July 31, 2014
Sir, Alice Ross reporting on the Landesbanks in Germany refers to “the disastrous lead in to the financial crisis that saw ill advised investments in US mortgage backed securities”, and it is just another monstrous example how financial history is being miswritten, “Bank balance” July 31.
And we are also told of how former or current board members… went to trial accused of failing to disclose the risks involved in buying certain asset-backed securities in 2005.
If I had been the defense lawyer at that trial, I would just have called one of any German bank regulators who had been involved with the approval of Basel II in June 2004, and asked the following questions.
Q. Is it not so that a bank was authorized to acquire AAA rated securities against only 1.6% in capital meaning they could leverage their equity 62.5 times to 1.
Q. Is it not so that allowing such a monstrously high leverage signified that the regulators trusted almost unlimited the capacity of the credit rating agencies?
Q. Would it have been reasonable for a German bank to travel to US and go through the AAA rated securities in detail knowing that the credit rating agencies which the regulators so much trusted had already done so?
Q. If those securities had turned out to be worthy of the AAA rating but the directors of one bank had foregone the opportunity to earn its shareholders huge returns on equity while other banks were doing so, would the shareholders not have thought of firing these directors?
Your honor, for the bank to under those circumstances have purchased those AAA rated securities was not in any way shape or form an ill advised investment. What was though clearly ill advised, were these bank regulations. I rest my case.
Who is going to prosecute the bank regulators?
PS. It was absolutely clear something like this had to happen… You yourself published a letter of mine in January 2003, in which I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”
There´s no bank lending to non-financial corporates as it requires the most of what is most scarce in Europe, bank capital.
Sir, Sarah Gordon writes that in Europe “bank lending to non-financial corporates has, almost unbelievably, been contracting for the past five years”, “Easy credit conditions are benefiting only the few” July 31.
What is unbelievable with that? As I have explained in hundreds of letter to you and your reporters for about soon a decade, bank lending to non-financial corporate requires, because of the risk-weighted capital requirements, the most of what is most scarce in Europe, namely bank capital… and so of course there is no lending. It is as easy as that!
And that is why liquidity does not reach where it is most needed. And the real problem is that some, like Mario Draghi, do not want to recognize how stupid these bank regulations are.
July 30, 2014
Sir, it is very hard to understand John Kay´s “Why there is never such a thing as a single true and fair view”, July 30, unless you begin with the premise that Kay does not understand the background or the implications of what he writes either.
For instance Kay says: “If banks had large portfolios of uncorrelated loans, it might make sense to value that portfolio at 99p in the pound: but, as financial institutions discovered yet again in 2008, the outcomes of a portfolio are generally closely correlated”.
Indeed… but Mr. Kay should know by now that bank portfolios had no chance in hell to be uncorrelated, as they had to forcibly be closely correlated to what was perceived as absolutely safe, because of the risk-weighted capital requirements for banks.
How really sad it is that a knowledgeable and influential man like John Kay does not find the time to read the most important document that pertains to current bank regulations, namely the Basel Committee’s “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” of 2005.
Had he read it he would see that in that document the Basel Committee confesses that the risk-weighted capital requirements are “portfolio invariant”… for the extremely poor reason that because otherwise, bank regulators would not be able to handle the equations.
Sir, if I understand it correctly, Robin Harding wants us to pick one of two possibilities. That in which “the interest rates are too low, but the economy is fundamentally healthy, or the bleak one, in which case “central bankers have written the right prescription, but the patient´s condition remains perilously weak”, “Fear of bubbles hides the dangers of stagnation”, July 30.
Not so Mr. Harding! Fears, by regulators, of banks lending too much to what is perceived ex ante as risky, as if such a thing has ever happened, has doomed the world to stagnation. When banks, by means of risk weighted capital requirements are told they can earn much higher risk-adjusted returns on equity when lending to what is perceived as absolutely safe, there will not be the sufficient lending to what is perceived as risky, like SMEs and entrepreneurs, for the economy to grow.
No risk-taking... no growth... it is as simple as that!
No risk-taking... no growth... it is as simple as that!
Wow! Did someone from Kremlin infiltrate the Basel Committee for Banking Supervision to seed bad advice?
Sir Courtney Weaver and Kathrin Hille report from Moscow that “Yevgeny Fyodorov, a deputy for the pro-Kremlin party United Russia… claimed US consulting and audit firms were working under the orders of their governments and could cause ´real damage´ to the Russian state by purposefully giving out bad advice.” “Duma hits back with proposal to ban Big Four auditing firms”, July 30.
Oh boy! That is precisely what I, in jest, implied in a blog of many years ago, when I suggested that a disappointed and revenge wanting Kremlin retiree, Carlos Molotov Pavlov, had infiltrated the Basel Committee for Banking Supervision in order to seed advice that would bring down the banking system of the west.
Sir, I refer to your “Lloyds and lessons from past scandals” July 30.
Sir we have bank regulators who told the bank: “Here you have ultra low capital requirements for whatever is perceived ex ante as absolutely safe, so that you can make ultra high returns on your equity financing that, and so that you stay away from financing those risky SMEs and entrepreneurs, even though these need and could do the most good with bank credit”.
In other words… the mother of all capital controls.
And in “Lloyds and lessons from past scandals”, July 30, you refer to this as “the ‘light touch’ regulation that characterized the pre-crunch period”? I shiver at the thought of what you would call firm handed regulations.
PS. I was recently censored, in Venezuela. But you know Sir, that is not the first time… so thanks for the preparation :-)
Luke Johnson. Who would be your favorite contender for the title of the mother of all start-up slayers?
Sir I would not argue one iota with Luke Johnson’s “Contenders for patron saint of start-ups” July 30.
That said it would be interesting to see who he opines is the number one contender for start-ups' slayer?
Clearly it has to be one prominent bank regulators, like Mario Draghi, Stefan Ingves, Mark Carney, Jaime Caruana or any other of those who concocted the venom against star-ups we know as the risk weighted capital requirements for banks.
Because of that the start-ups, usually perceived as “risky”, relatively to those perceived as “safe”, now have to pay even higher interest rates, get even smaller bank loans and have to accept even harsher terms than they used to.
And sadly the only result of that mumbo-jumbo regulation is that now our banks run the risks of too much exposure to what seems absolutely safe, while renouncing to the benefits of diversifying when lending to those who seems risky.
There is Sir, as you surely must understand, no future in such silly risk-aversion!
What if an Eric Schneiderman dared to stand up against those causing the greatest unfairness in the financial markets?
Sir, Kara Scannell, James Shotter, Daniel Schäfer and Alice Ross report on how New York attorney-general Eric Schneiderman is investigating unfairness in the financial markets, “Banks hit by dark pools probe” July 30.
But Sir, you know that those perceived as “absolutely safe” from a credit risk point of view, and who are therefore already the beneficiaries of lower interest rates, larger loans and on softer terms, get even lower interests, even larger loans and on even softer terms, because regulators allow banks to hold less capital against assets deemed as absolutely safe.
And you also know that those perceived as risky from a credit risk point of view, and who are therefore already paying higher interest rates, getting smaller loans and must accept harsher terms, are charged even higher interests, get even smaller loans and must accept even harsher terms, only because regulators require banks to hold more capital against assets deemed as risky.
And so I ask you Sir, does not the regulatory distortion produced by the risk-weighted capital requirements cause more unfairness in the capital markets than all the dark pools, and all the high frequency trading, and all the Libor manipulation and all the other misdeeds currently scrutinized put together? Of course it does!
What a shame there are no Attorney Generals willing to stand up to bank regulators discriminating based on perceived risk (in the Home of the Brave) … even when equipped with such formidable tools as the Equal Credit Opportunity Act – Regulation B. and all other non-discrimination and non-profiling rulings.
July 28, 2014
The collateral damage produced in the economy by faulty bank regulations, was mostly for the lack of a purpose.
Sir, Wolfgang Münchau writes “The west risks collateral damage by punishing Russia” July 28. That could be… but at least that would be the consequence of a purpose.
What is truly sad is to see that all collateral damage in the economy resulting from the distortions originated when favoring with ultra small capital requirements for banks assets perceived as absolutely safe, was more for the lack of a purpose.
John Augustus Shedd, 1850-1926 wrote “A ship in harbor is safe, but that is not what ships are for”
And though that clearly goes for banks too, that was something completely ignored by bank regulators.
Münchau writes “If you want to know how sanctions will affect the global economy, it is best to follow the money”. Indeed, and why does he not follow the money to understand where the global sanctions against the risky having access to bank credit took us? To lending too much to Greece? To investing too much in AAA-rated securities? To financing too much real estate in Spain? I believe so, but since he keeps so mum on it, what does he believe?
July 27, 2014
Sir, (and you other there) why is it so hard for FT and for regulators to understand that what applies to ships also applies to banks?
The motto of the British Special Air service its “Who dares win”, and your own includes “Without fear”… and yet you find nothing wrong with regulators senselessly making banks avoid risks by allowing them dangerously immense leverages and therefore high risk-adjusted profits on what is ex ante perceived as “absolutely safe”… but which of course presents no absolute certainty about how it will turn out ex post.
The risk weighted capital requirements for banks has effectively destroyed the credit transmission mechanism to the real economy of the banks. Sir, why is that so hard to understand?
FT, are you really proud of having your bank regulators turning your daring British banks into sissy banks?
PS. “Play the game for more than you can afford to lose… only then will you learn the game” so said also your very own Winston Churchill.
July 26, 2014
Sir, Tim Harford defends the apps for obtaining a “reservation at a popular restaurant… something that have always been valuable but they have been hard to buy and sell” arguing that “none of the people hoping to secure a reservation at a Michelin-starred restaurant is poverty stricken”, “Lessons from tech jerks”, July 26.
Yes indeed but let us not forget that even the one-percenters or less, have to compete for the one-percenters-of-the-one-percenters, and as this new service will extract a higher price, we are again confronting a service that mostly benefits the plutocracy. In fact they will probably pay less for this reservation service that what they currently pay the concierge of the hotel where they reside… and so this can only help to drive up even more the Piketty-inequalities we are told to abhor.
Now on the positive side… when these Michelin-starred restaurants run their own auctioning of reservation system… perhaps they find it profitable to open up for instance early morning shifts… and then some non-plutocrat gourmets and gourmands like me could perhaps have a better chance of finding a seat… and hopefully the real chefs will then perform especially well for their real admirers.
But while, we are on the subject of jerks, let me again remind you that the worst ones are the bank regulators who discriminate against the fair access to bank credit of those who, because they are perceived as risky, are already being discriminated against… the #JerkRegulator
Globally concentrating on the knowledge of the knowledgeable, renouncing to knowledge diversity, represents a huge systemic risk.
Sir, I refer to Gillian Tett “Chess in cyberspace: a smart move?” July 26. I am not a chess player, and I have not really been impacted by Fischer and Spassky playing chess on TV, or by “Deep Blue” beating Kasparov... and so I might be out on a limb here.
I agree with Tett that it is sad that globalization of competition has dramatically reduced the possibilities like singing Queen’s “We are the Champions” with true emotion, as clearly “We are the local champions” does not have the same ring to it.
But, it is when Gillian Tett describes how “parents are tapping the most brilliant brains in places such as India, Bulgaria or Moscow, to deliver online tutorials for their offspring via Skype”, that I get most concerned, because it is another example of a global concentration on the knowledge of the knowledgeable, which could in the end lead us to miss out on some really important knowledge diversity.
And frankly let us look at what has happened in the area of bank regulations since someone (not me), decided we should concentrate the most brilliant regulatory brains in the Basel Committee, and these most brilliant brains with too much hubris decided they could act as risk managers for the world, and on top of that decided to delegate much of that role into some few brilliant brains of some few credit rating agencies. As had to be expected, catastrophe ensued!
And now our banks are becoming riskier by the day, as their balances become more packed up with fewer and fewer assets deemed as absolutely safe, and without them being allowed the benefits of diversifying among the risky.
A decade ago, I told my colleague Executive Directors at the World Bank that if, by lottery, they would substitute for one of us with a plumber or a registered nurse, also picked by lottery we would be a much wiser Board. Of course that, in a mutual admiration club, was not too well received… but I still hold it to be true… even to become truer by the day.
July 24, 2014
On risk-weights for banks when financing houses vs. jobs, regulators do not answer, though stiff upper lips starts to wobble.
Sir, Stefan Ingves and Per Jansson, of Sveriges Riksbank, respond quite strongly against some criticism made by Wolfgang Münchau of the monetary policy in Sweden, “Monetary policy has had positive results in Sweden” July 24.
In their letter they mention that Sweden has been doing relatively fine in terms of reducing unemployment but that household debt and house prices have increased and “create risks of financial instability with serious macroeconomic consequences”.
Although my mother is from Sweden and lives there, I know little about its monetary policy but, since Stefan Ingves is the current chairman of the Basel Committee, and Münchau now has him on the line, would it not be great to ask him the following?
Mr. Ingves the risk-weights for defining the capital requirements for banks for house mortgages is 15% (I have heard some rumors about an increase to 25%) and the risk-weight for lending to an SME is 100%. Does it really make sense allowing banks to leverage 667% more times when financing houses than when financing the creation of the next generations of jobs… meaning banks can obtain a 667% higher risk adjusted return on their equity when financing houses than when financing the creation of the next generations of jobs? Do you not think this distorts the allocation of bank credit in the economy?
Since jobs seem more important than houses, and SME’s have never caused a bank crisis, which house financing has certainly done, why not the other way round?
Sir, when I have asked bank regulators from many countries a similar question their usually stiff upper lips have begun to wobble… but I have not been able to extract an answer from them. Perhaps Wolfgang Münchau could have more luck.
PS. Remind them of a Swedish psalm... "God make us daring!"
July 23, 2014
A bank’s expected failure going from once in 1000, to once in 200 years, does not sound like an impressive improvement :-)
Sir, Gina Chon refers to Steve Strongin, head of Goldman’s investment research division stating: “In the past the mean time for the failure of a well-capitalized bank was 41 years… Now, with increased capital standards and stress tests scrutinizing how banks would withstand a crisis, it is estimated to be about 200 years”, “Dodd-Frank rules blamed for curbing growth” July 23.
To help you understand what an unbelievable scenario for bullshit that represents, let me mention that in the Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, the confidence level is described as “fixed at 99.9%, i.e. an institution is expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years. This confidence level might seem rather high. However, Tier 2 does not have the loss absorbing capacity of Tier 1. The high confidence level was also chosen to protect against estimation errors that might inevitably occur from banks’ internal Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) estimation, as well as other model uncertainties.”
Chon mentions “A senior Obama administration official said banks had overreacted and argued that a person with a high credit score should be able to obtain a mortgage on decent terms, which was not happening at many banks”. That official should ask regulators to explain that the system in place is first the banks reacting to perceived credit risks with interest rates, size of exposures and other terms… and then having the regulators, for good measure, to also react to the same perceived credit risks by means of setting the capital the bank needs to hold against assets… and, of course, reacting twice to the same risk, must cause an overreaction.
In this respect the Dodd-Frank Act cannot be much blamed for curbing growth that is unless you feel, like I do, that in the home of the brave, that Act should have prohibited the odious system of risk weighing the capital requirements of banks, something which negates the fair access to bank credit to for instance all SMEs.
CMA. Bank regulators have stopped “the risky”, like SMEs, from being able to compete fairly for bank credit.
Sir, John Kay with respect to personal current account banking writes and conclude rightly in that “In banking too much competition is as bad as too little” July 23.
But in reference to banks and competition, I cannot but remind you of that regulators, by allowing banks to have much less capital when lending to “the infallible” than when lending to “the risky”, have hindered all those perceived as risky to be able to compete for bank credit on fair terms. In fact, on those borrowers already burdened by being perceived as risky, they have loaded up tons of extra weights.
And that Sir has an impact that is much worse than anything that could happen on the level of the service of personal checking accounts… and so that is what UK´s Competition and Markets Authority should really prioritize.
July 22, 2014
Sir, I refer to Tobias Buck’s “Export-shaped cloud looms over Spain’s bright outlook” July 22.
In it he refers to that “The IMF this month declared that Spain had ‘turned the corner’”
Forget it! No country that insists on capital requirements for banks which discriminate against the fair access to bank credit for the “risky”, medium and small businesses, entrepreneurs and start ups, can turn a corner… at least not for the better.
About this, on the web, I placed a message in a bottle to King Felipe VI, on his first working day
Sir, it is always slightly worrisome when a banker, no matter how correct he might be, starts reminding you about the importance of the simple things in life, like Bilal Hafeez of Deutsche Bank does, “Economists have a lot to learn from the ‘The Big Bang Theory’” July 22.
We might take some comfort in that Mr Haafez is a global head of foreign exchange research, and so seemingly has less to do with the day to day activities of Deutsche Bank :-)
July 21, 2014
When you cut off economic buds from fair access to bank credit you cannot but get slim pickings in the job market
Sir, I refer to James Politi’s report on US jobs “Slim pickings” July 21.
When you have bank regulations which, by means of capital requirements based on perceived risk, discriminate against fair access to bank credit of medium and small businesses, entrepreneurs and start-ups, you stop energizing the labor market, and therefore all you will get is some obese growth… and so of course there will be slim pickings… like mostly low-wage jobs increases. And the same or even worse goes for Europe.
Risk weighted capital requirements undoubtedly distorts the allocation of bank credit to the real economy. To see this problem being completely absent from the discussions at for instance the Federal Reserve, is truly sad.
Perhaps that silence has to do with no one being able to coherently explain a valid reason for those regulations… or, as John Kenneth Galbraith worded it in his “Money” 1975, “There is a reluctance in our time to attribute great consequences to human inadequacy – to what, in a semantically less cautious era, was called stupidity” [all made worse because] “men of reputation naturally see the person who has been right as a threat to their own eminence”.
Sir I refer to Sam Fleming, Ben McLannahan and Gina Chon reporting “BoE chief leads push to break ‘too big to fail’ impasse at G20”, July 21.
There they report on the efforts of Mark Carney as the current chairman of the Financial Stability Board to try to clinch a deal on bailing in creditors of globally significant, cross border banks that get into trouble”.
Mark Carney, to begin with should start by stopping giving the growth hormones that minimalist capital requirements for what is officially perceived as absolutely safe, represents for the Too-Big-to-Fail banks.
And then I would also suggest they think a little bit more about the implications of the Contingent Convertibles. The CoCos, hard to manage even in the presence of solely a leverage ratio rule, are mindboggling difficult when the capital requirements for banks are risk-weighted.
Perhaps Mr. Carney should read what George Banks had to say about CoCos when asked by his Board of Directors at theDawes Tomes Mousley Grubbs Fidelity Fiduciary Bank
As a sanction why not increase the risk-weight of Russia when calculating the capital requirements for banks?
Sir, Wolfgang Münchau writes that “Europe must impose financial sanctions on Russia” July 21, and among the possibilities for that he discusses the European Bank for Reconstruction and Development to stop lending to Russia.
Why not also, for the purpose of capital requirements of European banks, assign to Russia at least the same risk-weight currently assigned to Europeans small businesses and entrepreneurs, namely 100%. At its current credit rating BBB- Russia earns a 50% risk-weight, which means that banks are allowed to leverage twice as much when lending to Russia, than when lending to those who have done absolutely nothing wrong except being perceived as “risky”... something for which they already pay for dearly.
Besides, for a starter, why on earth would you want European banks lend more to Russia than to European job generators?
Sir, I refer to your “Eurozone needs quantitative easing” July 21. No! It cannot handle more distortions.
Before getting rid of the capital controls that risk-weighted capital requirements for banks represent, and which channels new liquidity to whatever is officially perceived as absolute safe, and not to where the economy most needs bank credit to go, any Eurozone quantitative easing would be plain foolish… and set the eurozone up for something even worse.
And to top it up, you suggest that quantitative easing should be carried out through the purchase of government bonds, as if the zero risk weighting of eurozone government bonds is not distortion more than enough.
Why are bank regulators obsessed with already used perceived credit risks and totally blind to job creation and Mother Earth?
Sir, Lucy Kellaway asks “Why we are more vocal about loo rolls that our jobs” July 21.
In the same vein I have for soon two decades asked why bank regulators are more than vocal, really obsessed, with credit ratings, and complete ignore such things that society would like to have banks financing, like the generation of new jobs or fighting climate change.
The risk-weighted capital requirements are stupid, because bankers already take into account whatever credit risk information is available when they set interest rates and decide on the size of exposures, and so there is no need to clear for the same information twice.
How much more interesting would be to allow for slightly smaller capital requirements, which means bank can leverage more and earn a higher return on their equity, based on something more useful, like potential-of-job-generating-ratings or Sustainability-of-Mother-Earth ratings.
July 20, 2014
Britain could be against bankers, bank lobbyist and bank regulators… but should never be versus its banks.
Sir I refer to Philip Augar’s “Britain versus the banks” July 19… what an unfortunate title.
Augar writing about Alex Brummer’s “Bad banks: Greed, incompetence and the Next Global Crisis” says the author poses the ultimate question for the authorities who have to decide “what sort of banking they actually want and the extent to which the market driven requirements of high returns through risk can be balanced with society´s desire for safe banking”.
What? “society’s desire for safe banking”? And what about all other society’s desires for banks… like helping to finance the creation of jobs?
Does Brummer for instance agree with that “market driven requirements of high returns [for banks]” and for which bank lobbyists convinced regulators to lower the capital requirements for banks when lending to what is perceived as safe, should trump the right of the “risky” small businesses and entrepreneurs of not being discriminated more than normal when accessing bank credit?
Sir, Just like Philip Augar starts by quoting JK Galbraith, so did I in my first article published in 1997 in the Daily Journal of Caracas, “Puritanism in banking”. In it I wrote:
“In his book “Money: Whence it came, where it went” (1975) [and of which the author signed a copy for me in 1978] John Kenneth Galbraith addresses the function of banks in the creation of wealth…
Galbraith speculates on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”
And clearly, the almost fanatic obsessions of current regulators with stopping banks from failing, impedes these from helping out in financing the development we need but that of course entails a lot of risk-taking. It also, with its minimalist capital requirements for anything that can dress up as "absolutely safe" guarantees the growth of the Too Big To Fail Banks.
And I also wrote “Galbraith refers to the banks’ function of democratization of capital as they allow entities with initiative, ideas, and will to work although they initially lack the resources to participate in the region’s economic activity. In this second case, Galbraith states that as the regulations affecting the activities of the banking sector are increased, the possibilities of this democratization of capital would decrease. There is obviously a risk in lending to the poor.”
And indeed few regulations can be argued to be as anti-democratic as the risk-weighted capital requirements for banks based on perceived risks… something which is amazingly ignored in these days when inequality is much discussed.
Sir, let me finalize again by quoting Galbraith from the same “Money”. “It should be the simple truth in all economic and monetary matters that anyone who has explained failure has failed. We should be kind to those whose performance has been poor. But we must never be so gracious as to keep them in office”.
Indeed we should, perhaps, not tar and feather those who had anything to do with Basel II… but we should send them home, not promote them, and the least of it all… allow them to have anything to do with Basel IV… as they have already contaminated Basel III.
July 19, 2014
Sir, John Authers relates pro and con comments about the Fed’s monetary policy made by Jim Cramer, Rick Santelli and Steven Liesman, in CNBC, “Rate increases will test the market mood” July 20.
I just wonder what those three gentlemen would have to say if SEC, with a little help from its friends, in order to avoid US investors taking undue risks, in order for these not lose their money and end up on the streets and perhaps becoming a burden to taxpayers, had decided that all profits from investments in companies rated AAA to AA would be allowed an 80% reduction in taxes; those rated A+ to A an 50% reduction; while those investing in companies rated BB- and lower would have to pay 50% more taxes.
I ask this because clearly I believe they would all scream bloody murder about how that would distort the markets. And yet that is almost exactly the way regulators with their Basel II risk-weighted capital requirements for banks are distorting the allocation of bank credit… and no one, especially in FT says a word about it. I wonder why?
Of course no quantitative easing, fiscal deficits or lower interests will be able to cause the economy to grow in a sturdy and sustainable way, if bank credit cannot go to where it would go without regulatory interference.
July 17, 2014
Do the financial rights of creditors come before the sustainability vultures' rights of Mother Earth?
Sir, Tim Smedley writes “The UK has a legal obligation to meet 15 percent of its energy demand from renewable resources by 2020” “Sustainable jobs surge fades as wind farms face”, July 17.
What does that mean? Can you bank on it? If duly servicing UK public debt requires subsidies to wind farms to be cut and as a consequence you will not be able to meet targets… could there be a renegotiation? Could sustainable energy vultures hold out… and force a cut in all other energy supplies?
It would be really interesting if FT explains how this kind of legal obligation would rank with respect to other legal obligations.
July 16, 2014
Banks, tell me who your “absolutely infallible” are, and I will tell you who your “really risky” are.
Sir, Thomas Hale, Christopher Thompson and Josh Noble report on that “most major Chinese banks have existing Tier-1 capital adequacy ratios of at least 9.5 percent according to CLSA, meeting Basel III requirements”, “China financials lead EM debt sales” July 16.
What does that really mean? Which are the low-risk weight bank assets in China? For instance in the case of European banks these were AAA rated securities, mortgages in Spain and loans to infallible sovereigns like Greece.
For instance if we divide the risk weighted capital Tier-1 ratio of a bank by its un-weighted leverage ratio, then we have a better idea of how much could be hiding in the officially sanctioned safety… the fictitious safety ratio... the Basel Risk Ratio
July 15, 2014
Current bank regulators evidence a truly unpardonable lack of vision. Après nous, le water and jobs dry-spell.
Sir, our young do not find jobs and could easily turn into a lost generation, and we are all facing “A world without water” and all our bank regulators think of is having our banks exclusively financing what is perceived in the short term as absolutely safe. Because that is precisely the consequence of their risk weighted capital requirements for banks. They should be ashamed of themselves.
Yes, Pilita Clark in her Analysis on water of July 15, does quote a 2013 report for Moody where Andrew Metcalf states “It´s plainly true that water scarcity is finally to bite financially”, but we all know that long before that gets to be actually reflected in credit ratings, it might already be too late.
Worse yet, if credit ratings go down because of water scarcity, banks would be required to hold more capital, and therefore the cost of credit for those so affected when combating water scarcity would go up.
What is safe and stable banks worth to us if they cannot help to deliver jobs and solutions to our other urgent problems? Could banks even survive if jobs and solutions to our other urgent problems are not found?
What about capital requirements based on potential of job creating ratings, or sustainability ratings, or getting us water ratings?
How shortsighted can we allow our bank regulators to be? It is clear that for them an “après nous, le Déluge”…or in this case a severe dry-spell reigns.
July 14, 2014
Is a 3 dollar per ticket tombola, to meet president Obama, really a comme il faut political fund-driving mechanism?
Sir I refer to the issue of fundraising raised by Edward Luce in “A farewell to trust: Obama´s Germany syndrome” July 14
Even though I am not a US citizen and have therefore no right to vote, I have recently gotten some emails where Michelle Obama addresses me very kindly with a “Per”, and then asks me to chip in 3 dollars for the cause, and that if I do, I will have a chance to meet Barack personally… all expenses covered.
It has a sort of delightful country fair tombola ring to it, but I also must confess it makes me a bit uneasy.
Is this really an adequate behavior for the president and the first lady of the most powerful country in the world, and upon which so much of my and my family future depends on?
First, I understand that Michelle Obama might have nothing to do with this, and also that I might be just a bit too old fashioned to understand the marketing of our times… but still, I can´t help having some serious reservations about it all.
Basel’s risk-weighted capital requirements for banks, is a macro-imprudential tool which blows financial bubbles.
Sir, I refer to Wolfgang Münchau’s “What central banks should do with bubbles” July 14.
My answer would be for central banks to make sure that if they must blow, when they blow, it is not for them to take over the role of the markets by directing their winds to where they, in the short term, perceive it to be safer.
We know that financial bubbles never ever inflate with air perceived as risky, but always with air that pays more than what its perceived absolute-safety would seem to validate. In this respect the best bubble inflator ever, must be the current capital requirements for banks which allow banks to earn higher risk adjusted returns on equity on what is perceived as absolutely safe.
Holy mo! What a dangerous macro-prudential tool that is.
Münchau also references bank´s “antisocial and unethical behavior” and so I would also like to ask the following:
What if the capital requirements for banks discriminated against gays, the sick, women or black persons? Would that not be deemed as an “antisocial and unethical behavior”?
Of course! And all hell would brake lose!
And so why is it that regulators can discriminate in favor of the infallible those who are already favored by being perceived as that, and against “the risky” those who are already being discriminated against by being perceived risky… and nobody cares.
July 12, 2014
Sir, I refer to Tim Harford’s “When targets backfire” July 12 where he concludes in the importance of naming and shaming… providing an “embarrassment of indicators”.
But what to do when targets are completely missed and no one fires back?
Like in the case of the risk-weighted capital requirements for banks which the Basel Committee uses as the pillar of their regulations… less ex ante perceived risk less capital – more ex ante perceived risk more capital.
With that they guarantee banks will stuff their balance sheets with anything that can be construed as absolutely safe, precisely the kind of assets that can cause disasters when ex post they turn out risky, and that, when that crisis happens, banks will stand there bare-naked without capital.
And that caused the current crisis but yet, the concocters of that have not been ashamed, instead they have been graciously retired, reassigned to build Basel III using the same failed principle or, like Mario Draghi, even promoted.
Frankly neither Hollywood nor Bollywood would have rewarded a Basel II box office flop that way.
Sir, I had no idea of the existence of the “state of the art risk and order management system” described interestingly by Tracy Alloway in “Genie not included in BlackRock´s Aladdin” July 12.
Of course “none of these tools are meant to supplant the basic human intelligence required to make informed investment decisions”… but they do. Perhaps, in order to avoid unnecessary introduction of systemic risk, there should be fairly low limit to how much of the market can be served by the same risk modeling tool.
But again it surprises me how Alloway can write such an insightful article, and still not comprehend that the Basel risk-weights which determine the capital banks need to hold, amounts to an Aladdin lamp with a residing genie as inept as they can come. Imagine, just for a starter that genie believes that what is risky for banks and bankers is what is perceived as risky… how dumb is not that?
And distorting the allocation of bank credit following the advice of that genie is as dangerous as it comes for the real economy.
PS. Tracy Alloway on Wall Street, how many shares are traded in the Dow Jones index? Could the increase in its value be a function of shrinkage of its base?
July 11, 2014
Draghi’s “Whatever it takes” does not include admitting risk-weighted capital requirements for banks cause distortions
Sir, Ralph Atkins reports on “businesses unable to tap capital markets – which includes job-creating small and medium sized enterprises”, “Crisis drags on for small European companies” July 11.
Not only do small companies have to face the fact that their loan requests are small and so the credit analysis is much more expensive per euro borrowed compared to those larger who can afford a credit rating but, to top it up, regulators also ask banks to hold much much more capital against these than against safer companies.
And this regulatory fact is not even mentioned by Atkins… it is frankly embarrassing.
And ECB hopes “targeted longer term refinancing operations”, or Tltros, which will inject liquidity in banks will help to solve this problem. That is embarrassing too, since what banks most lack is not funds but capital.
Clearly ECB’s Mario Draghi’s “whatever it takes” does not include admitting that the risk-weighted capital requirement for banks odiously discriminates against the possibility of “the risky” for a fair access to bank credit… by dangerously favoring the access to bank credit of those who are already favored by being perceived as “absolutely safe”
PS. Q: Why did interest rates on sovereign periphery debt tumble? A: Much because banks do not need to hold capital against it.
July 10, 2014
How do you price bank credit for sustainable growth having to consider both risk profiles and capital requirements?
Sir, Axel Merk writes “sustainable growth comes from pricing credit correctly according to the risk profile of the borrowers, not merely cheap credit”, “The missing fear factor will return to haunt Yellen”, July 10.
Absolutely… but how do banks do that when they also must price credit according to the capital requirements ordained by the regulators for different borrowers? Impossible!
And Merk also refers to that “Forward-looking indicators, such as the yield curve, are less reliable as the Fed itself has actively managed those gauges”. Yes and here also by means of the risk-weighted capital requirements for banks, which being the smallest or even zero for “infallible” sovereign debts, has helped to convert treasury bills and bonds into a proxy of a subsidized risk-free rate.
Do we need to use force to make Mario Draghi and ECB to accept urgently needed structural reforms in bank regulations?
Sir, Claire Jones and Peter Spiegel report that ECB’s Mario Draghi has called for Brussels to “Use force to secure economic reform” meaning “structural reforms… they believe would strengthen longer-term growth prospects”, July 10.
ECB should be ashamed of itself. If there is any structural reform that is urgent that is getting rid of those crazy risk-weighted capital requirements for banks which are hindering credit to reach those we most need to have it now, namely medium and small businesses, entrepreneurs and start-ups.
And I guess the main reason for the ECB not to be pushing for that is it would signify Mario Draghi admitting have been part to one of the most monstrous regulatory mistakes ever.
There’s a world of difference between ex ante perceived risks and ex-post realized risks.
July 09, 2014
“Trust me, I am a bank regulator” is not enough either. They do not treat all of their customers fairly.
Sir, John Kay describes well the difficulties of financial advisors to handle conflicts of interest in “Trust me I am a financial advisor’ is not enough” July 9. But, as I suspect you know by now, I would also hold that the “Trust me I am a bank regulator” is not enough either.
For instance what would bank regulators have answered if Sir Henry McCardie, the judge, a century ago, had argued the following?
“I know you have depositors’, taxpayers’ and governments’ best interests at heart when you make the capital banks need to hold a function of risk-weights… and I commend you for that…though I have some reservation about why these are lower for those perceived as absolutely safe, as from what I have seen it is always excessive bank exposures to these which have created havoc.
But, more important, why do you think you have no responsibility to all the borrowers, to the real economy, and to our job seekers, and think you can distort the allocation of bank credit at your will? Who told you not to care about those interests? Is this how you treat all your customers fairly?”
Sir, Martin Wolf, as he should be, is clearly concerned with climate change, and states the report “Risky Business” to be valuable in “that it sets this out rightly as a problem in risk management”, “Climate skeptics are losing their grip”, July 9.
Absolutely, and since Wolf so often mentions he formed part of a commission reviewing bank regulations I just wonder why he there did not take the opportunity to then ask for lower bank capital requirements when financing something that could prove to be useful against climate change (sustainability ratings), instead of so purposeless and even so dangerous allowing banks to hold less bank capital against those perceived credit risks they already clear for.
But I guess that Wolf, as a baby-boomer, is more worried about the very short term health of the banks than about the planet… just as he does not seem to worry about the long term prospects of employment of our youth, since had that been the case, he would also have asked about lower capital requirements for banks depending on potential of job creation ratings. Clearly an “après nous, le Déluge…or le dryspell” reigns.
PS. Sir, since this has to do with capital requirements for banks, and Wolf has asked me in no uncertain terms not to send him more comments on it, as he knows all there is about that subject, I leave it in your hands whether to forward this letter to him or not.
Old banking: “What do you intend to do with the money?” New banking: “How do I minimize the capital the bank needs to hold?
Sir, Camilla Hall quotes a bank officer in that “loan growth [in the US] doesn't seem to be driven by the underpinning of an economic recovery” and then she reports that “much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom”, “US banks cautious over growing levels of lending” July 9.
Ask any old retired banker what was his first question to a prospective borrower and you would most probably hear him say: “What do you intend to do with the money if I lend it to you?”, and the banker, as Camilla Hall writes, would not have liked to hear “To pay a dividend or buy back some shares”.
What is the first question a banker nowadays makes? Most probably “How can I structure this loan so that the bank needs to hold the least capital against it?”
And I ask you FT… what do you believe leads to healthier banks and a sturdier economy, the old or the new banking?
July 08, 2014
EAB regulators should be fired; they don’t care one iota about the real economy, as long as banks don’t go under during their watch.
Sir, Sam Fleming reports that in order to “limit inconsistencies between the practices of different supervisors” EBA will deploy “a regulatory scoring system” of banks dependant on: “business model analysis, assessments of internal governance, risks to capital and risks to liquidity”, “EU to score lenders in push for regulatory unity” July 8.
As you see not a word about whether banks allocate credit adequately to the real economy. These regulators do not care one iota about that. All they care for is for banks not to fall under their watch… until they retire, and if the real economy has to go under in order for that to happen, so be it.
They should be fired!
July 07, 2014
The labour pains of Europe are made worse, and permanent, by the risk-weighted capital requirements for banks.
Sir, I refer to Sarah Gordon´s, Claire Jones´ and Peter Wise´s report on the eurozone unemployment “Labor pains” July 7.
I just wish those three would take perhaps an hour or so to sit down and discuss among themselves which of the following two Europe they would prefer, if worried about the future job perspectives of their children or grandchildren.
One, like today´s, where regulators thinking this will bring stability to the banking sector allow banks to hold less capital against what is perceived as safe than against what is ex ante perceived as risky, or one, where banks must maintain the same capital (a leverage ratio), against any asset?
In today´s Europe banks therefore earn much higher risk adjusted returns on equity when lending to the infallible sovereigns, the housing sector or a member of the AAAristocracy, than when lending to “risky” medium and small businesses, entrepreneurs and start-ups. In the hypothetical Europe, in fact the Europe that used to be some decades ago, there is no such discrimination or distortion, though of course banks would as always consider the perceived credit risks in order to set interest rates, size of exposures and their other terms.
And I argue that banks in today´s Europe, as a consequence cannot finance “the risky”, those which represents so much of Europe´s potential future, but are forced to dedicate themselves mostly, or even exclusively, to re-finance the safer past… and that simply means that a new generation of jobs will never have a chance to see the light.
Please, when deciding, do not forget that most safety and prosperity of today is the result of the risk-taking of yesterday. God make us daring! Are you really going to exploit the past for your own benefit and refuse your children their future?
And I also hold that the current bank capital risk-weight distortions are, at the end of the day, absolutely useless even from the perspective of bringing stability to the banks. Because the only thing it guarantees, is that the absolutely safe will get too much credit in too lenient terms and therefore, sooner or later, ex-post, turn into absolutely risky.
And history is 100% on my side. Never ever has there been a major bank crisis caused by excessive bank exposures to what was ex-ante perceived as “risky”, these have always been caused, no exceptions by excessive exposures to what was perceived as absolutely safe but that ex-post turn out not to be.
PS. I believe FT and its journalists should be weary of the fact that there is not a chance in hell that the European Commission will order Google to eliminate the links to all the letters I have sent to all of you on the subject of the distortions caused by risk-weighted capital requirements for banks, and so you will have to live with the fact that for whatever reasons, these might indeed be very petty, you have decided to ignore my arguments.
July 05, 2014
Undercover Economist Harford, instead of "the volatility express" the rest of us we have, thanks to regulators, the volatility ball and chain.
Sir, in October 2004, in a written formal statement at the World Bank, as an Executive Director, I warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”
And so I believe that, whether you like it or not, few have such credentials to talk about volatility.
And today I refer to Tim Harford’s “The volatility express” July 5. In it, Harford correctly describes the dangers for the financial sector of low volatility, in that it can foster a false sense of security; and the benefits for the economy of low volatility, as it can provide for the stable environment investors need in order to take risks.
But what the Undercover Economist, and you yourself, fail to understand, is that regulators, with their risk-weighted capital requirements for banks create not only an artificial false low volatility which becomes extra dangerous for banks, while at the same time, with the same risk-weights, they block the access to bank credit to those most willing to take risks when volatility is low.
And so, instead of the volatility express the “rest of us” would all like to see, we now have, thanks to regulators, the volatility ball and chain.
Sir, Henny Sender makes a well argued call in “The Federal Reserve must not linger too long on QE exit” July 5; concluding with opining that “The Fed wants to have its cake and eat it too”, and asking “Might it be that the Fed has everything in reverse?" It is truly scary stuff!
On August 23, 2006, you published a letter I sent titled “Long-term benefits of a hard landing”. Therein I wrote:
“Sir, While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.
Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.
This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”
And now Sir, soon eight years later, we can only observe how the Federal Reserve, even when facing clear evidence all what their liquidity injections and low rates have achieved is increasing or maintaining value of existent assets, and little or nothing has it done for the creation of any new real economy… are unwilling to cut the losses short, and keep placing more and more bets on the table… with our money!
Sincerely, no matter how we look at the Greenspan-Bernanke and incipient Yellen era at the Fed, we have reasons to fret the existence of some fundamental lack of character.
PS. Of course, when it comes to banks, the regulators have already evidenced plenty lack of character with their phobia against “the risky”. And so now they also have our banks placing ever larger bets on what is “safe”, blithely ignoring that in roulette, as in so many other aspects of life, you can equally lose by playing it too safe.
July 03, 2014
Please, could somebody urgently brief Fed Chair Janet Yellen on the fact that there are different kinds of bubbles?
Sir, Robin Harding reports that Janet Yellen holds that the Fed “is more interested in having a resilient financial system that can cope when asset bubbles burst than it is in popping them through rate rises” “No need to lift rates to curb risk, says Yellen” July 3.
I would totally agree with her… if only we found ourselves within a productive bubble and not as now within a useless bubble. Let me explain.
There are bubbles based on a lot of risk taking which albeit sometimes they have very large costs, at least takes us forward. And then there are bubbles, like this one based on risk aversion, that though just as costly, keeps us, in the best case scenario, stamping waters.
For instance the dotcom bubble cost us a lot, but left some useful advances, while the housing bubble with its AAA rated securities backed with mortgages to the US subprime sector was pure pain with no gain.
Unfortunately it seems that no one has briefed Janet Yellen about the implications of risk-weighted capital requirements for banks.
From Mr Per Kurowski.
Sir, I refer to John Gapper’s article “We are the product that Facebook has been testing” (July 2), about the research Facebook has been carrying out on whether our feelings can be influenced. I find that research to be absolutely great news!
Now Facebook, without us having to spend one penny on it, has with its own money conducted the research that proves conclusively that it needs to be controlled. And, to top it all off, it already confessed the motives and intentions of what it was up to. And what’s more, it did so, as Mr Gapper says, without really seeking anyone’s consent. Had it done so, its confessions would not have been half as useful.
But since that research might also open a window in how Facebook could branch out in the future by offering one Happy-Facebook, one Sad-Facebook and one Slightly-dull-neutral-Facebook, let me hereby formally notify Facebook that I want to be happy, and if it makes me sad I will sue it into oblivion!
By the way, at what point could Facebook be labelled a stalker?
Current bank fines paid in cash is judicial masochism. Fines should instead be paid in voting shares.
Sir, I very much agree with Daniel Zuberbühler’s in that a much more constructive way of sanctioning the banks for misdeeds would be to increase their capital requirements, “In banking capital punishment works better than torture”, July 3. Clearly to punish banks with bribes that go against their capital, precisely when we most need them to be better capitalized so as take on their lending functions, amounts to something like judiciary masochism.
But if populist prosecutors insist on taking that route then I have also proposed sometime ago that the fines should paid by having the perpetrator issue voting shares… which the government needs to unload in the market within a specified period. That would indeed be a better way to punish what needs to be punished, without punishing ourselves.
July 02, 2014
Why does Martin Wolf keep mum about the horrendous mistakes with risk-weighted capital requirements for banks?
Sir, until about two years ago I had written way over a hundred letters to Martin Wolf where I explained the profound mistakes of the risk-weighted capital requirements for banks present in Basel II. At that point he told me, in no uncertain terms, not to explain it to him anymore since he already understood it. And since that time, as you know, I have not copied Wolf with the letters I have been sending to you commenting on his articles.
But still, week after week, like in his “Bad advice from Basel’s Jeremiah” July 2, Wolf steadfastly refuses to discuss the possibility, I would say the certainty, that these capital requirements seriously distorts all monetary and fiscal policies enacted to ease the consequences of the financial crisis, rendering these useless.
And so Sir, I have to either conclude that Martin Wolf has not understood one iota of what I explained to him, something which might be entirely my fault, or he has some other reasons for keeping mum about it.
PS. Again I will not copy Martin Wolf with this letter. You decide Sir what to do.
July 01, 2014
No Mr. John Plender, it is the lousy risk weights corset imposed on banks by the Basel Committee which is strangling the sunlit banks.
Sir, John Plender quotes Sir Charlie Bean of the BoE arguing “if lenders do find ways of moving activities outside the regulatory perimeter, there may be times when monetary policy is the only game in town to guard against incipient financial stability risks”, “Don the corset but beware the risks in dark corners” July 1.
Hold it there Mr. Plender, “risks in dark corners”? If there are any real dangerous risks those are the ones that remain within the regulatory perimeter of the sunlit banks.
With their silly risk weighted capital requirements regulators imposed on the banks a badly designed corset which only allowed these to show off their absolutely safe, but oh so boring parts.
Where is all that excitement which bank lending to the risky medium and small businesses, to entrepreneurs and start-ups can provide the economy? It is nowhere to be seen.
On the contrary all banks can now show-off is that obesity that comes from financing “infallible sovereigns”, the housing sector and the AAAristocracy… so much fat that we are even scared they could suffer an infarct any moment soon.
What a difference it would be had banks been allowed to diversify their exposures with millions of small risky loans!
Regulators painted the banks into the dangerous corner of holding much of what is perceived as safe against little capital.
Sir, Alberto Gallo notes “The irony is that the Fed is becoming trapped by its own policies. QE and low rates have helped to solve the banking crisis, but also pushed investors to take on bigger risks” “Fed has grown complacent on credit market risk” July 1.
Yes but what has trapped them even more than so is that while providing liquidity and low rates because portfolio invariant risk weights, they forced banks into ever larger and dangerous exposures to what is, for the times being, officially perceived as “absolutely safe”.
Look for instance at the UK where even though BoE expresses concern of a housing bubble, it still permit banks to hold much less capital against mortgages than for instance against loans to SMEs.
The real problem we face today is that it is impossible for regulators to help banks out of the dangerous corners they have been painted, while they refuse to admit the possibility that it was they who did most of that painting.