My New Year’s wish for FT. Wake up to what the risk-weighted capital requirements for banks really signify.

Sir, if banks could measure and price risks perfectly, then there would be no need for bank capital, as all expected losses and capital cost would be covered. But, since the measuring and pricing of risk is by nature imperfect, there will always be “unexpected losses”, and so regulators need to impose capital requirements for banks.

Unfortunately, the regulators decided that the “unexpected losses” would occur mainly in assets perceived as “risky”, probably because they confuse “unexpected” with ex-ante perceived risk, or because they only concerned themselves with individual banks; while I contend instead that the kind of “unexpected” which could threaten the stability of our whole banking system, is most likely to be found in the “absolutely safe” category.

And, requiring banks to reserve more for “unexpected losses” on “risky” than on “infallible” assets, allows banks to earn much higher risk-adjusted return on equity on the latter.

And, by allowing so, the regulators introduced a distortion that makes it impossible for banks to allocate credit efficiently in the real economy.

Tom Braithwaite ends his December 31 New Year’s “Reasons [for the banks] to be cheerful, despite the threat in the shadows” with “Even as regulators tighten the screws on the banks they seem unsure as to how much they want to police their shadow risks”.

If I could have a New Year’s wish about something that FT could do in 2014, then that would be to notice more how these regulations which discriminate based on ex ante perceived risks, really “tighten the screws” on the access to bank credit for all those ex ante perceived as riskier.

And, consequentially, to notice how that increases inequality, and hinders the banks from taking those risks that could help our young to have a future… those risks that generations before us took through the banks, so that we would all have a future. 

And all for nothing, because at the end of the day, what those regulations guarantees, is that our banks are going to end up gasping for oxygen, in some dangerously overpopulated “safe-havens”.

PS. Reducing the risk of bank failures increases, exponentially, the risk of banking system failure.

God make us daring!

Since risk-weighted capital requirements are still in place, nothing is really new on the dangerous bank regulatory front

Sir, Wolfgang Münchau quite remarkably writes “Don’t fret about asset prices – this time is different” December 29. For that he refers to “all the changes in global bank regulations”. What changes? The capital requirements for banks are still risk-weighted and so these still give banks huge incentives to dress up as absolutely safe what might not be.

And given that the banks have less capital after the crisis, and must therefore go to where capital is required the least, banks are most probably building up huge dangerous exposures to what is officially ex ante considered as “absolute safe”, like in Europe to the “infallible sovereigns”.

The Basel Committee has ordered the banks to report in January 2015 the leverage ratio, that which is based on not risk-weighted assets… and that could become a really scary report.

And frankly are we not to fret what could happen to asset prizes if a retreat of the quantitative easing is declared?

No more broken hearts in every port

Sir, at age sixteen and a week, I signed up for three months on a Swedish merchant ship, where I would wash dishes and scrape rust for the next four months (delayed by strikes and storms).

Luckily that happened just “before the containerization, when it took days to unload and days to load, and you were young”. That kind of seafaring was indeed quite different from that described by Horatio Clare in “A freight adventure” Life & Arts December 28… So different I must admit I would never have even thought about the idea of signing up on a container ship.

So different that one of Sweden’s most famous poets and troubadours, Ever Taube, who among other sang about “The girl in Havana”, might never have become inspired.

I feel sad for today’s sailors, and for current sixteen years old who lack the opportunity to really sail the seas and explore ports... perhaps leaving some broken hearts, or breaking one’s own heart a bit while doing so.

My Ms Bolivia

The future of current and future pensioners is being pickpocketed by distortive bank regulations.

Sir you discuss capping pension fees in “Plug the deficit on pension regulations” December 27.

In it you hold that “workers need to save more… but they also need to invest wisely”, that “Vigilant regulation is needed to make sure that unsuspecting savers do not end up being pickpocketed”, and that “Savers should be grateful if business ideas that depend on charging unreasonable high fees never see the light of day”.

And solomonically you end holding that “Regulators cannot ensure that every provider charges a fair price. But they should give consumers the means of looking after themselves.”

How good of you! But why do you not dare to care more about how the future of current and future pensioners, like that of so many young without job, is pickpocketed by distortive bank regulations? These certainly cause much more damage than some unreasonable high fees.

“Invest wisely?” In an economy in which the capital requirements for banks are based on perceived risks already previously cleared for? In an economy where banks are therefore investing on preferential leverage terms in what is perceived as “absolutely safe”? Where are then pension funds to go? To finance railroads in Argentina perhaps?

The Basel Committee, with its Basel II, was at least 90% responsible for AAA rated AIG´s collapse.

Sir, of course “Insurers may be at the centre of the next big crisis” as Patrick Jenkins writes, December 27.

But when Jenkins describes AIG´s collapse in terms of it becoming “diversified so fast that it became impossible to manage and regulate”, he does not explain with sufficient clarity what really happened.

AIG, by having an AAA rating, was granted by bank regulators the gift of by lending its name, being able to reduce immensely the capital requirements for the banks. And that was worth so much in the market, that the banks went crazy borrowing AIG´s name and AIG lending it out… and no credit rating agency was fast enough to pick that up.

Had not Basel II been approved, something else bad could have happened to AIG, but not what happened. And I just wonder why this insistence on shielding the regulators from the truth that they were (and are) the party most responsible for the crisis, because of how they distorted all bank resource allocation, with their stupid capital requirements based on some perceived risks which are already cleared for by other means.

The members of the Basel Committee should be made to parade down our avenues wearing dunce caps. If there is one single spot where total accountability must be absolutely required, that should be in those committees that take upon them to design global rules for all.

The thought of having the same failed bank regulators given some powers to also regulate the insurers, “now a crucial part of the so called shadow banking sector” is as scary as can be.

Ms Tett. Not having a clue, “conventional blissful ignorance”, should not be confused with having an idea, “conventional wisdom”.

Sir, Gillian Tett writes “Ideas must adjust to new ‘facts’ of finance”, December 27. But as I see it therein she refers to what mostly had nothing to do with ideas, and all to do with simply not knowing. What Tett calls “conventional wisdom” is nothing but “conventional blissful ignorance”.

For instance “Before 2008 [leverage] seemed irrelevant”. Well go to all the initial reports on the 2007-08 crisis, and you will only be able to read about reasonable leverages… and that is because markets, and reporters, had no idea, most still do not have, of how much leverage could hide behind the risk-weighting of assets. Most of those compliant with “stricter Basel III capital rules” are still today, in not risk-weighted terms, leveraged over 30 to 1.

Tett also writes “Before 2008, it was almost outlandish to suggest policy makers might deliberately shape the direction of finance with policy interventions”. Really? What if not an extreme policy intervention is capital requirements based on perceived risks? That, which allows banks to earn much risk adjusted returns on their equity on assets deemed ex ante as “absolutely safe” than on assets deemed as “risky”, is for instance what drove the banks into the arms of those AAA rated securities which detonated the crisis.

And surprisingly Tett also states “Before 2008, policy makers liked to think they could mop up after excesses, if necessary, rather than intervene in advance. No longer.” What? Is not all Quantitative Easing going on based on the basic assumption that they will be able to mop it up before it all overflows into inflation?

Happy pondering Ms Tett!

There are productive and there are destructive inequalities, and we must know which are which.

Sir I refer to John Gapper’s “In search of balance: Capitalism”, December 24.

I have no problems with most of the “productive” inequalities which result from courageously moving forward – when financing the “risky” future, when increasing the cake. But I do have problems with many of the “destructive” inequalities, which occur when just trampling in the water, when extracting the last ounce of juice from any past risk taking – when refinancing the “safer” past, when only wanting to distribute the cake.

In this respect, when Pope Francis says “I exhort you to a generous solidarity and a return of economics and finance to an ethical approach that favors human beings”, I most emphatically have to state that the current capital requirements for banks based on perceived risks, risks already cleared for elsewhere, is definitely not an ethical approach to economic and finance.

And since Gapper makes a reference to Branko Milanovic of the World Bank, the author of “The Haves and the Have-Nots”, I must also comment that it is truly surprising to see how few realize how these regulations, which favor the Haves and discriminate against the Have-Nots, constitute one of the foremost drivers of “destructive” inequalities.

And that the World Bank, the world’s premier development bank, and who should be the first to know that risk-taking is the oxygen of development, keeps quiet on this whole issue, just makes me very sad for the future generations.

FT, please try to reflect on where we in the Western World would have been, had those risk-weighted capital requirements introduced over the last three decades by the Basel Accord, always applied.

QE is a drug that has been applied by the Fed in an emergency without going through any FDA type testing procedures

Sir, Barry Eichengreen considers that “The Fed’s monetary tweak is a tempest in a teapot” December 20.

But, considering the fact that the monthly reduction of $10bn in QE gets so much more attention than the $75bn that the Fed will keep on injecting in the economy, in a quite distortive way, all on the long side of the market, all for the treasury and the housing sector, then perhaps a teapot being in a tempest, could be a more adequate simile.

Eichengreen also holds that “the central bank has signaled that it is not prepared to return to normal times until a normal economy has returned”. Sorry, then we might never get there. 

A normal economy will not return until regulators stop using risk weighted capital requirements for banks. Because these allow banks to earn much higher risk-adjusted returns on equity financing the infallible sovereigns and the AAAristocracy than when financing the “risky” medium and small businesses, entrepreneurs and start-up, they do the facto guarantee the market to be abnormal.

And Eichengreen ends by referring to Hippocrates… “It has at least done no harm” What? Is that not something yet to be seen?

Europe, you have been placed in a death spiral by dangerously mistaken risk-adverse bank regulations. Get out! Fast!

Sir, Mario Monti writes that in order for monetary discipline and structural reforms in the south of Europe to pay off Europe’s policy framework [should become] more growth friendly, "Europe’s north and south must reform together” December 20.

He is more right than he knows. Europe has been place in a death spiral by risk-weighted capital requirements for banks, and which is about as unfriendly to sturdy and sustainable economic growth there is.

Allowing banks to earn much higher risk-adjusted returns on equity when financing what is “safe” than when financing what is risky, only guarantees you will milk all there is to be milked out of your past economic development, and without replacing it with the future which can only be derived by abundant and hopefully astute risk-taking.

FT, Martin Wolf, be brave, dare pickup the lessons of the crisis’s keys lying there under the lamppost.

Martin Wolf in “We still need to learn the real lessons of the crisis” December 20, refers to the search for the keys under the lamppost, only because that is “where the light falls”.

I would hold that with respect to what is currently happening, or not happening, with the economy and the banking sector, the keys have been there under the lamppost, for quite some time. The fact though is that very few seem to be willing to pick these up… and that could be because it would shine light on the sad fact that our magnificent global bank regulators, the Basel Committee and the Financial Stability Board, are just clueless.

Those keys are the risk-weighted capital requirements for banks based on perceived risks; those which allow banks to earn much more risk adjusted return on equity, when lending to the “infallible sovereign” and the AAAristocracy, than when lending to the “risky” like medium and small businesses, entrepreneurs and start-ups.

Those capital requirements being much lower for what was perceived as “absolutely safe” also guaranteed, when shit hit the fan, as always happens, and something ex ante very safe ex post turns out to be very risky, that banks would stand their naked with no capital.

In January 2003, while an Executive Director at the World Bank, FT published a letter in which I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors to be propagated at modern speeds”.

Of course if credit ratings are already being used to determine interest rates, size of exposures, duration and other terms, to re-clear for the same ratings in the capital, condemned banks to overdose on these.

And in November 2004 FT also published another one of my letters which stated “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much lending to the public sector”

And it is still happening, banks are searching for refuge in the arms of sovereigns all the while out the in the real economy those credit needs that could hold the jobs for our youth remain unsatisfied.

No, a world where banks are told not to finance the “risky” future but only refinance the “safer” pasts is in a death spiral. And on imprudent risk aversion I wrote on the FT’s Economists’ Forum blog in October 2009.

And so Martin Wolf, be brave, and pick the keys up! Let’s get rid of those dumb innovative bank regulations the Basel Accord brought us.

PS. Sir, I leave it to you to copy or not Martin Wolf with this. 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.

“Little people”, do not listen to Chris Giles, if they finance you at a too high rate, try to keep your consumption low

Sir, Chris Giles writes “It is also deeply patronizing for those with reasonable comfortable incomes to fret that the little people are consuming too much for their good and for that of the wider economy”, “In economics consumption is for life not just for Christmas” December 19.

That might be easy for him to say, he who probably either pays off in cash his credit cards or has the benefit of a reasonable financing rate. If Mr. Giles simply looked at what the “little people” paid in finance costs for their financed consumption, he might think differently.

One of the problems is that much of what the “little people” could spend in consumption, for their good and for that of the wider economy”, goes to pay bonuses to bankers… would Chris Giles by any chance be a banker or a shareholder of a credit company?

You, not so old journalist of @FT, say something! Help take the economy out of the respirator and to send it to rehabilitation

Sir, Mr John Riding in “Negative rates will not help investment spending” December 18, comments on Larry Summers’ “thesis of secular stagnation”.

Riding writes: “It seems to me that the impediments to stronger investment spending in the US are not monetary in origin and forcing negative real or nominal interest rates would distort asset markets further without providing meaningful stimulus to the economy”.

And he is absolutely right. What is needed to promote stronger investment spending is to get rid of those senseless risk-weighted capital requirements which allow banks to earn much higher expected risk-adjusted returns on equity on “absolutely safe” exposures, than on “risky” exposures.

That stops banks from financing the “risky” future and to concentrate instead on refinancing the “safer” past… as if what is safe today was not quite often very risky yesterday.

Sir, again, though you have clearly shown you prefer to turn a blind eye to it, you must know for sure that, in order to become and remain strong, an economy requires a lot of risk-taking, as dumb risk aversion will only make it a weakling.

And while that risk-adverse bank regulation is in place, any type of outside assistance, be it fiscal stimulus or quantitative easing, will just put the economy in a respirator, instead of having it go to rehabilitation.

Any sign of growth you might see in the interim, is pure froth… or let´s say pure fat no muscles… in other words the economy turning dangerously obese.

How curious FT does not want that to be discussed. Might it be that most of its journalists are soon to be retirees and who all fit an ultraconservative investment profile?

I sure hope that at least some of FT's younger members find it in themselves to further the cause of astute risk-taking. For that they should just perhaps reflect on the fact that any investment adviser who provided them, at their ages, with the kind of advice the Basel Committee provide the banks, would soon be prohibited to give any financial advice… and would have any professional certification revoked.

France, risk weighted capital requirements for banks, guarantees you a weak and obese economy. Any growth... just froth

Sir, Lindsay Whipp and Claire Jones report “France business activity weakens” December 17.

This is to be expected. Risk weighted capital requirements for banks which allow these to earn much higher risk-adjusted returns on equity when lending to “infallible sovereigns” and the AAAristocracy, than when lending to the “risky” medium and small businesses, entrepreneurs and start-ups can only guarantee turning our western economies into weaklings.

Distorting the banks into refinancing the safe past and not financing the more risky future is no way to create a strong and healthy economy. Any sigh of growth you might see in the interim, is pure froth… or let´s say pure fat no muscles… in other words the economy turning dangerously obese.

Even though I am aware that FT does not want to report on this, for reasons of its own, I will be remembering you about it every time I see the need for it.

If banks do well but the real economy falls, we will all fall… at the end including the banks. It is as easy as that!

Sir, it is hard for me to get a grip on what John Authers really means with heavily regulated when writing “Banking is complex, and must be heavily regulated”, “Volcker rule is doing its job despite Kafkaesque turns” December 16.

I say this because one single line of regulations, “capital requirements must be 10% of all assets”, would in my opinion be a more comprehensive regulation than the ten thousands of lines that will be derived from Basel III, Dodd-Frank Act and the Volcker rules.

Also, again, as I observed at a 2003 workshop on Basel II at the World Bank, there is still not a word about the purpose of the banks.

If the real economy does well, we will survive any bank crisis. If banks do well but the real economy goes down the drain, we will all fall… at the end, including the banks. It is as easy as that!

And in that respect I can also guarantee that my single regulatory line will distort the allocation of bank credit to the real economy, a thousand times less than the other referenced regulatory concoctions.

PS. The latest version of Basel III, December 2017, in 158 pages still contains no other stated purpose, like e.g., that of allocating credit efficiently to the real economy.

More than a new normal, stagnation has been decreed, by risk adverse regulators, as the new structural standard.

Sir, Lawrence Summers writes “The risk of financial instability provides yet another reason why pre-empting structural stagnation is so profoundly important”, “Why stagnation might prove to be the new normal” December 16. 

And I do not know what to say to that. It was precisely well intended but horribly executed efforts to avoid financial instability which basically has decreed stagnation as the new standard.

When regulators risk-weighted capital requirements for banks, they allowed banks to earn much higher expected risk adjusted returns on assets perceived as “absolutely safe”, than on assets perceived as “risky”.

And that translates into bank credit, one of the most important drivers of growth, not going any longer go to finance the “risky” future, but only to refinance the “safer” past.

And how you can avoid stagnation with that kind of misplaced risk-aversion beats me.

Does Professor Summers really believe that the economies of West would have become what they are with that kind of bank regulations?

Any economy growth based solely on “easy money”, and not based on astute risk-taking, is doomed to solely become froth on the surface.

And all for nothing as the current financial instability has, as usual, been created by excessive bank exposures to what was officially perceived as “absolutely safe”, like AAA-rated bonds, real estate in Spain, loans to Greece etc.

More than market forces government intervention forces need to be tempered

Sir, Ian Buruma writes "If the new elites in the global economy want to stave off the storm of destructive hatred, they had better to come up with some ideas of their own on how to temper the market forces", "Global forces are uniting populists against the elites", December 14.

I do not presume forming part of any elite but yet I need to question that our current problems are derived from allowing too much market forces to reign. I suggest there is plenty of evidence which points in the opposite direction.

For instance, our banks are now subject to risk weighted capital requirements, which translates directly into allowing these to earn much higher risk adjusted returns on equity on assets deemed as “safe”, than on assets deemed as risky. It beats me to know what this has to do with markets.

And then we have the whole TARP and Quantitative Easing affairs, and which in all truth might point to an urgent need to temper the intervention by governments in the markets.

Listen graduates, “plastics” is long passé… now it is “bank regulations”

Sir reading Christopher Caldwell’s “The Volcker rule is a gift to banks and excludes the rest” December 14, it is easy to see whey instead of recommending “plastics” as a future to a graduate, any person with good intentions would now easily tell him “bank regulations”.

And if we already gasp at the 828 pages of the Dodd-Frank Act, we should not forget that this is without making one single reference to the Basel Committee for Banking Supervision, and to the Basel Accord to which the US is a signatory.

If this regulatory frenzy is not digging us deeper in the hole we’re in, I do not know what is.

When banks earn more on what is “safe”, than on what is “risky”, the real economy suffers.

Sir Philip Stephens correctly writes “Europe faces a bigger threat than German caution”, December 13, and he correctly identifies that threat as “risk aversion”.

But there is an enormous difference between the consequences of natural risk aversion, like that which “comes with relatively higher standards and ageing population” and the consequences of an institutionalized pathological risk aversion… like that reflected in the risk-weighted capital requirements for banks.

If a society structures it in such a way that banks are allowed to earn much much higher risk-adjusted returns on equity when lending to what is perceived as “absolutely safe”, than when lending to “the risky”, banks will not allocated credit efficiently, and the real economy will wither away.

And the saddest part of that stupid risk-aversion is that it will anyhow bring down the banks (and perhaps the sovereigns with it) as banks will as a result, dangerously overpopulate all “safe havens”.

And what about the “pension mugging” produced by low interest rates produced by monetary policy?

Sir you write that Britain must make sure that the conversion of lifetime saving into decent retirement incomes is performed with total honesty, “Act now to prevent pension mugging” December 13.

But the number one factor which determines the amount of the annuity, at the moment of conversion, is the interest rate that insurance companies can earn long term on the “lifetime savings” received. And so now, when monetary policy is officially manipulated, so as for interest rates to be artificially low, especially the long side, the question is who is going to be responsible to the retired for the low annuities they receive?

How would you to explain to a retiree who converts into an annuity today if his neighbor, converting the same amount at a future time, receives a much higher annuity?

ECB, hard-cheese, first you need to test the credibility of the bank regulators

Sir, I refer to Sam Fleming´s and Alex Barker´s “ECB: Credibility test” December 12.

You must be perfectly aware that absolutely all bank crises in history, including the current one, have resulted from excessive lending to something that was ex ante perceived as absolutely safe, but that ex post turned out to be very risky. And no major crisis ever, has resulted from excessive bank exposures to assets that which ex ante considered risky.

And so therefore, allowing the banks to have extraordinarily little capital when exposed to something “absolutely safe”, can only guarantee that when shit hits the fan, all banks will stand there naked, with no capital to cover themselves up with.

And, to top up that mistake, that also allows banks to earn much higher risk adjusted returns on their equity when exposed to “The Infallible” than when exposed to “The Risky”, and which of course creates the distortion that makes it impossible for banks to fulfill their societal role, of allocating bank credit as efficiently as possible.

And so if there is a real credibility test that needs to be carried out first, that is the one of the bank regulators themselves since, honestly, I do not think they know what they are doing, and I consider them being about the largest producers of systemic risks in the financial system.

And with respect to the test of the banks… even more important than what´s on their books, would be to understand all the loans to medium and small businesses, entrepreneurs and start-ups that are NOT on their books, as a direct result of the capital requirements, because that is what can lead to the failure of the whole real economy… and when that failure happens, not even the safest bank stands a chance to survive.

ECB, I know it is hard for you to test your boss, Mario Draghi, the former chairman of the Financial Stability Board, but, what can I say, other than hard-cheese.

Paul Volcker and John Reed, our jobless young, more than a safer, need a more functional financial system

I cannot fully agree with Paul Volcker and John Reed about having a 6% cross the board capital requirement “standard alongside a robust system of risk weights” unless there is more clarity about what risk are to be weighted, “A safer financial system is now within our grasp”, December 12.

I say this because the problem with the current risk weighting used is that it weighs that risk of the assets which is already weighted, by means of interest rates, size of exposure, duration and other terms. And so, re-clearing for the same risk in the capital, causes banks to earn much higher risk adjusted returns on equity for assets perceived as “absolutely safe” than for assets perceived as “risky”; and this makes it therefore impossible for banks to allocate bank credit efficiently in the real economy. 

At this moment, when a generation of young people without jobs risk becoming a lost generation, the limited objective of a safer financial system needs urgently to be superseded by the much more comprehensive objective of banks becoming more functional.

Sir FT Bank regulations were not lax at all. They were, and still are, extremely dangerous.

Sir in your “A weak hand on casino banking”, December 11, you write “Lax regulation did little to discourage rash behavior”

No! You are wrong Sir. Allowing banks to leverage 60 times or more their equity with assets only because these are perceived as absolutely safe, has nothing to do with lax regulations, and all to do with dangerous regulations that encouraged rash behavior.

With the laxest regulation of them all, meaning no regulation at all, some other crisis might have happened but not the current one, a really free market would never ever have permitted such leverages.

And since you make a reference to casino banking, let me remind you that it was the regulators who, with their risk-weighted capital requirements, altered all the pay-out ratios on the different casino bets, and thereby created the distortions in the allocation of bank credit to the real economy that led to the current chaos.

And where do you get to know that “the financial system is now safer that it was four years ago”? Do you mean you think so because it is holding more infallible sovereign assets against less capital?

Mr. Kay. It is necessary to place bets that risk bankruptcy so as to have a chance to avoid bankruptcy.

Sir I refer to John Kay’s “Is it better to play it safe or to place bets that risk bankruptcy?” December 11.

In it Kay asks “Did mothers warn their daughters that marriage to brave hunters might end in widowhood, or urge them to seek husbands who would enable them to breed well-fed grandchildren?” That would in any case all be a matter of individual decisions. But, if there was a council of mothers which decided they had all to be extraordinarily nice to the sons in laws who stayed safely home and pester badly those who dared go hunting that society would definitely not prosper.

As cannot prosper an economy or a society where banks are given the incentive by their regulators to obtain much much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”.

And so the answer to Kay’s title question is that it is necessary to place bets that risk bankruptcy so as to have a chance to avoid bankruptcy.

How can the west have faith in its own future when its banks are hindered to finance it?

Sir, Gideon Rachman writes “The west is losing faith in its own future” December 10.

Absolutely, but how could the west not? Capital requirements for banks that are much much lower for assets perceived as absolutely safe, than on assets perceived as risky, allow banks to earn much higher risk-adjusted returns on what is “safe” than on what is “risky” and that stops banks from financing the future and makes these concentrate on refinancing, while its worth something, the safer past.

Rest assured, with its current castrated banking system, the west would never ever have become what it became.

Does FT´s capital markets editor really believe that in free markets banks could leverage equity 50 times or more?

Sir, I refer to Ralph Atkins´ review of Costas Lapavitsas´ “Profiting without producing”, “A Marxist take on economic meltdown” December 9.

In it Atkins writes “The resulting financial turmoil and global economic slump cast doubt on the ability of free markets to provide sustainable growth and employment in advanced economies”. I truly marvel at how one can call the current financial turmoil a result of “free markets” when for instance there can be no doubt that in really free markets banks could never ever have leveraged their equity 50 times or more. That was only made possible by extremely intrusive bank regulations that were based on such nonsense as risk-weighted capital requirements for banks.

It also argues that “financialisation”, which can indeed be corrosive, “has forced the retreat of labor and exacerbated income equality”. But again that is not the consequence of free markets but of regulations that so much favor the access to bank credit of “The Infallible” over that of “The Risky”.

Atkins correctly holds that “when it works, finance discipline governments and companies” but then he blithely ignores the fact that for instance, with Basel II, banks were authorized to lend to “infallible governments holding no capital at all. What a disciplining!

And as to "a Marxists take on economic meltdown", that is precisely what I would first ask the author… what is not Marxist about requiring the banks to hold substantial capital when lending to the private citizen and zero capital when lending to a central government?

“Lazy banking” is not just an Indian phenomenon. The Basel Committee has decreed it to rule everywhere.

Sir, James Crabtree in his interview of Arundhati Bhattacharya “Toughest job in Indian banking for head of state-backed behemoth”, December 9, refers to the challenge “to shake off India´s reputation for what is known as ‘lazy banking’, a system in which stolid lenders, led by cautious bureaucrats, park deposit in ultra-safe government securities”.

I am sorry, described that way “lazy banking” does not solely happen in India. In fact the Basel Committee, with their risk weighted bank capital requirements, which allow banks to earn much higher risk-adjusted returns on assets perceived as “absolutely safe”, than on assets perceived as “risky”, have in fact decreed lazy banking to rule everywhere.

The Basel Committee and the Financial Stability Board have also some questions of ethics they should grapple with.

Sir, if a boy listens to the weatherman, and dresses up accordingly, but then comes his mommy and, having listened to the same weatherman, and ignoring what clothing the boy already has on, orders him to put on or take off additional layers of clothes, you can bet that boy will end up having too much or too little on, even if the weatherman turns out to be absolutely right about his forecast. And of course, and especially if the weatherman was wrong, as happens sometime, real tragedy could ensue with the boy dying from either excessive cold or heat.

That is precisely what happens when regulators, ignoring how banks have adjusted to the perceived risk of the asset through interest rates, size of exposure, duration and other terms, order banks to also adjust for the same perceived risk in the capital they are required to hold. 

Even if the risks have been perfectly perceived, the bank will as a consequence lend too much in too generous terms to those perceived as “absolutely safe” and too little in too harsh terms, to those perceived as “risky”. The introduction of this regulatory distortion puts both the banks and the real economy at serious risk.

And artificially favoring the borrowings of some bank clients over others, just to satisfy I do not what, is a highly unethical to do. And so Sir, in reference to Andrew Hill´s “Bankers grapple with question of ethics” December 9, I wonder if Dan Ostergaard, the managing partner of Integrity By Design and who is mentioned as advising on ethical training, might have a program for the Basel Committee for Banking Supervision and the Financial Stability Board. If not it seems urgently needed.

By the way it might also have to do with ethics when financial journalists refuse to make any reference to this regulatory distortion, for reasons of their own. Think of it, “Five years on, Lehman still haunts us” and the fact that it was the extremely low capital requirements allowed by the SEC to the investment banks under their supervision, when holding AAA rated securities, that most tempted Lehman into perdition, is not even discussed.

It is not voluntarily that European banks are abandoning the private sector in order to take refuge in the government.

Sir, I refer to John Dizard’s “Risk of a European break-up has not marginally disappeared”, December 7.

In it Dizard writes about “the collapse of private sector lending, which in the euro area as a whole has declined for more than a year and a half. That money had to go somewhere… ‘risk-free’ government paper has been a perfect place for the banking system to stuff the cash they are not lending to companies”. Dizzard makes it sound like this was a voluntary normal market based rational decision by the banks. It was not!

It is only the result of extremely distorting bank regulations which require banks to have a lot more of that capital they are currently so lacking of, when lending to the “risky” private sector, than when lending to the “infallible sovereign”.

Dizzard argues the European banking system is being “renationalized” but the sad reality is that banks are de facto being turned into statist government agents… and unfortunately we all know what happens to economies when their financing goes down that line.

Any self-respecting serious buyer on the web will surely like to have her own pick-up drone.

Sir Tim Harford writes about “How delivery drones could transform the world” December 6, and I just have to wonder whether it might not as well be “pick-up drones” which could transform the world.

And I say this because, looking only at some of my family´s members, I have an inkling that any serious purchaser on the web who respects herself, would want to have her own drone… at least for the last mile… just in order to be free to buy from anyone… yes even from Walmart.

I can see all those big houses, next to their cars, having a stand for the latest shiny pick-up drone model… and which, as a complementary service, has a built in camera so as to be able to better see what the neighbor is buying… and send that data to the local data-purchasing agent.

When are they going to fine the bankers and not, suicidally, fine the banks?

Sir, right now, when the European banks are leveraged to the tilt and unable, because of faulty capital requirements and lack of capital, to finance those in the real economy most in need of bank credit, we read, reported by Alex Barker and Daniel Schäfer that “Brussels poised to announce hefty rate-fixing fines on global banks” December 4.

When are they going to fine the bankers and not the banks? Don´t they know that in these days of so little bank capital, derived from regulators requiring so little bank capital with Basel II, that every fine a bank pays, translates into less bank credit… primarily to those medium and small businesses entrepreneurs and start-ups we most need to have access to bank credit in competitive terms?

Bank of England´s and Financial Stability Board´s Mark Carney, is nothing but a housing dove

Sir, John Plender writes that “UK must be more alert to housing bubbles risks” December 4, and comments that “to his credit, Mark Carney, the governor of the Bank of England, has been making suitable hawkish noises about housing.

But let me remind Plender that Mark Carney is also the Chairman of the Financial Stability Board. And as such Carney approves of risk-weights which allow banks to earn much higher risk-adjusted returns on equity when financing houses than when financing, for instance the entrepreneurs and start-ups, those that could get the house owners the job incomes with which pay their utility bills.

So please do not tell us that Mark Carney is nothing but a housing dove.

For a starter Carney does not even understand this

We need personal drones more than Amazon or Google, to get spare keys, and to buy anywhere we please, like in Walmart :-)

Sir, everywhere we read reports on Amazon using drones in the future to deliver us goods, like in Tim Bradshaw´s “Amazon delivers boost to drone pioneers”, December 4.

As I see it the real question is whether we citizens should all have our personal drone instead, so that for instance we could send it home for a spare if we lost our car key… or buy anywhere we please… like in Walmart :-)

The monstrous distortion in the allocation of bank credit to the real economy that regulators do not know they cause

Sir, Tom Braithwaite reports on “Counting the cost to customers of banking regulations” December 3. And he refers to facts such as regulators tightening the standards of capital requirements for banks, for instance against commitments such as those of letters of credit.

But nowhere does he discuss the cost to some customers, some borrowers, of bank regulations that discriminate among the customers. Might it be that he, like the regulators, has not yet understood it?

Let me explain it all to him again.

If there was no risk weighing of Basel II’s 8 percent capital requirements for banks, then the banks would allocate their credit in the real economy, based on who produces the highest risk-adjusted return on eight units of bank capital for each 100 units of loans.

But there is risk weighing in Basel II, and so banks allocate their credit, for instance to the private sector, in terms of:

For those rated AAA to AA, risk weight of 20%, based on who produces the highest risk-adjusted return on 1.6 units of bank capital for each 100 units of loans.

For those rated A+ to A, risk weight of 50%, based on who produces the highest risk-adjusted return on 4 units of bank capital for each 100 units of loans.

For those rated BBB+ to BB-, and those unrated, risk weight of 100%, based on who produces the highest risk-adjusted return on 8 units of bank capital for each 100 units of loans.

For those rated AAA to AA, risk weight 20%, based on who produces the highest risk-adjusted return on 1.6 units of bank capital, for each 100 units of loans.

And so of course those perceived as safer produce the banks a much higher risk-adjusted return on equity than those perceived as riskier.

And that causes banks to lend more than what they should to those perceived as safe and much less, sometimes nothing, to those perceived as risky… like to medium and small businesses, entrepreneurs and start-ups.

And amazingly… the regulators… xxx… do not even understand they are distorting the economically effective allocation of bank credit in the real economy.

What are we to do with them?

When the autopsy on Europe’s economy is performed, the cause of death will be sissy and dumb bank regulatory risk aversion.

Sir, Wolfgang Münchau writes “Lending by banks to the private sector is contracting at accelerated rates… Unsurprisingly the banks are trying to minimize the amount of capital they need to raise by scaling back their risky exposures to private creditors.” “Germany’s coalition will have to break promises”, December 2. And then he writes that “It is rational to expect the credit crunch to continue for as long the adjustment in the banking sector takes place – all the way through to 2014.

Yes, “unsurprisingly” and “rational” are the correct terms, but they are related to the completely irrational capital requirements for banks based on perceived risks.

Before these regulations came into being a bank looked at how to maximize the return of each euro by lending all over the spectrum of perceived risks… and that is what can lead to an efficient allocation of bank credit in the real economy.

Not now. Now a banks looks at the risks of an AAA rated, and since its regulatory risk weight is 20 percent, it uses only 20 percent of a euro when comparing its return to the return of a loan to a “risky” small business, and for which it has to use the full 100 percent of a euro. And, if lending to an “infallible sovereign”, then it can basically measure its returns on equity use 0 percent of a euro as equity.

No! When the autopsy on Europe’s economy will be performed some years from now, these loony and sissy risk adverse regulation virus is going to be identified as the prime cause of its death, and FT and its journalist, by having kept mum on it, will be among its contagion agents.

God, make us daring!

Brother you who do not have a dime, or a job, can you spare me a dime or a job, so that we can grow together?

Sir, I am not taking a position for or against a minimum wage but, when Edward Luce writes that increasing “it would inject a much-needed stimulus into the anemic recovery without involving a dollar of taxpayer money”, something definitely does not sound right, “Avoiding poverty pay is the tonic America needs”, December 2.

If the company ends up paying for it, then we might have less employment and that of course nobody wants. And so, if the taxpayer is not paying for it…who is going to pay for it? Could it perhaps be mostly those who are not taxpayers because they earn too little? And so, if a stimulus, is it not in fact a quite regressive one?

And then Luce mentions that these minimum wage increases will affect “sectors where the bulk of new jobs are being created” and which in fact would point to the plan as being somewhat suicidal.

Honestly I do not think America needs a recovery stimulated by an increase in the minimum wage and Luce would do himself a favor looking at how economies where there is no minimum wage are doing.

Do I have an alternative plan? No, but I would of course start by eliminating immediately the odious regulatory discrimination which makes it so much more difficult for those perceived as “risky” to access bank credit in competitive terms. The growth in America and in Europe has, as in their past, to be based upon risk-taking and not risk-avoidance.

God, make us daring!

PS. Sincerely it is also a bit surrealistic reading that Luce feels that the unions “have reasons to hate” Walmart, the largest employer in the USA, and all this operating on a 3 percent margin, in the poorer sectors of the real economy. Don't we wish we had such banks!