “The Infallible”, sovereigns, housing and the AAAristocracy, than when lending to “The Risky”, medium and small businesses, entrepreneurs and start-ups. And in this case we all see how, instead, all the fiber is being taken out of UK´s real economy.

Jacob Frenkel has his, and I have my own cross examination dream

Sir, Jacob Frenkel, a lawyer, dreams of “cross examining all the senior government officials… who begged JPMorgan to save the US and take over Bear Sterns and WaMu” with a “the government is asking you to find liable and impose massive fines on this institution, which tried to help, not hurt, the American economy”, “The madness of the $13bn JPMorgan settlement”, November 1.

I, as a grandfather, would dream instead of cross examining all the bank regulators asking them “Why do you require banks to hold more capital against loans to those perceived as “risky” than against those perceived as infallible, even though the first are already being charged higher risk premiums, get smaller loans, in harsher terms, and have never ever caused a major bank crisis?”

Don’t you know that those we most have to thanks for having some “absolutely safe” today are the “risky” of yesterday? Don’t you know that those who best stand a chance of helping my grandchild to find a decent and sturdy job tomorrow might very well be those “risky” most in need of access to bank credit in competitive terms, like the medium and small businesses, entrepreneurs and start-ups?

Don't you know that is against the Equal Credit Opportunity Act - Regulation B?

Regulators gaming regulations massively, is so much worse than banks gaming regulations somewhat

Sir, Sam Fleming reports that “Global regulators are cracking down on banks that try to game capital rules for their trading businesses by proposing new standards for the way lenders assess risk… The new system will require banks to calculate risks according to a standardised approach in addition to their own in-house methodology” "Banks set for tougher trading rules", November 1.

There are rules which can be gamed, and then there are those which cannot. For instance, if Basel II had required banks to hold 8 percent of well defined capital against any asset, that would not have been possible to game. But, instead regulators went for the risk-weighing system which are so easy to game… even for the regulators.

In fact, it was the regulators who really gamed the whole system, with such lunacies as assigning risk weights of 20 percent, or even zero, which allowed banks to hold some assets, like AAA rated securities and loans to infallible sovereigns, against only 1.6, or even zero, capital, while assigning 100 percent risk weights, to “riskier” loans, which forced banks to hold 8 percent in capital, 500 percent more, on loans to medium and small businesses, entrepreneurs and start-ups.

And so if you ask me, much worse than banks gaming regulations, is when the regulators do so.

And let me ask. Do you think the banks, on their own, without this regulatory assistance would have been able to game themselves into 40 or even 50 to 1 leverages? No way Jose!

FT journalists don’t be so lame. Dare to ask bank regulators to explain risk-weighted capital requirements to you.

PS. Regulators are suffering from the Annie Oakley syndrome, and we because if that.