September 29, 2014

Mr. Gross was the victim of bank regulatory distortions in favor of the “infallible sovereigns”

Sir, Gillian Tett writes: “After a life of trend spotting, Gross missed the big shift” September 29 and she argues that “Mr. Gross is a potent symbol of a distorted investment world”.

Indeed he is, but again Ms. Tett is not able to identify the main source of the distortion that I believe Gross missed, namely the risk-weighted capital requirements for banks which allow banks to hold debt of the “infallible sovereigns”, against much less capital than what they need to hold against any other asset. 

In November of 2004 FT published a letter in which I wrote “how many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector”

Clearly neither Mr. Gross nor Ms. Tett read that letter.

September 27, 2014

Basel regulations infected banks with a risk-taking deficiency virus, which is mortal to the economy

Sir, Tim Harford in reference to recent food regulations in France writes: “Insisting on home made food ensures neither quality nor Frenchness”, “When regulators are all out to dèjenuer” September 27.

And Harford sort of hints at the possibility that regulatory meddling could spell the end to French cooking and, because better influencing taste buds might be roaming freer in Britain, we might end up with a British cuisine. That would clearly be a tragedy for France, but perhaps also for Britain, which I have often felt derives some national pride from its bad cooking.

Harford also reminds us of “International rules of financial stability did not give us financial stability. Just because a problem exists does not mean that a new regulation will solve it”.

Indeed, the risk-weighted capital requirements imposed on banks, and that very clearly signaled that banks should only lend to the safe and not lend to the risky, ensures neither safe banks nor sturdy economies. The first guarantees excessive exposures, backed with very little capital, to what ex ante is perceived as safe but could ex post be very risky; the second, much too little bank exposures to those our economies might most need our banks to be financing, like our “risky” SME’s and entrepreneurs.

Sir, it amazes me how difficult it is for most financial and economy “experts”, which includes you, and Harford, to understand the fact that current Basel regulations have infected our banks with a risk-taking deficiency virus which is mortal for our economies.

PS. I am not sure about the title of Tim Harford's article as it seems not to be a bad idea that all regulators left their jobs and went out to dèjenuer, and left us alone.

September 26, 2014

FT, why do you keep on just blaming banks and letting regulators off the hook?

Sir I refer to your “Economics needs to reflect a post-crisis world” September 26. In it you write: “Having watched the global economy fall off a cliff, new students [of economy] will not tolerate anodyne lectures on the wisdom of markets.”

Well sorry, long before that they should concern themselves much more with all the anodyne presumptions that regulators know what they are doing. I know that FT resists believing such thing, but sometimes they haven’t the faintest.

There can be no doubt whatsoever that had it not been for the credit risk weighted capital requirements for banks, which distorted the allocation of bank credit to the real economy and allowed banks to leverage over 50 to 1, we might have stumbled here and there, but we would not have fallen of such a cliff like we did.

In November 1999 in an Op-Ed I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of our banks”

And still today… I am much more frightened by arrogant busybody besserwisser regulators not being held accountable for what they are doing than what I am by the market… and so should you be.

September 24, 2014

It is better to have capital requirements for banks based on clean growth and jobs than on credit risks.

Sir, Martin Wolf writes: “Clean growth is a safe bet in the climate casino”, September 24.

Indeed, and that is why I have for years argued that it would be so much better if the capital requirements for banks were based on sustainability or clean growth ratings (or potential for job creating ratings), instead of on credit risks which should be cleared for by banks with interest rates and size of exposures.

I mean, if regulators absolutely must distort the allocation of bank credit in order to show us they are working, it would be so much better if they did so with a purpose.

You might argue that credit risk weighting has the purpose of bringing stability to the banks. Forget it! Only a sturdy and growing real economy can bring real long lasting stability to banks… it is NOT the other way round.

I can partly understand bank-navel-gazing regulators not seeing that, but it is truly sad when economists like Martin Wolf do not get it.

September 23, 2014

Mr. Draghi, Europe’s problem is not the demand for business loans but the supply of it.

Sir, Claire Jones reports “Draghi defends strategy after weak take-up of cheap loans” September 23. And therein she writes that Mr. Draghi acknowledged Europe had “a problem of lack of demand” for business loans.

How gracious of him… why does he not report the truth? That because of the risk-weighted capital requirements for banks, and the scarcity of bank capital, and what he admits the ECB’s Comprehensive Assessment that has banks running scared about coming out among the worse, Europe has a big problem with the lack of supply of bank credit to all those tough “risky” risk-takers it needs to get going when the times are tough.

Ah! Draghi might resort to quantitative easing buying sovereign bonds? How typical, helping those who are already awash in bank credit, and ignoring the clamor on the streets. Shame on him… and all because he refuses to admit to the fundamental mistake with the so distortive risk-weighted bank capital regulations, for which he is in large part responsible.

And Sir, and what amazes me the most is why we do not hear reporters asking Draghi about this… are there no real reporters left? Have these also been risk-weighted and weeded out?

September 22, 2014

The gran coalition of the Basel Committee is a very dangerous bank regulatory populist.

Sir, I refer to Niall Ferguson’s “Scotland’s No echoes Europe’s Yes to gran coalitions” September 22. Ferguson concludes it with a: “From now on, I no longer need to deny my allegiance to the extreme center.

Well I have not done that for years, blogging from “The radical of the middle”, or “The extremist of the center”. And so I have no problem with that, except I have never done that in pursuit of a coalition, but more in pursuit of the “truths” which have been captured by the extremes. And it is not easy to swim in the middle of the river, being thrown rocks at from both shores.

And so when Ferguson writes “Populism has been popping up all over Europe since the financial crisis” I have to stand up and explain, again, for the umpteenth time, that in the field of bank regulations, there has never ever been something so populist, as the “risk-weighted capital requirements”.

The regulators of the Basel Committee for Banking Supervision fooled the world (and probably themselves too) into believing that all would be fine and dandy, if only we distorted banks to lend to what credit wise seemed, ex ante, to be “absolutely safe”; and stopped the banks from lending to “the risky”; no matter how useless the lending to the first, and how useful the lending to the latter could be.

And the world hailed, “Now our banks are safe”. But excessive lending to what was ex ante officially perceived as absolutely safe, like to infallible Greece, real estate in Spain and investing in AAA rated securities, against little or no capital, caused a crisis, and proved the regulators wrong, in record time.

Unfortunately that populism survives, now again, with Basel III, regulators insist in that with banks will be safer with credit-risk weighing… and this even though they must be aware of that banks are not lending to the risky SMEs and entrepreneurs, those who our economies most need to get going in order not to stall and fall.

Ferguson praises, “grand coalitions, [which] have turned out to bring stability”, as a great weapon against populism. Let us beware that grand coalitions, like that of the Basel Committee, is also capable of producing some extremely de-stabilizing populism.

September 20, 2014

Should an 81 years old Scot, have had more right to vote on Scotland independency than a newborn Scot?

Sir, on your first page September 19, we saw the photo of a Jock Robertson, who from how he is dressed is undoubtedly a Scot, and who says: “I have waited all my life for this vote”.

He is 81 years old… and my first though was, I am sure he might deserve to vote, and I am truly happy for him… but, really, should an 81 years old Scot be allowed to vote for on the future of Scotland, when all those under 16, and who will be much longer affected by the outcome cannot?

And it is not that I suggest new born should vote… but I wonder if Jock Robertson, exercising a voting right in the name of perhaps a young grandchild of his, would vote the same as he voted his own vote.

In these baby-boomers’ days and when so many of those 18 to 25 year olds do not seem sufficient interested in elections so as to look up from their I-pads, I have often thought that democracy would be much more dynamic and responsible, if mothers, or fathers, were allowed to vote in the name of their children…

And I say this also because then perhaps we would be able to have governments who do not accept the risk aversion of regulators, and which have banks not financing the future but only refinancing the past.

In 2006 I published an Op-Ed in Venezuela that stated: “Whenever on television we see a desperately poor mother telling how she has been let down again by politicians, it just evidences that her voice and her vote does not count enough.

If that mother, or father, besides speaking in the name of her or his own voting rights, were also speaking on behalf of the votes of their children, her or his voice would carry much more power.

Since it is the young who will benefit, or suffer, for a longer time from what governments’ do or not do, they not only should have a vote but also perhaps have more votes than adults. In some countries, especially those who demographically are in the process of becoming real baby-boomer dictatorships, the lack of representation of youth can have serious consequences.

We see all around us how the short-term interest reigns, we even hear now about accounting in real time, while problems that are perceived as of a more long-term nature, such as protection the environment [and lack of jobs] accumulate everywhere.

To assign a voting right to the newborn, can be the most effective way to remind all other voters that there are also who are interested in what might happen in eighty years time.”

In summary, if the average life is eighty years, a new born should have 80 votes (exercised by his mother or older brother) someone like me would have 16 votes left, and someone over eighty should count his blessings and be glad if he is allowed to keep one as a memento. I do not want to owe the world to my children, I want to assure their rights as stakeholders and make it all more of a joint venture.

Mario Draghi lousy Basel bank diet does not work for Europe, or for anyone else.

Mario Draghi of ECB, as the former chairman of the Financial Stability Board, FSB, knows that current Basel bank regulations implies the following diet:

If banks take on exposures that are risky, and which is like eating spinach to kids, they will be punished with higher capital requirements, which means they earn less risk-adjusted returns on equity, which is something like eating broccoli to kids.

But, if banks take on exposures to what is believed as absolutely safe, something which would be like eating chocolate cake to kids, then they will be allowed to hold much much less capital allowing them to earn much much higher risk adjusted returns on equity, which is something like eating ice cream for the kids.

But seemingly Mario Draghi does not understand that the only economic growth that can result from such a bank diet is dangerous economic obesity, since only real risks, taken by banks with reasoned audacity, can lead to sturdy muscular economic growth.

But Mario Draghi is not alone in not understanding that, in FT he has a solid companion.

I say this with reference to Christopher Johnson’s analysis “Weak ECB loan take-up paves way for QE” September 20.

In it, Thompson referring to the low take-up by banks of “targeted longer-term refinancing operations” writes that “When historians come to write the story of the European Central Bank, they may look back at [that event] as the moment when the countdown to ‘quantitative easing’ began”.

And so clearly it is not yet understood that, because banks must hold more capital when financing what the ECB would want them to finance, SMEs for instance, they cannot oblige, for pure lack of bank capital; or that QEs, which would only be taking up more of the “absolutely safe” investments, can only help to further dangerously overcrowd the havens perceives as safe.

No, history, when it looks back, is primarily going to shocked reflect on how on earth such a bad bank diet came about.

PS. Without the need to look, we should be able to assume that the banks in the troubled periphery, those who are taking some of the TLTRO loans, are not lending to SMEs, but investing the proceeds in debt of periphery sovereigns, that which requires them to hold the least of capital. Please, tomorrow, don't call this an "unexpected consequence".


September 19, 2014

Never allow anything to be classified as unexpected or unintended consequences, unless proven beyond doubts to be such.

Sir, I refer to Gillian Tett’s “Emerging markets brace for a bumpy ride” September 19.

I agree with absolutely all she writes about the losses many emerging nations suffered with their exposure to derivatives in 2008 “when the dollar suddenly surged in value as a safe haven currency”, except for when she argues“It is a lesson in unexpected consequences in a tightly interconnected world”.

As I see it, nothing should be classified as an unexpected, or much less an unintended consequence, if it has not been proven to be beyond any reasonable doubt to be so. Otherwise it just serves as an excuse for stupid behavior.

For instance, in January 2003 in FT 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” and I was no bank regulator.

And so no one should be allowed to talk about unexpected or unintended consequences of ordering the banks to follow so much the credit ratings as Basel II did. But yet, how often have you not heard about the unexpected or unintended consequence of credit rating agencies not rating correctly?

In the real world, not the world of unaccountable regulators, anyone guilty of such a mistake, would have had two minutes to collect his personal items and hit the door, never to return. And yet there they are as if nothing happened… even expected to save the day.

Could what happened because of the exposures in derivatives Tett describes not be an unexpected consequence? Of course it could... but let them prove it to us first.

Investors driven out of safe investments by bank regulations and QEs, are they yield-hungry or just yield-starved?

Sir, Tracy Alloway and Michael MacKensie write that “Sales of US corporate bonds reflect a worrying lack of ratings differentiation” and they title that “Yield-hungry investors overlook credit risk” September 19.

All Fed’s QE’s, as well as the risk-weighted capital requirements for banks, as well as the upcoming liquidity requirements for banks, as well as much other risk-adverse regulations, only end up crowding out normal investors from what is deemed as “absolutely safe”, that which used to be said belonged to widows and orphans. 

And in that respect I wonder if “yield-hungry” is really the correct description of investors who seem more to have been yield-starved by official governments actions.

But also, let us not forget to ask ourselves… when can the extremely safe havens become so extremely dangerous crowded, so that suddenly the risky waters outside are actually safer?

And, is it not sad to read that increased corporate leverage is not resulting from increased real economic activity but only from “the combination of share buybacks dividend increases and M&A activities? I bet some years from now some authorities will once again try to explain that to us as just the result of “unintended consequences”… let us not be fooled by that… at least to me they are guilty, until they proved beyond any reasonable doubt it was not their intentions… or they plead insanity :-).

Janet Yellen, “normality” in the US, has it any longer anything to do with the “home of the brave”?

Sir, you hold that “Yellen charts a smooth course to normality” September 19.

Well, if normality is to have anything to do with “the home of the brave” that must mean of course getting rid of those senselessly distorting credit-risk weighted capital requirements for banks.

But, since we have not heard Yellen mentioning anything about that, I guess “normality” here means the new risk-adverse normality of the US… that which has Americans suing soccer teams for being hurt while playing or that which forces me out of the pool every hour so that they can take water quality tests… that which allows banks to earn much much higher risk adjusted returns on equity when lending to its AAAristocracy or its “infallible” government, than when lending to a so "risky” American entrepreneur.

What a pity, the world was indeed much benefitted by having the US being “the home of the brave”… let us at least hope they keep up “the land of the free” part... cross your fingers.

What if instead of credit risks we used credit usefulness when weighing capital requirements for banks?

Sir, I refer to the opinions of several economists on how to jump-start wage growth… which of course has to do with the creation of jobs, “Pay Pressure” September 19.

Even though some of the economists asked by FT might have diddled a bit with bank regulations, I know at least Joseph Stiglitz has, economists in general have little knowledge of these, or, like Joseph Stiglitz, have not understood what the Basel Committee for Banking Supervision has been up to during the last decades.

The current pillar of bank regulations is the “risk weighted capital requirements”. And that, since the perceived credit risks are already cleared for in interest rates and the amounts of the loans, clears for the same risk perception a second time… something which distorts, and causes banks to lend too much to what is perceived as absolutely safe, and too little to what is perceived as risky, like SME’s and entrepreneurs.

I, also an economist, would prefer not to weigh any capital requirements for banks at all, applying the same percentage for all assets, as I believe markets distort less than economists and regulators. But, if regulators absolutely must weigh, in order to show they do something, I would implore them to instead of credit-risk ratings, use potential-of-job-creation ratings, sustainability-of-planet-earth ratings and, in the case of sovereigns, ethic-and-governability ratings.

We care too much about financing houses when compared with financing the jobs needed to the pay the mortgages and the utilities.

Sir, I refer to Martin Wolf’s “Deeper reform of housing finance is vital for stability” September 19.

Wolf writes: “Collectively, we have made a huge bet on leveraging up property. This has gone bad”.

And Wolf is indeed correct. But, while mentioning some important subsidies to house financing, why does he ignore the role that the so much lower risk weights assigned to it by regulators when calculating the capital requirements for banks play?

At this moment a bank that finances the purchase of a house is allowed to hold much much less equity, and can therefore earn much much higher risk adjusted returns on equity than when financing a small business.

That, considering the fact that lending to a small business could help to create the jobs by which house owners could service the mortgage and pay the utilities does not seem so very intelligent to me.

September 18, 2014

Britain, frankly, don’t you think your forefathers would be ashamed of you.

Sir, I refer to Mure Dickie´s “Battle for Britain”, September 18.

As a professional, with an MBA, I left a very good paying job in my homeland Venezuela, and with the financial support of my father in law, spent a whole year with my wife in London, as an intern at Kleinwort and Benson, and studying corporate finance at London Business School, and International Economic at the London School of economics.

Now, why on earth would I do a thing like that? If I had to explain it, besides of course being alone with my wife, and the English music groups of the 60s, it would be because of Winston Churchill, the traditions of English merchant banks, and British stiff upper lips.

And therefore it has been so sad to me to observe over the last decade, how for instance the Financial Times, the paper I then eagerly read and now just read, does not care one iota about the fact that bank regulations, with credit risk based capital requirements, is making Britain into just another run of the mill risk-adverse nation.

Frankly, don’t you think your forefathers would be ashamed of you.

And then, same day, I read John Gapper admonishing “Scotland has to be braver to build strong banks”, and my reaction is… is this a joke? What about Britain recovering some of its own brave banks?

PS. How is it possible that FT finds nothing wrong with banks being able to leverage so much more their equity for what is perceived as absolutely safe than for what is perceived as risky, when those credit risk perceptions have already been cleared for with interest rates (risk premiums) amount of exposure and other terms? If you absolutely must distort with capital requirements, would it not be better to do so with a purpose, like the creation of jobs or the sustainability of mother earth?

PS. FT has been squarely in favor the NO with respect to Scottish independence. Can you imagine what we could have achieved if FT had taken a similar position on allowing some unelected regulators to distort the allocation of bank credit in our economies?

Would Janet Yellen be able to hear my question, if I was able to make it?

Sir, Robin Harding quotes Janet Yellen: “There are still too many people who want jobs but cannot find them, too many working part time but would prefer full-time work, and too many who are not searching for a job but would be if the labour market were stronger” “Yellen sticks to script as impatience rises”, September 18.

If I had a voice in the Federal Open MarkeT Committee, which I have not, I would have loved to have asked Janet Yellen: 

“And how many of those so affected, can we estimate to be the result of us requiring our banks to hold much much more capital, meaning equity, when they lend to medium and small businesses entrepreneurs and start ups, than what we require them to have when they lend to the Federal government or to the AAAristocracy?”

I wonder whether Janet Yellen would have even heard my question.

Joe Hockey, as an impact assessment, just ask bank regulators some easy questions.

Sir, Jamie Smith, Sam Fleming and Gina Chon report that “The B20, a business lobby group has called on… the Basel Committee to investigate further the side effects of financial regulations”, “G20 split over call to assess impact of financial rules” September 18.

About time! I just hope this B20 also includes a god representation of those borrower who because they are perceived as risky are, by means of credit-risk-weighted capital requirements for banks, being denied fair access to bank credit.

I just came back from Toronto where I saw the play “Our Country's Good” advertised with “Thieves, murderers, prostitute, actors…this is what made Australia”. I sure hope Joe Hockey, Australia’s finance minister, now reflects on what would have become of Australia’s economy if its banks had needed to hold much much more capital (equity) when lending to its own “risky” outcasts, than what they needed to hold when lending to the “absolutely safe”, like to Greece. 

Frankly, before requiring any impact assessments I would be great if Joe Hockey, just asked bank regulators to answer some kindergarten level questions, and did not let go until he had an answer that a kindergartener would understand. Like the following:

Q. Why on earth should a lot of money lent at low interest rates to Mr. Safe be safer, or less risky for the bank, than little money lent at high rates to Mr. Risky?

Q. Is the truth not that the risk of banks have nothing to do with the credit risks of Mr. Safe or Mr. Risky, and all to do with how banks lend to Mr. Safe or Mr. Risky which, as they say in French, is pas la meme chose?

Q. Why on earth would bank regulators expect the bank to keep on lending to Mr. Risky if it cannot leverage its equity as much as it is allowed to do when lending to Mr. Safe?

Q. And if banks only lend to the Mr. Safe of this world and avoid all the Mr. Risky, what might become of the real economy… a safer or a riskier place?

The sad truth is that all current bank regulations have been written without first settling the issue of what is the purpose of banks.

Overly risk adverse regulators ignored that risk-taking is the most fundamental element needed for keeping an economy going forward, without stalling, and falling. “A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

September 17, 2014

What is wrong with you FT?

Sir in “Put Britain’s economy on a sustainable footing” of September 17, you write that George Osborne needs policies that boost investment and productivity.

Let me ask you, for the umpteenth time, do you really thing it is possible to achieve a sturdy sustainable economy by negating all medium and small businesses, entrepreneurs and start-ups, fair access to bank credit?

Because you must know by now, that is exactly what the credit-risk-weighted capital requirements for banks do.

You accuse Britain’s midsized businesses of “insufficient aspirations”. Frankly, you should be ashamed of yourself.

You ask the government to do more, for instance through its UK Trade and Investment Agency, arguing that while house buyers are granted billions of pounds of fiscal support, UKTI has suffered real-terms cut.

Just pick up the phone and call any of your many banker friends and ask how many times they are allowed to leverage their equity when financing house purchases, and how many times they can do that when financing any of UKTI’s typical clients. And then draw your conclusions, and beg Britain’s midsized businesses to forgive you.

Martin Wolf, a neighbor, Russia, can become dangerous by Europe’s and US’ own weakening.

Sir, Martin Wolf is absolutely right when he writes “For Europe and, I believe, the US, there is no greater foreign policy question than how to deal with today’s Russia”, “Russia is our most dangerous neighbor” September 17.

But that said let us not never ignore the dangers with a neighbor becoming more dangerous, only because ones’ own country is becoming weaker. And in this respect something is happening both in Europe and in the US. 

Only as an example I cannot shake off the impression it made on me seeing the image of Britain’s David Cameron, Germany’s Angela Merkel, Holland’s Mark Rutte and Sweden’s Fredrik Reinfeldt, in a row boat, in a little lake, probably surrounded by thousands of life guards… wearing life vests… exactly where, perhaps in the same boat, 50 years earlier, we had seen Tage Erlander of Sweden and Nikita Khrushchev, rowing… without life vests.

What I said to those around me was “Never ever would Winston Churchill (or Putin) have allowed to be photographed in a little row boat, on a small lake, close to the shore, wearing a life vest!”

And with respect to the US, I just heard on the radio of a soccer team being sued because one of the players hurt his head while playing… come on... in the "home of the brave"?

And of course I do not refer here to any silly bare-chested testosterone showing-off, like Putin often does… but, of course, I do refer here to that de-testosteroning of our banks, which risk adverse regulators are causing with their credit-risk-weighted capital requirements.

PS. By the way, in order not to become dangerously cocky, we should never forget that one of the reasons for the fall of Russia was the low oil price at that time.

ECB and Mario Draghi, cheap cash will not revive anything, when it is capital (equity) banks need

Sir, Claire Jones reports on how “ECB seeks to spur revival with offer of cheap cash” to banks, September 17.

What a nonsense! ECB should know better than any that what Eurozone banks lack is not cash but capital, meaning equity.

And the fact that is not even discussed, makes it all so surreal. And I cannot find any other explanation for it that regulators, like Mario Draghi, are scared death the profound mistake of their regulatory pillar, the risk-weighted capital requirements for banks, becomes known.

And though that is humanly understandable, that does not make it more pardonable… especially when a full generation of Europeans could, because of this regulation, become a lost generation.

September 15, 2014

The Financial Times “a better newspaper for the modern age” ignored the financial story of the century.

Sir, I refer to your new look as described in a special FT supplement on September 15.

Mark Twain said, so we are told, that bankers are those who lend you the umbrella when the sun is out, but want it back, immediately, when it looks like it is going to rain.

But for the Basel Committee bank regulators that was not enough, and so they told the bankers, if you lend while the sun is out, meaning to someone perceived credit risk wise as “absolutely safe”, then we will reward you by allowing you to hold much less capital (equity) than if you lend to someone when it rains, meaning some perceived as risky.

And so, if bankers were risk adverse before, they were now castrated… and of course they started to sing in falsetto accumulating extremely large exposures to what was officially perceive as “absolutely safe”, like AAA rated securities backed with mortgages to the subprime mortgage sector in the US, real estate in Spain and “infallible sovereigns” like Greece.

But, as if those regulations were not risk adverse enough, most financial commentators insisted on an excess of testosterone in the financial system, and so no corrections were made, and all those “risky” medium and small businesses, entrepreneurs and start ups, and who are the tough risky risk-takers we need to get going when the going gets tough, were left without having fair access to bank credit.

And about this story, the de-testosterone-mania that has affected and almost conquered the banks in the western world, the Financial Times has kept mum. And not that they were not informed about it. Truly amazing!

PS. Does this all mean that I would be against banks being well capitalized and therefore more risky? Of course not, requiring players to put plenty of their own skin on the line (or something private specifically related :-), increases the need for testosterone, as well as the need to know how to simultaneously control for it.

Let us aim for bankers capable of that reasoned audacity that can help our economies to move forward and avoid that risk aversion which only guarantees we will stall and fall.

Europe, why should chief executives of businesses with cash on hand take risks when banks are officially paid not to?

Sir, Sarah Gordon quotes Chris Gentle with: “Who is owning the growth agenda? It should be chief executives, but they have not been rewarded recently for taking risks. The danger is that Europe will lose competitiveness in the long term?”, “Europe shuns growth in favour of ‘safety first’” September 15.

What’s strange about that? Why on earth should chief executives of businesses with cash surpluses invest and take risks when banks, those who should be the forefront in financial intermediation, are officially ordered not to take risks.

Europe, for some decades now, has actually paid its bankers to avoid risks, by allowing them to earn much higher risk adjusted returns on equity on exposures officially deemed as safe like to infallible sovereigns, the housing sector and the AAAristocracy than on assets deemed as “risky”. And of course that stalls any economy.

Europe, the safety of your banks, though important, is only a subset of the safety of your real economy.

Sir, Wolfgang Münchau writes: “The wisest course of action is to appeal to those who are concerned about Europe’s declining influence, and who are open minded enough up to see the casual link between narrow-minded national economic dogmatism, poor economic performance, and declining geopolitical influence”, “Divisions behind a continent’s declining influence” September 15.

Indeed! But how hard it is for most to understand that possibly the narrow-minded national economic dogmatism that most causes poor economic performance, is the credit risk weighted capital requirements for banks

Not many decades ago, in Europe and elsewhere, banks decided what amount of credit to award to borrowers based on who offered to pay them the highest interest rates adjusted of course for perceived credit risk. And for the purposes of those decisions, the capital cost for the banks were the same for all borrowers. And that helped banks to allocate credit in the real economy to those who could produce the highest economic returns.

But then in July 1988 some besserwisser busybodies, in something know as the Basel Committee on Banking Supervision decided that banks needed to hold much less capital (equity) for some assets, because these were perceived as safe. 

And that meant of course that the banks would earn much higher credit risk adjusted returns on what was perceived as safe than on what was perceived as risky… and so the allocation of bank credit was not any longer based on who produced the highest return, but on who produced the highest return on capital (equity) adjusted for risk weights.

Simplified, initially safe assets were defined as: loans to (good) sovereigns, with a risk weight of 0 to 20%; “loans fully secured by mortgage on residential property that is or will be occupied by the borrower or that is rented” with a risk weight of 50%; and all other assets were given a risk weight of 100%.

In June 2004, with Basel II, all those other assets were awarded risk-weights between 20 and 150% depending on their credit ratings. And in Basel III the risk weighted capital requirements survive, though there is a minimum capital floor for the total of all assets, the leverage ratio.

And so, of course, banks are not longer allocating bank credit efficiently. In essence they are giving much too little credit to what is perceived as risky, which means financing too little future, while giving much too much credit to what is perceived as “absolutely safe” which in essence means mostly refinancing the past, and, under such circumstances it should be clear that Europe cannot go anywhere else but down.

Münchau correctly states: “It is only when you take a global view that you can spot what is wrong”. How sad then he is unable to take that global view which clearly indicates that the safety of banks, though important, is only a subset of the safety and sturdiness of the economy.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

September 13, 2014

On allocating resources, why does the undercover economist care more about donations than bank credit?

Sir, I refer to Tim Harford’s “Ice bucket challenge: the cold facts” September 13.

In it he refers to the problem that many very well intended donation drives, for all types of individually very worthy causes, may not, in aggregate, reflect the best use of donations.

Who is to decide? Harford suggests: “GiveWell, an organization that aims to give donors the information they need to make the most effective donations”, a sort of donation effectiveness rating agencies. But, Harford would of course not go to the length of making donors have to heed the opinions of GiveWell, as that would of course give GiveWell a power that, sooner or later, it would be tempted to abuse.

But in banking that happens! Even though banks considered credit ratings and other risk information when deciding to whom to lend and at what rates, the besserwisser risk adverse Basel Committee decided that it had to intervene, and with its credit risk weighted capital requirements, it much favored bank lending to those already favored, “the infallible”, which of course meant that those who already had less access to bank credit, “the risky”, would have that even more restricted.

And so the question that remains is… why would the undercover economist Tim Harford care more about the efficient allocation of donations, than about the efficient allocation of bank credit?

FT, why do you suggest Eurozone should follow faulty visionaries like Mario Draghi?

John Kenneth Galbraith, perhaps in all of his books, writes about how we so often, perhaps always, fall into the trap of in awe believing that having a big fortune or holding really important posts in the world of banking, goes hand in hand with great knowledge on economic and financial matters.

That came to mind when I read your mindboggling favoring title “Draghi’s vision for Eurozone growth” September 13.

Vision? What vision, for ECB to inject hundred of billions of euros buying the least risky tranches of some asset-backed-securities, for the governments to take on debt and spend more freely, and for some countries to do some structural reform in the labor markets? Is that a vision? No way Jose!

Clearly the above could help to create some growth, but it would only be of an illusive type of obese growth, which leads to nothing sustainable, which instead requires to be sustained at all time, and which is never to be able to repay what finances it.

For sturdy muscular growth to have the slightest chance to return, the Eurozone, like other, must remove that huge boulder that lies in the way of banks being able to efficiently allocate bank credit to the real economy, namely the risk adverse credit risk weighted capital requirements for banks.

Mario Draghi, as a former chairman of the Financial Stability Board, is one of those directly responsible for the absurd vision that by allowing banks to earn much higher risk adjusted returns on assets perceived as absolutely safe than on assets perceived as risky, all would be fine and dandy. That just ended up with too much credit to sovereigns like Greece, and too little credit to Greek small businesses and entrepreneurs.

Sir, have you not seen enough of where these faulty pipers of the Basel regulations have lead us, so as to insist we should keep follow their “visions”? FT, wake up, have no fear!

September 12, 2014

Reckless (and dumb) bank regulators, with their distortions, are a drag on the economy

Sir, I refer to Anat Admati and Martin Hellwigs letter “A reckless banking industry is a drag on the economy” September 10.

What an unfortunate title. The drag on the economy that banks are causing now, has nothing to do with them being reckless, and all to do with reckless risk-adverse regulators who de facto decided, with their credit risk weighted capital requirements, that banks should not lend to the risky, even at the risk of lending too much to the infallible.

And of course banks need to hold more capital, meaning more equity, as Admati and Hellwig suggest. Were the regulation of banks to be left to the market, with the market paying the consequences of bank failures, it would be very hard to imagine bank equity leverages more than 10 to 1. Compare that with the allowed 62.5 to 1 leverage when lending to Greece authorized by this generation of loony regulators.

And of course banks need to hold more equity, but, let us not ignore the fact that the journey from undercapitalized banks to well capitalized banks is a journey full of dangers to the real economy. Just for a starter, before requiring banks to hold more capital, we need to eliminate the credit-risk weighing of capital, since otherwise the distortions will become even more intense.

Finally with respect to all those fines paid by banks… I just wished the judges had not been so masochistic as to ask for those fines to be paid in cash, against equity, but had asked these to be paid instead in voting shares, priced at current market values.

September 11, 2014

Are those who lend to a morally bankrupt government not just as morally bankrupt themselves

Sir, FastFT reports “Venezuela bonds yields are shooting higher” September 11.

It refers to a recent article by Ricardo Haussman’s and Miguel Angel Santos’ that said: “The fact that [the government] has chosen to default on 30 m Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of moral bankruptcy”.

And FastFT states “Investors are clearly little concerned”… something which is quite ok with me.

Most investors in Venezuelan debt, perhaps all, have for a very long time been perfectly aware that things in Venezuela were not as they should be, but they have decided to look away, because of the high risk premiums offered. And so as I see it, they are just as moral bankrupt.

And I repeat questions I have often made: Would it be right to buy bonds to finance the building of concentration camps... if the price, the risk premium, is right? Where do you draw the line on what is morally admissive lending? Where do you draw the line on what kind of intermediation fine reputable investment banks can do before they become morally repulsive?

The way I see it, the world, at least us citizens, need good governance ratings and ethic-ratings, much more than what it needs credit ratings

Mario Draghi… you are personally responsible for any ECB liquidity injections in Europe being just wasted away.

Sir, I refer to Stefan Wagstyl’s “ECB presses on with securities plan” September 10.

Mario Draghi, as the former chairman of the Financial Stability Board must be aware that, because of the risk-weighted capital requirements, all those borrowers who have the misfortune of ex ante being perceived as risky from a credit point of view, independently of how important they could be for the European economy, and for European job generation, will not have fair access to bank credit.

And so therefore banks will by means of their credits not be able to allocate any ECB (or fiscal deficit) liquidity injections efficiently to the European economy.

And one of the reasons for why this distortive regulatory lunacy introduced 10 years ago with Basel II survives, is the quite natural but still highly irresponsible reluctance of regulators to admit their mistake.

And that is why, I at least, hold Mario Draghi personally responsible if any ECB liquidity injection in Europe is just wasted away… and this even though he might not care one iota about it, as he sure must be surrounded by so many other who support his ego by daily reaffirming his magnificence.

September 10, 2014

Credit risk-weighted capital requirements make it impossible for banks to price risk

Sir, I refer to Howard Davies’ in FT’s A-List, “Dilemma of defining risk” September 10.

There Davies states: “Regulators accept that banking necessarily entails risk. Their view, however, is that banks should know what risk they are taking on, why they are doing so, and should ensure that risk is priced properly”.

Indeed, it should be so, but it is not! 

Regulators, by using credit risk weighted capital requirements for the banks, not only send the message that they do not believe banks know what risk they are taking on, and worse, much worse, they make it completely impossible for banks to price risk properly. As is, banks price risks adjusted for the capital required, and that distorts all.

Regulators have yet not understood that the risk they must be concerned with has nothing to do with the credit risk of a bank’s exposure and all to do with how a bank manages those credit risks. Today they act like a nannie helping a child to cross a street looking only at the traffic light and not looking at the kid.

What should regulators do? Fix some capital requirements in order to cushion for any unexpected losses. But for the unexpected, you cannot, as regulators, by their own admission have done and do, use the expected.

To me it is surrealistic to read Douglas Flint expressing how the main preoccupation of bankers is “to protect themselves and the firm from future censor” by regulators when it is the regulators who should hang (illustrative… I think) for their mistakes. 

As is Basel II and III risk weighted capital requirements for banks is a true regulatory nightmare.

Neither Martin Wolf’s nor Mario Draghi’s ”whatever it takes” includes what is most urgent for Europe

Sir, Martin Wolf holds that ”Europe has to do whatever it takes” September 10, and that is indeed correct.

But Wolf’s “whatever it takes”, just like Mario Draghi’s, does not include what is the most urgent for Europe.

And that is getting rid of the distortions that the credit risk-weighted capital requirements produce in the allocation of bank credit. And that might have to include temporarily reducing the capital requirements for banks on exposures to what is perceived as risky.

For instance Christopher Thomas in “Power of Draghi ABS plan questioned” quotes various analysts for instance saying: “banks are already awash with liquidity… they hardly need more money… ABS supply… can only come through capital relief that makes it more profitable for banks to lend to small businesses in the first place without then having to hold lots of capital against those loans”

The day Europe begins to think of capital requirements for banks in terms of risks to Europe, to its economy and to the creation of jobs for its young, well that will be the day it will begin seeing light again, and fully understand what its bank regulators did wrong.

I understand Draghi’s reluctance, since that would require him to admit he was profoundly mistaken while being the chairman of the Financial Stability Board.

But, Martin Wolf’s?

PS.Basel II and III risk weighted capital requirements are a regulatory nightmare.

September 09, 2014

Regulators like FSB’s Draghi, placed heavy weights, on what central bankers like ECB’s Draghi, now want banks to carry.

Sir, I refer to Patrick Jenkin’s “Question hangs over Draghi’s latest salvo on lending” September 8.

In it, with respect to the ECB purchase of asset backed securities, planned in order to free up banks’ balance sheets” so that banks lend more to business, Jenkins writes: “Selling the highest quality, least risky tranches… still leaves the issuing banks with the lower-grade portion of the securitization”.

But though Jenkins refers to the obstacle of rules on capital, he does not make clear that it is precisely those “lower-grade” tranches of the ABSs, and the lending to business, which is by far what is most affected by those capital rules and which, by the way, are not really “post crisis” rules but Basel II rules.

The irony is that Mario Draghi, when during many years the chairman of the Financial Stability Board, supported the very nonsensical credit risk weighted capital requirements for banks; those which now impedes him as chairman of the European Central Bank, to perform his duties. And of course, he does not want anyone now to notice how dumb he has been, since that would lead many to ask, “If so, why on earth was he promoted?” 

What a Shakespearian tragicomedy!

If Venezuela defaults, two have tangoed, an incompetent government and highly irresponsible lenders.

Sir, I refer to John Paul Rathbone’s “Call for default underscores Venezuelan incompetence” September 8.

In it Rathbone analyses Ricardo Hausmann’s and Miguel Angel Santos’ recent “Should Venezuela default?” where they so correctly argue that Venezuela’s government, though being current on its debt service, has already de facto defaulted in so many ways on “its people”, something which signals a “moral bankruptcy”.

Venezuela’s government has clearly shown absolute incompetence, the highest disdain for Venezuela’s constitution and for instance, according to Human Right Watch, has also committed crimes against humanity. And facts like gasoline-petrol being given away at US$ 1 cent per gallon, 278 times less than the price of milk… makes all of the above as evident as can be.

But, let it us be very clear, all equally points to highly irresponsible lenders who do not care one iota, as long as the price, the risk-premiums, are right.

Rathbone reminds us that “Venezuelan bond yield on average 12.3 percentage points more than US treasury”. Let us then suppose a bond issue yielding 20% that is going to finance the building of some concentration camps. Where do you draw the line on what is morally admissive lending? Where do you draw the line on what kind of intermediation fine reputable investment banks can do before they become morally repulsive?

As I have been arguing for some time, anyone investing in a bond that (when rates are as low as the current) pay for instance 4% more than the risk free rate, should know he is buying morally questionable pre-defaulted bonds… and that he must renounce to the possibility of having the cake and eat it too, meaning aspiring to get 100% of risk premiums and 100% of principal.

As a Venezuelan citizen let me also remind all that currently the government receives directly 97 percent of all the nation’s exports and, while so, as I see it, has no right to take on any debt whatsoever.

PS. During the Venezuelan default in the 80s I asked a foreign banker “How come you lent especially much to this entity that is emblematic of all non-transparency, corruption and mismanagement in Venezuela?” His answer was: “At the end of the day it is all going to be government debt, and this entity pays the highest interest rates”. I felt like slapping his face, I wish I had!

September 08, 2014

For carpet bombing to work everything must have a chance of being hit.

Sir, Wolfgang Münchau writes “even if we disagree on the precise causes of the present downturn, we can still find a common and effective policy response”. “What Draghi must do next to fix Europe’s economy” September 8.

Yes that could be possible, but only if the real cause for the downturns was among the causes being disagreed on. But it is not!

The pillar of current bank regulations, as Münchau should know by now, is the credit risk-weighted capital requirements, those which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky.

And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main Street.

And so when Münchau, with respect to different choices of how liquidity could best be provided in Europe, concludes that “carpet bombing would be much safer bet”, something with which agree, that is currently impossible. For it to happen the bombs would have to be allowed to also hit those perceived as being more risky than others in terms of credit risks.

Is the economic establishment really dumb or, much worse, playing dumb and conspiring? Draghinomics or Drachulanomics?

Sir when I read “Economists hail birth of ‘Draghinomics” September 7, and see the photo included, I know the establishment is circling the wagons, as all whose members therein referred to are, by defending Mario Draghi, only defending themselves.

The pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main Street.

To therefore speak well of any sort of injection of liquidity in Europe, whether by governments or the ECB, before removing that huge unsurpassable boulder that hinders banks from allocating credit efficiently to the economy, is pure dangerous nonsense.

Yes, the establishment dutifully speaks about needed “structural reforms”, but it never includes a reference to the above, to what the economy most needs.

I do not know really know whether the Establishment is truly dumb and doesn’t get it, or is just making out to be dumb. For their sake I pray it is the first, because the second option would make them co-conspirators against the chances of our young ones being able to access the new generation of jobs, which only the financing with reasoned audacity, or intelligent risk-taking, can provide for.

With respect to the future being sucked out by regulatory risk aversion, and remembering that Mario Draghi was for years the chair of the Financial Stability Board, we might perhaps better talk about “Drachulanomics”.

Does Lawrence Summers really think risk adverse bureaucrats can deliver “bold reform”?

Sir the pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main street.

And so you can understand how frustrating it is to read Lawrence Summers finding room to include “policies to promote family-friendly work” in his list of needed structural reforms essential to increase productivity, and not including the need of correcting the above mentioned regulatory distortion, “Bold reform is the only answer to secular stagnation” September 7.

“Bold reform” Ha! How can clearly overly risk-adverse bureaucrats carry out that? They only know about throwing money at problems.

PS. As Summers also refers to the need of “infrastructure investments” we should not forget that there is a prior need of making sure those “infrastructure investments” are done efficiently, in terms of costs.

September 05, 2014

Europe, are you sure Mario Draghi has a clear idea of what he is doing? Scary question eh?

Sir I refer to the latest ECB/Draghi measures “to save the eurozone from economic stagnation, as reported and commented on in several ways in FT on September 5.

In the Short View James MacKintosh writes “they should… perhaps encourage mortgage and business lending”. Mortgage lending, yes, business lending, NO! Because business lending requires banks to hold much more of that extremely scarce bank capital than what mortgage lending does.

In fact anyone that in Europe, with added liquidity and lower interests tries to help medium and small business, entrepreneurs and startups, to gain some access to bank credit, without considering eliminating completely the considerable differences in capital requirement for banks when lending to these “The Risky” than when lending to “The Infallible”, has no idea of what he is doing. Scary eh?

But perhaps Draghi knows. When Claire Jones and Christopher Thompson, in “Draghi pins hopes on ‘orphan child’ plan” write about asset backed securities and capital charges and that “Mr Draghi said that decision was in the hand of independent regulators and beyond central bank’s control”, it sure sounds like the former chairman of the Financial Stability Board is trying to wash his hands.

And you argue “Purchases of asset-backed securities will only make a difference… if loans are genuinely taken off strained bank balance sheets, freeing space for new lending”. I ask, what kind of new lending are you referring to? I guess all the bank lending we would see would be that which requires them to hold little capital.

In fact, I suspect that most of what that part of the ECB exercise would achieve, is to dress up the banks before the oncoming asset quality review and stress tests… Might ECB be getting nervous about what it might find? Indeed, ignorance is often bliss!

September 04, 2014

We must expel regulators who only think of banks as mattresses to stash away savings

Sir, Martin Wolf, naturally reluctant to make a reference to all my letters to him about risk-weights that we have discussed over the years, writes: “An important part of higher capital requirements is that these should not be based on risk-weighting. In the event, the risk weights used before the crisis proved extraordinarily fallible, indeed grossly misleading” “Call to arms” September 4. 

He approximates, but he is still far from comprehending the fundamental problem with risk-weighting… it is indeed proving very difficult for him. The most serious problem with the risk-weights is that even if they are accurate, even if they do not (momentarily) mislead, they will still be distorting the allocation of bank credit in the real economy, and thereby setting up the worst of the calamities, not the destruction of the banks, but the destruction of the real economy.

Again, for the umpteenth time, you cannot allocate bank credit so preferentially as the risk weighing based on credit risks causes, to what is perceived as absolutely safe, in detriment of what is perceived as risky, and expect the economy to keep moving. Risk-taking is the most fundamental part in keeping an economy going forward, without stalling, and falling.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

So the most urgent action we must take is to remove from regulating our banks those who only think of banks exclusively in terms of a more secure mattress to stash away our savings… and for the time being at least, I am sorry to say those still include Martin Wolf.

Some fifty years ago we saw the photo of Nikita Khrushchev and Swedish Prime Minister Tage Erlander in a little rowboat close the shore, discussing. This year we saw Angela Merkel, David Cameron, Mark Rutte and the host Fredrik Reinfeldt, doing the same, in the same place, and in the same or a similar boat… but now they were all wearing life-vests. 

And just the other week we heard of a team being sued in the US because of some head injuries sustained by someone …playing soccer… and I fret for the destiny of this new manic risk adverse western world in which my grandchildren will have to live.

September 03, 2014

ECB´s Mario Draghi needs to do an act of contrition, for history to be more lenient on him…perhaps

Sir I refer to Claire Jones “Draghi’s new deal”, September 3.

In it Jones writes “The message: Paris and Rome must reform their economies, removing barriers to the creation of business and jobs”.

Well Mario Draghi, as the former chairman of the Financial Stability Board, and therefore much responsible for current bank regulations, should be ashamed of himself. 

I say this because perhaps no barrier stand as high against the creation of business and jobs, than the current credit risk-weighted capital requirements for banks, which have only to do with the short term stability of banks (not the long term) and not one iota with the creation of business and jobs.

It must be demolished, so that bank credit can again flow in fair terms to the “risky” medium and small businesses entrepreneurs and start-ups, and without whose help no economy can move forward.

Were Draghi in an act of contrition, to confess his mistake, and help to "tear that wall down", history might be more lenient with him… though that might be difficult considering how much of Europe’s youth might have already been condemned to form part of a lost generation only because of the regulators' so idiotic and so dangerous risk aversion.

When discussing sovereign debt restructuring, let us begin with the beguine

Sir I refer to Martin Wolf’s “Holdouts give vultures a bad name” September 3.

Without opining on the sovereign debt problems of any particular country (like in this case Argentina’s) I have often said we need more clarity in the terms we use.

For instance any sovereign debt holder who acquired the debt at moments when it paid low risk premiums, and the debtor country seemed to be going in the right direction with sustainable debt, should be classified as a bona fide sovereign creditor.

On the opposite side, any debt holder who acquired the debt at moments when it was paying high-risk premiums, because the debtor country was deemed to be going in the wrong direction, towards unsustainable debt, should be classified as a speculative sovereign creditor.

And there are no clearer frontiers between those two categories, than the implicit risk premiums at the moment of investing in that debt… for example 400 basis points over the lowest rate paid by sovereigns for similar debt.

And I believe that, if a country needs to renegotiate its debts, the speculative holders should not expect to have the cake and eat it too, meaning collecting high risk premiums and full capital. For instance, any interests collected over a certain base risk premium defined, should first be deducted from principal owed, in order to allow for some justice with respect to the bona-fide creditors.

The above is not intended as a fully thought out solution, especially when we know that many speculative debt holders could dress up their positions as bona-fide, but at least it also helps to remind us that, both among hold-outs and restructured there could be good and not so good creditors.

But I say all this because just as important, or even more important than any restructuring of sovereign debt, is to send the right signal about when these debts were originated… as so much of renegotiated sovereign debts should never have really come into existence.

I believe us citizens who suffer bad governments, can always benefit from new tools that put some dampers on their possibilities to contract debt, usually only to benefit some few, and to be paid by future generations. Where would for instance the debt-squandered-away levels be for many countries where it not for holdouts?

And so, when discussing sovereign debt restructuring mechanism, we should begin with the beguine. 

For example any debt restructuring for a sovereign debtor who is in problems for causes mostly of his own making, should include clear mechanisms which at least shows an intention of that not happening again. By the way, that is most often an integral part of any private sector debt rescheduling, for instance maximum debt levels, minimum cash reserves and so on. 

A sovereign creditor who just plays out the card of “take your hit and leave me alone” might very well merit some bad vulture holdouts, I mean for the benefit of us tax paying citizens.

PS. Beside sovereign credit risk ratings, should we not also have sovereign governability and ethic ratings?

PS. And, in all these matters, let us never forget that what might appear as a benefit to some, might very well reappear somewhere down the line as a cost to another.

September 01, 2014

I challenge all in FT to, without fear, read The Document on Basel II risk-weights and then, without favour, explain it to us in layman terms

Sir, Stephany Flanders writes “Mr Draghi was quite explicit in Jackson Hole: the risk of doing too little in Europe are now greater than doing too much. “Draghi approaches his Abenomics moment”, September 1.

Indeed, but what is really sad is that neither ECB nor European governments say nothing, worse yet, seem to know nothing, about what is absolutely most urgent, namely getting rid of the risk-weighted capital requirements for banks. The credit-risk weighting effectively blocks credit from flowing freely and fairly to all “risky” capillary economic agents, like SMEs and entrepreneurs. Though these borrowers might individually represent risky credits, they are absolutely indispensable for the economy, they pay higher risk premiums and get smaller loans, and they do also not pose major dangers to bank stability, since bankers, like all of us, tend to avoid the risks they perceive.

In fact, I challenge anyone of you in FT to, without fear, read the explanations given by regulators on the risk-weights given in “The Basel Committee on Banking Supervision´s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005” and then, without favor, explain it to us in layman terms.

And please do not tell us that it is not your responsibility to read and understand such document, before reporting or opining on the pillar of current bank regulations. That bank regulators did not dare to question that document is what has gotten Europe and the world in its current bind. And I pray that is true, because to think regulators read it, understood it, and still went ahead and approved of it, is just too scary.