February 19, 2015

That banks are instructed to push out pension funds, widows and orphans from safe havens is absurd, and immoral.

Sir, I refer to Percival Stanion’s “When prospect of certain loss unleashes risk-seeking impulse”, February 19.

There are two major types of risk directions: that of loans to those perceived as risky, and that of excessive exposures to what is perceived as “absolutely safe”. Regulators have instructed banks, in no unclear terms, by means of portfolio invariant credit risk weighted equity requirements, to stay away from the first type, but they have not said a word about the second.

As a result, and most specially in these days of scarce bank equity, European banks are entering more and more into that terrain that already in some places signify at its best “locking in a loss at redemption”. In fact, with pre-announced inflation targets you do not even need negative rates for that.

Today Roula Khalaf gives a nice illustrating account on what is happening to Russia, by means of looking at Russian tourism in Switzerland, “A slippery slope for Switzerland’s Russian skier”. How sad that the Financial Times does not ask its journalists to look equally look at what is happening in Europe, by looking at where bank credits in Europe have been traveling ever since Basel II was introduced in June 2004. At this moment those credits are going into sovereigns squeezing out widows and orphans. Is that not an absurd and even immoral state of affairs?

PS. I have been lately been calling those negative rates as “pre-agreed minimum haircuts” because that is what they are… and so not only does Greece want a haircut… Germany and others are already giving de facto haircuts.

PS. Sir I have also asked you whether a pension fund would be authorized to accept such haircuts in the name of the beneficiaries… but I have not yet been given an answer.