September 30, 2013
Sir, Wolfgang Münchau in “Do not kid yourself that the eurozone is recovering” September 30 writes that “The single largest constraint on the resumption of eurozone growth is the continued failure to clean up the banks”
That in itself is an indication that after more than five years, the “experts” do not yet understand what has been going on. It is not that banks have been building up excessive risks to what is perceived as “risky” like loans to medium and small businesses, entrepreneurs and start ups, but excessive exposures to what is perceived as “absolutely safe” like sovereigns, housing and the AAAristocracy.
If, as Münchau hopes, Mario Draghi, the president of the European Central Bank, is serious in producing a clean and honest quality [bank] asset quality review next month” that would also including the review of what is NOT on the banks balances. Fat chance! Mario Draghi was for years the chairman of the Financial Stability Board.
“The Risky” borrowers, if only they knew, would envy like crazy the banks and “The Infallible”, their Basel Committee lapdog
Sir, Patrick Jenkins, reports “Watchdog to retreat from strict capital rules”. September 30. In it Stefan Ingves, the Swedish central banker who is the head of the Basel Committee on Banking Supervision, is quoted opining that perhaps they should be softening the “tough capital rules on securitisation introduced four years ago”. Why do not the “risky” borrowers have a similar access to a regulatory lapdog?
The more the regulators soften the capital requirements for banks on whatever can be construed as belonging to “The Infallible”, the more will these directly discriminate against those already being discriminated against by banks and markets, on account of being perceived as “risky”, such as medium and small businesses, entrepreneurs and startups.
When the “risky” become “safe”, by means of being bundled up in securities, the profits of lowering the capital requirements for banks, goes almost entirely to the bundler and the banks. Why does not that profit go primarily to those being bundled?
It just comes to show that the small and “risky” of the real economy, even though they have never ever caused a bank crisis, are just chicken shit in the eyes of regulators who just love to mingle with the AAAristocracy.
If the ordinary citizen, not just “civil society”, is not part of the climate change challenge, we are all toast.
Sir, my first reaction when I read Nicholas Stern’s “World leaders must act faster on climate change” September 30, was “How could they? There are none.
When about a decade ago I was an Executive Director at the World Bank, I often held that since at our board no one spoke for the world at large, and really only parochial interests were represented, we should perhaps in the name of transparency, rename us the World Pieces Bank, or perhaps the World Puzzle Bank.
And I also held and hold that if we allow acting on climate change to become just another rent seeking opportunity, or a political agenda pushing opportunity, we are all toast!
Having had the opportunity of flying over many environmentally affected areas, I really do not need a lot of scientifically studies to know that something is very wrong with how we maintain our planet, or our pied à terre as I like to call it. But what can we do about it?
I have no definitive answers of course, but I do firmly believe that impeding “climate change” to become an issue which belongs solely to an elite, and engaging the full attention of the ordinary citizen, is an absolute must.
For example when reading about the Copenhagen Climate Change Conference of 2009, I got upset about how often it was implied that the solution was the exclusive responsibility of the rich countries, as if the poorest human being, in the poorest of the countries has not exactly the same right, and duty, as an indigenous of the world, to participate in the challenge.
And to stimulate such citizen participation, and by which I mean immensely more than “civil society”, creating a visual aide, such as an environmental Google-map that tracks the climatic and environmental changes, and make it accessible in all schoolrooms around the world, could help.
If the threat to our earth is truly serious, something that I have no real evidence to doubt, it is clear that we cannot leave its solution to politicians, and green rent seekers. If we do so we are toast.
September 27, 2013
If “Osborne has now been proven wrong on austerity” that does not mean that Martin Wolf would be right
Sir, if “Osborne has now been proven wrong on austerity” as Martin Wolf opines, September 27 it does not mean that Martin Wolf would have been proven right with his lesser austerity.
I say this because Martin Wolf refers to monetary stimulus, and if given while capital requirements for banks based on ex ante perceived risk impedes the liquidity to go where it is most needed and could be most productive, then you will also have an “unnecessarily protracted slump”, perhaps even an everlasting one… until all blows up!
The austerity that is killing off the western world economies, is the risk-taking austerity imposed by bank regulators who seem to ignore that we pray “God make us daring!” in our churches.
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.
Sir, Nigel Andrews writes “The spawn of the bankers make the scariest movie villains”, September 27. But since I am much more scared of bank regulators that of bankers I wonder if he could identify some movies were these are presented as villains.
For instance their capital current requirements for banks, based on ex ante perceived risk of their assets, could be likened to traffic allowing cars to speed at different velocities depending on the ex ante perceived value of car safety features, and without considering the driver. Can you imagine what scary disastrous car wreckage scenes could be filmed as a result?
Sir, Patrick Jenkins reports on a “Bank review to asses lending exposures”, September 27, and which, in words of Mario Draghi, will take place “to dispel this fog that lies over bank balance sheets”. Let us pray that what they find is not too scary.
That said, what the regulators will not be looking for, primarily because they do not care a shit about the real economy, are all those really productive “risky” bank assets that should have been on bank balances, had these not been scared away by the regulators senseless risk-weighted capital requirements.
How and when will we be able to dispel the fog that lies over the regulators’ eyes?
September 26, 2013
FT, I just can’t believe you believe we need regulators, like Michel Barnier, to save us from Libor scandals
On September 3 you wrote “Barnier’s revolution”, in which you held that Brussels is right to end self-regulations”, like in the case of setting the Libor benchmarks.
Please read carefully your own reporters “Court papers reveal Libor broker called banks ‘sheep’” September 26, and tell us: Now that the market knows what happened, what good can come from having a regulator, perhaps Mr. Michel Barnier himself, overseeing the setting of Libor?
Sir, in “ECB’s next steps”, September 27, you write that “Providing cheap loans to the banks is no guarantee that the money will find its way to families and businesses”. Of course not! Banks now suffer a tremendous lack capital, and since lending to “The Risky” requires the most of it, there will be no such lending.
And then you conclude “Putting the stability of Europe’s banking system beyond doubt is arguably more important than a new round of cheap loans”. But No! Hold it there! That’s is exactly what got Europe in trouble in the first place.
Precisely because of searching for bank stability, so fanatically that no consideration was given to how bank credit was allocated in the real economy, the regulators allowed banks to hold much much less capital for whatever exposures were ex ante perceived as “absolutely safe” than for exposures perceived as “risky”. And so, as was doomed to happen, the banks ended up with huge exposures to the absolutely-safe-gone-very-risky, all aggravated by the fact of also having little capital.
Of course “new long term financing operation should not come at the expense of capital” but much much more important than that, is that no new LTRO should be made available, before getting rid of the so distorting risk-weighted bank capital requirements.
And FT, if you are to be true to your motto, “Without fear and without favour”, you should not withhold such recommendations only because one of the responsible for this regulatory stupidity is Mario Draghi, a former chairman of the Financial Stability Board, who now happens to be the president of ECB.
The world is much better off thinking that the risky are less risky than we think them to be, than that the safe are as safe as we think.
September 25, 2013
Why should banks earn higher risk adjusted returns on equity financing property than when financing businesses?
Sir, John Plender writes “Historically, the biggest single cause of financial crises in the UK has been the bursting of property bubbles” “BoE lacks tools needed to prick property bubble” September 25.
If that is so, which I have no reason to suspect it is not then would he, or Lord Turner, explain to us, why were regulators allowing banks to lend to property against less capital than when doing much other lending? Did that not signify that banks would be earning higher risk adjusted returns on equity on property lending than on other lending? Did that not doom banks, next time a property bubble burst, that everything would be so much worse, since banks would be standing there with especially little capital?
BoE does not lack tools. It just needs to arm itself with a new generation of regulators capable of understanding that risk-taking is not something dirty, even when banks do it. And of understanding that there is nothing as risky as excessive risk-aversion.
No matter what Schäuble-Merkel or Wolf think, Europe will not survive if it does not rid itself of Basel II and III
Sir I refer to Martin Wolf’s “Germany’s strange parallel universe”, September 25.
Bank regulators have based and still base their capital requirements for banks on how borrowers could fail and not, as they should, on how banks could fail, as entities and in allocating credit to the real economy. For instance, instead of observing themselves the credit ratings of any bank borrowers, they should be observing what bankers do when they see those credit ratings.
And so when the Basel Committee regulators introduced risk-weighting into the capital requirements for banks they created huge distortions, which have proven to be not only very dangerous for the safety of the European banks, but which also impedes bank credit to be efficiently allocated in Europe.
And that unpardonable mistake caused the crisis in Europe, and blocks any real European economic recovery, and this no matter what other route Europe takes, be it Schäuble’s and Merkel’s, or one that Martin Wolf could agree with.
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.
September 23, 2013
If banks and QE finance sovereigns, housing and AAAristocracy, who is to finance “the risky”? You and me? Widows and orphans?
Sir, I refer to John Authers’ “Side-effects that should call time on the QE medicine” September 23.
The market, as the compass that directs the allocation of financial resources, has been rendered useless by the introduction in its center of two big chunks of iron. The first is capital requirements based on ex ante perceived risk, the other is QE. If these sources of magnetic distortion somehow neutralized each other, for instance QE mirrored the deleveraging of the banks the economy might not head too much out of course. But, unfortunately, they just reinforce each other.
The capital requirements push banks to lend to sovereigns, housing and the AAAristocracy, and QE, buying sovereigns to ease the borrowing rates of government, and help housing, push in the same direction. The question which remains is then who is going to take care of financing the risky. Truth is that if we get out of this storm alive and are able to find safe harbor, we can count ourselves extremely lucky indeed. As is what is most probable is that we end up sitting in million dollar houses, without a job, to help us pay the utility bills.
Sir, Martin Feldstein in “Why the Fed is wrong to delay the return to normality”, September 23, writes that by “promising to keep the real short-term rate below zero even the economy has returned to full economy… they distort the investment behavior of individuals and institutions, driving them to reach for higher yields by taking inappropriate risks. They lead banks to make riskier loans in order to get higher returns”
Feldstein is right about individuals and institutions, other than banks. Because, as to the banks, these are not searching for higher returns by making “riskier loans”, but to maximize the return on equity by minimizing the capital they need to hold against the loans. It is all about a flight to perceived regulatory safety
If banks had self-regulated, current extreme high bank leverages would never existed. Basel Committee´s regulations enabled these.
Sir, in “Barnier’s revolution”, September 23, you write that “Brussels is right to end self-regulation” in this case of benchmarks, like the Libor. But we should forget that having other selves regulating, does not guarantee by a long shot better results.
For instance, if the banks had been self-regulating, instead of falling in the hands of the Basel Committee the current financial crisis would not have happened. I say this because there is no imaginable way banks would allow each other to hold capital in accordance to ex ante perceived risks, since they would all have been asking each other… “What if those ex ante perceptions, ex post turn out wrong?”
For instance can you imagine European banks with 30 to 50 times to 1 debt equity ratios, if there had not been a regulator who vouching for these enabled it all?
And in the case such as the Libor, I would still believe that self-regulation which explicitly accepts responsibility is still the best way to go. The quotes of Libor which created the scandal were quotes lower than the real Libor, which implied that the interest rates banks could charge their borrowers were lower than what they should be, and so any bank, sufficiently aware now of what shenanigans were going on, would most certainly raise all hell if that was repeated.
And besides, since some regulators did not mind at all low Libor quotes, since these inspired tranquility, one should also be highly suspicious of what other types of selves can be present in non-self-regulation.
God save us from regulator hubris!
September 21, 2013
Parade bank regulators down 5th Av, wearing dunce caps, so the next generations of them, know they will be held accountable.
Sir, Mr. William N Kring writes “Banks continuing to sabotage reform”, September 21. Indeed, of course, that’s their business.
But, the number one saboteurs of the much needed reforms are the regulators. By hanging on to their so misguided capital requirements based on ex ante perceived risk, as if their risk perceptions had not previously been seen and cleared for by bankers, they keep creating the regulatory muddiness which allows for the so much muddy lobbying by the banks.
What could banks do if for instance there was just one simple and transparent battle line, like an 8 percent capital requirement on any type of bank assets?
But that would also signify that the whole regulatory establishment would need to confess they were absolutely wrong, from beginning to end, when they with immense hubris thought they could be the risk managers of the world, and started to impose risk-weights, and which only distorted all common sense out of the allocation of bank credit to the real economy.
Damn them, make them parade down 5th Av, wearing dunce caps, so that next generations of bank regulators know they will be held accountable.
September 20, 2013
Sir, Gillian Tett quotes Lord Turner in that a standard economics text book claims that banks exist to “raise deposits from savers and then make loans to borrowers”… and “primarily lend to firms/entrepreneurs to fund investment projects” but that it is a fiction, as he calculates that today in UK a mere 15 percent of total financial flows actually go into investment projects, the rest is to support existing corporate assets, real estate or to “facilitate lifecycle consumption smoothing”, “Debt explosion is the real story behind QE dance”, September 20.
Frankly, what did this former bank regulator would happen when he and his colleagues never concerned themselves one iota with what the purpose of the banks could be; and limited their action to mostly allowing extremely low capital requirements for banks on whatever exposures that, ex ante, could be perceived as “absolutely safe”; something which of course made it so much more difficult for “The Risky”, the medium and small businesses, the entrepreneurs and the start-ups to access bank credit, in competitive terms?
The regulators helped to hook western economies on ever-expanding levels of debt? Yes, indeed, but worse yet, they castrated the banks and introduced a regulatory risk-aversion that is taking the western economies down down down.
As I see it Lord Turner is just one of those regulators who should put on a dunce cap, and go sit in a corner. Is it rude of me? Perhaps but what, except for socially sanctioning such dumb behavior, can an ordinary citizen do?
And, of course, this also goes for many other of Lord Turner's regulating colleagues. Like Mario Draghi for example. A Big "Dunce-Cap" Party!
And, of course, this also goes for many other of Lord Turner's regulating colleagues. Like Mario Draghi for example. A Big "Dunce-Cap" Party!
September 18, 2013
But, Luke Johnson, how do we get the Basel Committee to understand it has hit regulatory rock bottom?
Sir, the Basel Committee’s bank regulators, by allowing Cypriot and other banks to lend to Greece against only 1.6 percent in capital, which basically means allowing for a 62.5 to 1 debt to equity leverage, helped to cause both Cyprus and Greece to hit bottom.
But, in Luke Johnson’s “How to find some value in hitting rock bottom” September 18, we find no clue about how we could make sure that the Basel Committee understands and acknowledges it has hit regulatory rock bottom?
I mean these comfy regulators do not pay or suffer much direct impact from the damages they produce. In fact, after their Basel II flop they have even been authorized to follow up with a Basel III, using the same script of capital requirements based on ex-ante perceived risk. Hell, neither Hollywood nor Bollywod would allow something so dumb.
Sir, bank regulators, by allowing banks to hold absolute minimal capital against what was perceived as “absolutely safe”, 1.6 percent or less, effectively injected huge amounts of liquidity in the economy. And precisely because of how these capital requirements were skewed, in favor of “The Infallible” and against “The Risky”, they directed our banks to lend too much, at too low interest rates and in too lenient terms to sovereigns, housing and the AAAristocracy, and too little, at too high rates and in too strict terms to “the medium and small businesses, the entrepreneurs and start-ups.
And with that distortion inflicted on the real economy, they not only created the current crisis but also keep us there. Unfortunately, even though he has assured me that he understands it, Martin Wolf does still not get it. And perhaps that is because this argument might stand in the way of his macroeconomic imbalances explanations. “We still live in Lehman’s shadow” September 18.
And, if now Wolf’s favorite to Fed chairman, Janet Yellen, does not understand that either, and is appointed, and keeps on swamping the swamps and drying the deserts, so help us God.
PS. Sir, jut to remind you again that I am not copying Martin Wolf with this comment. He has asked me not to send him anything more on “distorting bank capital requirements” as he already knows it all… at least so he thinks.
September 17, 2013
Anat Admati. Forget about 20 to 30 percent of bank equity, it will not happen in our world and in our time.
Sir, of course, most of us would like the banks to have the 20 to 30 percent of equity, for total not risk weighted assets, which Anat Admati recommends. "Higher equity level for banks not such a bitter pill" September 17.
But why do we discuss an impossible? Does Admati not understand how many trillions of Euros in bank equity would have to be raised only in Europe? The sole mention of 20-30 percent scares all new bank equity away.
If a more modest, and I believe also quite reasonable goal of 8 to 10 percent was set, in a credible way, then that goal could perhaps be reached, especially if governments, as they should, since the undercapitalization of the banks is entirely their Basel Committee´s fault, helped along with some special tax incentives to bank equity.
And the above does not even begin to consider the tremendous reallocation of bank assets that would have to take place; since the assets a 30 percent capitalized bank wishes to hold are completely different from what than the current 3 percent capitalized banks have.
But, on the real positive side, let me assure you that just getting rid of the distortions produced by the so foolish ex ante perceived risk-reweighting, would make for much safer banks and would allow these to allocate financial resources much more efficiently in the real economy.
September 16, 2013
Mr. Bob Diamond. Is not a level playing field for borrowers in the real economy accessing bank credit, even more important?
Sir, Bob Diamond, a banker, holds that “A level [regulatory] playing field… is essential to ensure banks have consistent and predictable financial targets” “‘Too big to fail’ is still a threat to the financial system”, September 16.
But, is not a level playing field for when the actors in the real economy access bank credit even more important? Because, there is no level playing field there as long as bank regulators allow for different capital requirements based on perceived risk.
Currently banks are earning much much higher risk-adjusted returns on equity when lending to “The Infallible”, like to some sovereigns, housing and the AAAristocracy, than when lending to “The Risky”, like to SMEs, entrepreneurs and start-ups.
And that as you of course would understand, but that bankers prefer to conveniently ignore, causes, consistently and predictably, our banks to lend too much, at too low interest rates and in too lenient terms to “The Infallible”, and too little, at too high rates and in too strict terms to “The Risky”. And that is a distortion inflicted on the real economy, and therefore also a threat to the financial system.
September 13, 2013
A leverage ratio for banks is mostly needed, not to make these safer, but to distort less their credit allocation.
Sir, the prime reason for imposing a leverage ratio on banks is not, as most suggest, to make banks safer, but to stop the distortion that the risk weighted capital requirements for banks produce in the allocation of bank credit in the real economy.
And it is a true shame that this angle is not reviewed by Patrick Jenkins, in “Five bitter pills” September 13, where he settles instead on discussing a 30% leverage ratio, something that will just not happen. In fact, a maximum 2.3 debt to equity ratio for banks, which is what 30% leverage ratio results in, is, in many ways, just as absurd, as the 32.3 debt to equity ratio that a 3% leverage ratio allows.
Sir, if banks are allowed to hold much less equity against what is perceived as “absolutely safe” than against what is perceived as “risky”, the banks will earn much higher risk adjusted returns on their equity when lending to “The Infallible”, like to some sovereigns, housing and the AAAristocracy, than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and start-up.
And that as you of course will understand, causes banks to lend too much, at too low interest rates and in too lenient terms to “The Infallible”, and too little, at too high rates and in too strict terms to “The Risky”.
And so here is a question to Ms Gillian Tett. Does she believe those risk weighted capital requirements will lead to stability in the bank sector, or to the correct allocation of bank credit in the real economy?
If she says “Yes”, well then there is little I can do. Perhaps I should not expect more from an anthropologist. But, if she says “No”, then I would have to ask her on why she insists on ignoring this most outrageous “uneasy truth”, like when she describes how the “Insane financial system lives on post-Lehman”, September 13.
I say all this because the fact remains that the outright dangerous and so insane “risk-weighing” of capital requirements, has been, and still is, the fundamental pillar of all the Basel Committee’s bank regulations… and that mostly because that comprises a too uneasy truth for regulators’ egos to handle.
September 12, 2013
Sir, there is a question bank regulators really hate being asked, and it goes like this:
Sir Bank Regulator, you must know that when banks are allowed by you to hold “ultra-safe” assets against much less capital than what is required of them when holding “risky” assets, they do earn much higher risk-adjusted return on equity on the safe assets than what they earn on the risky.
And that of course means that banks will lend too much at too low interests to “The Infallible”, like sovereigns, housing and the AAAristocracy, something which in itself is risky for the banks; and too little, or nothing, at too high interests to “The Risky”, like the medium and small businesses, the entrepreneurs and start-ups, something which is equally risky for the real economy, and for the banks.
And so, Sir Bank Regulator, excuse my bluntness, but is that not really fucking dumb?
And when I have asked regulators what’s above (with only two exceptions and who I do not want to name, because that could make life difficult for them with their colleagues) they all go away, as if I have insulted their intelligence… something which I really don’t have to do, since, as I see it, they are with gusto doing it to themselves.
Sir, and now again it is you Sir of FT. My question on capital requirements for banks based on ex ante perceived risk, only reinforces what Satyajit Das so well concludes in his “Post-crisis policies offer only chronic stagnation” September 12, namely that current “policies will engineer a chronic stagnation, requiring continuous interventions to prevent rapid deterioration”, and this as I would explain, when more safe-havens get to be dangerously populated and more of the risky but potentially valuable bays are left unexplored.
Am I supposed to use this f... language in this context? Perhaps not! Especially so when being a respectable grandfather, but, much more vulgar and harmful to our society, primarily to the possibilities of our young ones of finding sturdy employments in their lifetime, are these regulators.
September 11, 2013
Though policymakers cannot decree the balance of the economy, they can surely guarantee its imbalance.
Sir, how economically efficiently the banks allocate credit is going to a very high degree determine the vitality and sturdiness of the real economy.
And current bank regulations, with capital requirements based on perceived risk, by allowing banks to earn much much higher risk-adjusted returns of equity when lending to “The Infallible”, like sovereigns, housing and the AAAristocracy; than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and start-ups, guarantees an inefficient allocation of bank credit.
Robin Harding, in “Americas economic growth is built on sand” September 11, writes that “Policy makers cannot prescribe the balance of the economy”. That is correct, but policy makers, by allowing for these dumb regulations, with its phony risk aversion, are indeed decreeing the imbalance of the economy. Obviously, Washington is not alone doing that, all Europe is too.
So there are two kinds of entrepreneurs, those with housing collateral to offer banks and those without. Pity the latter... the unemployed... and us
Sir, John Plender in “Britain has embarked on wrong kind of recovery”, September 11, writes, “Since banks require entrepreneurs to back their borrowings with housing collateral the small business sector also needs a rising housing market to prosper and generate jobs”.
So there are two kinds of entrepreneurs, those with housing collateral to offer banks, and those without. Just out of curiosity, why does not John Plender call a banker and ask him, how much capital a bank is required to hold when lending to either one of those entrepreneurs classes. Might much of the bank reluctance to lend to the entrepreneurs without property have to do with that they might then be required to hold much more capital that in the other case?
Do you really want to have bankers who lend to entrepreneurs by looking at their properties and not caring shit about what they will do with the money? Is that how you wish to drive a recovery that creates sturdy jobs?
September 10, 2013
Sir, in “A plan to finish fixing the global financial system” September 10, if his then quite an arrogant title, Mark Carney, the governor of the Bank of England and the current chairman of the Financial Stability Board writes “supervisors need to make good the pledge to G20 leaders… to tackle large differences in risk weights across banks”. I would ask him the following.
Why do you not tackle the supervisors’ own criteria of allowing large differences in risk weights to determine the effective capital requirement for banks?
Do you not understand that allowing for much much lower capital requirements on exposures to the “Infallible Sovereign”, to houses, or to the AAAristocracy, than for “The Risky”, like the medium and small businesses, entrepreneurs and start-upscauses the banks to be able to earn much much higher risk adjusted returns on equity when lending to the former than when lending to the latter.
Do you not understand that causes serious misallocations of bank credit in the real economy, and is by itself a source of immense systemic risk for the banking system?
Now if Mr. Carney would not understand what I am talking about, then I guess I would humbly have to recommend him taking a Finance 101 refreshment.
Carney also states “The G20s aim is to turn shadow banking from a source of risk to a source of resilience”. If that is going to happen by the Basel Committee and the Financial Stability Board, with excessive hubris continuing to believing themselves to be the risk managers of the world, and thereby distorting the global financial system… then, God help us! That would only finish it off.
September 09, 2013
And now, in the age of transparency, the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!
Sir, I refer to Steve Johnson’s “Money market ratings ‘outlawed’” of September 9 in your FTfm.
There Johnson writes of a proposal by the European Commission to ban money market funds from soliciting or financing a rating from a credit rating agency” so as “to end the risk of sudden massive redemptions” from a fund in the wake of a rating downgrade, [thereby strengthening the financial stability”.
What can we say? Now the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!
Why do they not just impose a little note after each credit rating stating who paid for it? And let the market take it from there?
Sir, Patrick Jenkins, in “Banks adapt to being kept in check” September 9, quotes “one top regulator who is close to Mark Carney, the new governor of the Bank of England” and the current chairman of the Financial Stability Board” saying “Regulators are the rock stars these days”. If so, what a sad class of rock stars we have.
Three of the problem circles in Jenkins’ “nucleus of the banking crisis” are directly related to bad regulations.
“Low capital”, indeed, how could it be otherwise when Basel II authorized banks to hold only 1.6 percent or even zero capital against so many of their assets.
“Bad investments/trading”, indeed, if you as a bank were allowed to leverage your equity 62.5 times to 1, only because something had an AAA rating provided by human fallible credit rating agencies, you were bound to get into trouble.
“Bad lending” indeed, I bet you that none of our real rock stars would have thought it a great idea for banks, like those of Cyprus, to lend to Greece against only 1.6 percent in capital.
And also when Jenkins quotes Douglas Flint, chairman of HSBC saying “It’s the system’s asset concentration – principally in government debt and in mortgage debt – that can be dangerous” he is directly spelling out what should have been the expected results of Basel I, of Basel II and, unfortunately it would seems, of Basel III too.
But the worst consequence of these faulty regulations, by which banks are allowed to earn much higher risk-adjusted returns on their equity when lending to “The Infallible”, than when lending to “The Risky”, does not even appear on the bank’s balance sheets. The worst consequence, in my opinion, is all those many loans to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups, which were denied by the banks, only because of these capital requirements. Those credits, if approved, could have delivered the next generation of sturdy jobs that our young ones so much need.
And so the bank regulators are now the rock stars? Forget it! Truth is that if any modest social sanction existed, and journalists did their jobs, instead of sucking up to the regulators, they would be paraded down the main avenues wearing dunce caps.
September 06, 2013
Risk-weighted capital requirements are a prime example of quack policies, and FT ignoring it, of quack journalism
Sir, Sir Samuel Brittan writes that “Politics resonate with the sound of quack policies”, September 6.
A prime example of those quack policies, are the risk-weighted capital requirements for banks based on perceived risk, lower-risk less-capital, higher-risk more-capital. These cause the banks to earn much much higher risk-adjusted returns on their equity when lending to “The Infallible”, the AAAristocracy, than when lending to “The Risky”, like the medium and small businesses, entrepreneurs and start-ups. And that of course distorts completely the allocation of bank credit to the real economy.
Those capital requirements are not “based on evidence”, and do not stand up to scrutiny. As to the empirical evidence, this would point in the opposite direction, as all major bank crises have always resulted from excessive exposures to what is perceived as “absolutely safe”. As for the analysis that lies behind, that is as mumbo-jumboish as you can find.
Brittan holds that such quack policies “overlook the benefits that people derive from the discouraged activities”. Indeed the benefits for the real economy, of the banks providing access to “The Risky”, in competitive terms, are completely overlooked.
Brittan also hold that such quack policies ignore the substitutes that are found and can be as harmful as the original. Indeed, by allowing the banks to earn such high expected returns on equity on what is “absolutely safe”, they might lend it too much on too lenient terms, and so the safe havens can get get to be dangerously overcrowded, like what happened to AAA rated securities in the US, Spanish real estate, Greece and other “infallibles”.
But I must say that for the Financial Times to ignore such regulatory quack, for so long, even when I have written you over one thousand letters about the problem with these regulations, that could also classify as quack journalism.
September 05, 2013
“Inalienable sovereign rights” is most often just a wonderful exploitable excuse to screw your own citizens
Sir, François Heisbourg writes “It is clear… that the new great powers, including a reinvigorated Russia are deeply averse to interference in what they see as inalienable sovereign rights – an attitude explained in many instances by their former colonial or dependent status”, “The west is accelerating its own strategic decline”, September 5.
I think there is a need for a clarification. 99 percent, at least, of the demand for the respect of inalienable sovereign rights, comes from those wanting to use that as a shelter in order to violate what should be the even much more inalienable human and economic and democratic rights of their citizens.
To oversell the importance of “inalienable sovereign rights” is only to play into the hands of dictatorships, even those who dressed up as popular democracies, are quite often, de facto, nothing but dictatorships.
September 03, 2013
Current bank regulations can only produce old weak jobs, not new sturdy and strong jobs. That takes risk-taking.
Sir, Chris Bryant, in “Germany’s ‘jobwunder’ obscures full picture” September 3 reports that most job growth in Germany is made by “low paid, precarious types of employment Such as part-time work, temporary contracts, so called ‘minijobs’ and outsourcing”.
We should not be surprised. Bank regulations which allow banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible”, than when lending to “The Risky”, can only produce fatty tissue, and not the muscles required to engineer a new generation of sturdy jobs… that requires risk-taking and does not allow for excessive risk-aversion.
September 02, 2013
Sir, you write “the FSB should not shy away from making markets safer. But it should try to minimise disruption along the way”, “Making repos safe: Financial Stability Board seeks shadow banking rules” September 2.
Fat chance, neither the Financial Stability Board, nor the Basel Committee, care one iota about how they distort. Just look at how they so blithely ignore that their capital requirements for banks, which causes to provide the banks with different risk-adjusted returns on equity for different assets, has distorted all common sense out of the allocation of bank credit in the real economy.
And here, for the repo market, the FSB now wants to impose a minimum .05 percent haircut for corporate debt securities with maturity of less than a year – and a 4 percent haircut on longer term securities. Why the discrimination? In general terms of stability, what is wrong with long term debt?