Europe is a continent enfeebled by an economic crisis resulting from enfeebling bank regulations.

Sir, Tony Barber writes: “A continent enfeebled by economic crisis” March 31. I have a question to him (and you).

What does Barber think would happen with his retirement account if, since he began to save, he would have paid his investment manager much higher commissions on returns produced by safe investments than on returns produced by riskier investments. Would his investment manager not have played it overly safe for him?

But, on a societal level, by means of those credit-risk weighted equity requirements which allow banks to earn much higher risk adjusted returns on their equity when lending to something “safe”, than when lending to something “risky”, that is precisely how current regulators have instructed our banks to act.

Whether we like it or not, banks have a very important role to play as investment managers for our economies. And the reason we taxpayers implicitly agree to support banks is not for them to avoid risks but to, with reasoned audacity, take intelligent risks on our behalf.

We need our banks to act much more like aggressive hedge fund in which the manager, the bank, takes a great commission, but also produces great results for us the investors, and for our economies.

Barber quotes Frederick the Great with “Diplomacy without arms is like music without instruments”. Indeed, but banking without risk-taking can only, in the best of cases, result in paying out some lousy annuities to those with very short life expectancy.

Europe (and other) has been enfeebled by risk-adverse bank regulations and, amazingly, this seems to be a non-issue for most of you at the Financial Times.

@PerKurowski

Accepting credit-risk weighted equity requirements for banks, is accepting the economy going into early retirement.

Sir I refer to Yoichi Takita’s “Split emerge between central bank and policy makers”, your special report on Japan, March 30.

Takita writes “ The government is working hard to ensure investment and employment growth will lead to an economic upswing.”… and for that Mr. Abe will try “eliminating disincentives such as high corporate tax rates, big electricity bills and excessive economic rules”.

I do not know enough about Japan to evaluate how much that could help, but, if it was for instance Europe, which depends so much on bank credit, then that would not suffice. That is because any country that tells its banks to go and leverage much their equity, and the implicit support they receive from taxpayers, on what is “absolutely safe”, and to stay away from “the risky”, is a country that has placed itself, unwittingly or voluntarily, in an early retirement mode not compatible with any sturdy and sustainable economic growth.

@PerKurowski

There’s much more bank regulatory stupidity than what we should tolerate

Sir, Laura Noonan writes “The avalanche of post-crisis banking regulation is coming to an end and most of the uncertainties weighing on the financial industry will be dealt with in the next year, Basel Committee secretary-general William Coen has said”, “End in sight for post-crisis bank reform” March 30,

And she quotes Coen with: “There is light at the end of the tunnel, the big pieces are there and it’s really now about getting to the finish line”

Sorry, as I see it, they have not really started, there’s much more bank regulatory stupidity than what we should tolerate. For example:

Regulators should have no concern with individual banks failing, but with the banking system itself failing. In fact they should know that the failure of individual banks is needed in order to help to strengthening the bank system at large.

Regulators should foremost be concerned with how banks perceive credit risks, and with how they manage these. But they do also concern themselves with the perceived credit risks in order to set the equity requirements. Doubling down on the same basic perceptions can help no one.

Regulators should know the banks play an essential role in allocating credit to the real economy, and that they need to be extremely careful in not distorting that process. And yet they allow banks to leverage their equity, and the implicit support these receive from taxpayers, differently depending on perceived credit risks, something that of course distorts.

Most of us ordinary citizens are extremely risk-adverse. And that is why we as taxpayers agree to give support to banks so that they, on our behalf, take some of the risks we know the economy needs to go forward. So why on earth do regulators believe we taxpayers support the banks for these to be only safe mattresses in which to stash away our savings?

By the way, besides stupidity, there is immorality. To discriminate against the fair access to bank credit of the “risky” those who by being perceived as risky are already discriminated against by bankers, kills opportunities and promotes inequality.

Perhaps the Basel Committee is so blinded by its own mistake so that there’s no other way than to start from scratch… beginning with holding bank regulators accountable for their stupidity and immorality.

@PerKurowski

I want a net 40 percent of the revenues generated by ads on the web in which I am the target. Who can help me?

Sir, I refer to Robert Cookson’s “Web publishers in arms race with adblockers” March 30.

Clearly picking up information about what we are up to on the Internet, and screening us for what we might like, in order to reach us for with some advertising, is big big business. And stopping that from happening seems also to be big big businesses… and now we read that sometimes those two big big interests even collude to get the most out of us.

But what about us, the targets? Is there no way we can participate in those revenues? Anyone who figures that out could have a very interesting business model in his hands.

For instance: “I want to prohibit any ad blocker to block any ad in which I am the target and in which I do not get a share of the ad-revenues… let’s say 50 percent”. Who can help me with that? I am willing to pay 20 percent out of my revenues for that service… in order to retain a quite modest 40% of my value as a target.

PS. Sir, between us, to block any ads targeted at me, without my explicit authorization, sounds like something quite criminal to me.

@PerKurowski

When the how to fight deflation is unequivocally dumb, and when deflation is the only good news in town

Sir, I refer to Gillian Tett’s “How deflation gave lower prices a bad name” March 29, with two brief comments:

One: Let’s suppose deflation is unequivocally bad. Even so to try to avoid it by artificially inflating the value of existing assets, by means of QEs, caring less about the creation of new assets, by means of bank regulations, sounds like something unequivocally dumb.

Two: For savers, who have sacrificed much consumption earlier in their lives, and who do now earn zero or even negative interests on what they consider as save investments, deflation must sound like the only good news in town.

@PerKurowski

Our economies are drowning for lack of oxygen in overpopulated safe havens.

Sir, I refer to John Dizard’s “Central banks enlist ageing populations in the competitive devaluation game”, March 28.

Dizard discusses Bank of Japan’s paper “Demographic Changes and Macroeconomic Performance — Japanese Experiences”; IMF’s “Is Japan’s Population Aging Deflationary?” and a paper by BIS titled “Can Demography Affect Inflation and Monetary Policy?”

One aspect not discussed in connection to this demographic change, is that since increased risk-aversion goes with the investment objectives of an aging population, the demand for safe havens relative to risky bays should be increasing.

Add to that the sad fact that bank regulators decided, on their own, that it was more important for our banks to avoid risks instead of to allocate bank credit to efficiently to the real needs of the economy, that of course also adds immensely to the demand for safe havens.

And it is only getting worse. Now by means of added Basel III liquidity requirements for banks, and Solvency II regulations for the insurance sector, which all-predicates risk-aversion, the demand for what’s “safe” must grow even more.

And, since any safe haven can become extremely dangerous if overly populated, it should be clear that an amazing scarcity of financial safety is lurching around the corner. Poor widows and orphans financially they will be more widowed and orphaned than ever.

But also poor the coming young generations, those who will be denied that societal risk-taking that could help them to have a good future with plenty of jobs.

@PerKurowski

In statistics we need to adjust confidence levels to significance of conclusions levels.

Sir, I refer to Tim Harford’s “Highs and lows of minimum wages”, March 28.

In it Harford writes: “A fascinating survey reported in the World Development Report showed World Bank staff some numbers and asked for an interpretation. In some cases, the staff was told that the data referred to the effectiveness of a skin cream; in other cases, they were told that the data were about whether minimum wages reduced poverty. The same numbers should lead to the same conclusions but staff had much more trouble drawing the statistically correct inference when they had been told the data were about minimum wages. It can be hard to set aside our preconceptions.”

Sorry, is that not good? Should World Bank staff not be more careful about drawing a statistically correct inference from data relating to skin cream than from data relating to something that could have such profound implications as minimum wages? In statistics, besides confidence levels, do we not need significance of conclusion levels?

For instance I sure wish that some staff somewhere, when presented data concerning the credit risk of bank borrowers, for the purpose of setting the equity requirements for banks, would have had the sufficient presence of mind to remind everyone of that what they really needed was data about what caused major bank failures… something completely different.

Had someone done so, and had someone been able to make bank regulators listen, the world would have saved itself many tears and much trouble.

@PerKurowski

PS. You might have noticed a made a slight mistake :-) I left it that way because, most probably, those who not understand what I really meant, might not be able to understand it even if I corrected it.

Dark forces keep Europe from correcting what is immoral and dumb, and which hurts its economies.

Sir, I refer to Nikolaus Blome’s “The quest for common ground between Greek morals and German maths” March 28.

Suppose only Greece had regulations that included the current credit risk-weighted equity requirements for banks; those which distort the allocation of credit by allowing banks to leverage their equity, and the support they receive from taxpayers, much more for exposures to something perceived as safe, than on exposures to “the risky”, like to SMEs and entrepreneurs.

In that case you can bet that the structural reforms Germany and Europe would request from Greece, would have included getting rid of such nonsense; on moral and on math grounds.

On moral, because it is immoral to discriminate against the fair access to bank credit of those who already, by being perceived as risky, have less access to it.

On math, because there is nothing that guarantees that those perceived as safe will in fact be safer for banks, quite the opposite; and there is absolutely nothing that states that “the safer” will allocate resources more efficiently to create supply demand and jobs in the real economy.

But that structural reform, of something that affects all in Europe (and many more countries), is not even on the table… and one really has to wonder what dark forces could be in play.

@PerKurowski

We must deregulate the risk-taking of banks in order to keep the world’s labor markets busy

Sir, you write “labour markets in advanced economies need liberalization… But policy makers should not expect that supply side reforms will create their own demand. Appropriately easy fiscal and monetary policies must be pursued. The engine of jobs creation needs fuel to work.”, “Keeping the world’s labour markets busy” March 28.

But again, steadfastly, you say nothing about how the fuel of bank credit can create jobs, if allowed to flow freely. Since Basel I, about 25 years ago, bank credit has been instructed to flow to where the risk-weights are low and so the allowed leverages of bank equity are high. That means that the access to bank credit for "the risky", like SMEs and entrepreneurs, has unfairly become more and more difficult. Anyone who believes this does not affect job creation needs to go and have a look at reality.

Let me put it this way. Suppose their had been no Basel Committee credit-risk-weighted equity requirements; and suppose someone, to solve Greece’s problems, now suggested:

“We must increase the equity requirements for banks when lending to SMEs and entrepreneurs because they are too risky and so it is better that banks give loans to the public sector, so that plenty of good paying public sector jobs are created.”

Would you, the Troika or anyone else approve of such a plan? I doubt it. But as this is how it is, why are you silent about that? Is it because it takes less courage to qualify a proposal as idiotic than to qualify something dumb done and on which one kept silence as idiotic?

Things are not getting better… our current regulators clearly do not know what they are doing.

In the Basel Committees’ consultative document “Revisions to the Standardised Approach for credit risk” I was shocked seeing that the risk-weights are now proposed to be smaller the larger the private corporation is… as if the larger you are the safer or the better able to use the credit you are. How on earth do we achieve more jobs and less inequality when being opposed by such regulators?

@PerKurowski

Here’s another reminder of how scary our current bank regulators really are.

Sir, the Lex Column writes about “Nigerian banks: wrong concentrations” March 27.

I just thought it would be a good opportunity to remind everyone that we have put our banks into the hands of regulators who, on their own, have decided to impose “portfolio invariant” equity requirements for banks. And that means the regulators do not consider the benefits of diversification, nor the dangers of concentration.

By their own admittance, to do otherwise, would be too hard work for them.

Scary eh?

@PerKurowski

Was Alan Greenspan just a mole planted in the capitalistic system by statist ideologists?

Sir, I refer to Daniel Ben-Ami’s review of David M. Kotz’ “The rise and fall of neoliberalism capitalism” FT-Wealth, Spring 2015.

It states: “It is richly ironic that the Fed chairman from 1987 to 2006 was Alan Greenspan, an ardent devotee of Ayn Rand, an arch free marketer”.

Hold it there!

Put that in the perspective of the Basel Accord having approved, in 1988, that the risk-weights for determining the equity banks needed to hold when lending to central governments was to be zero percent, while the risk-weight when lending to an SME, or to an entrepreneur, or to an ordinary citizen were set to be 100 percent.

Put that in the perspective of that with Basel II, in 2004, the regulators determined that the same risk weight for a member of the private AAArisktocracy was to be only 20 percent, while the risk-weight applicable to an SME, or to an entrepreneur, meaning to an ordinary citizen was to remain 100 percent.

If anything distorted free markets, that was it!

And in 2007-08 the AAA-bomb detonated and short after "infallible sovereigns" like Greece ran into big troubles

And so what conclusions can we have to reach? Could it perhaps be that Alan Greenspan was just one of many moles, planted by statist or anti-capitalist ideologists, in the heart of the capitalistic system, meaning its banks?

You Greeks, in order to stand a chance, should begin by throwing out the statist/communist Basel Accord bank regulations.

Sir, I refer to Mohamed El-Erian’s “Missteps and miscalculations that could cost Greece the euro” March 26.

In it El-Erian decribes the challenges for Greece as “restoring economic dynamism, jobs and financial viability” and as tools to achieve those goals “three policy changes that many economists agree on: reducing excessive austerity, revamping structural reforms to unleash broader economic dynamism, and removing crippling debt overhangs that undermine existing productive activities and discourage the stimulus that comes with new investments.”

And I repeat, for the umpteenth time. You cannot restore dynamism, jobs and financial viability in Greece or in any country with bank regulations that, for the purpose of setting the equity requirement for banks, indicates the risk-weight of central governments to be zero, while the risk-weight of an SME or an entrepreneur is set at 100 percent.

Anyone who thinks that one Euro lent by a bank to Greece’s government will produce a sturdier economic growth, than a Euro lent to a Greek SME or a Greek entrepreneur… is a statist, a communist or most probably both.

Greeks (and all you other citizens) if you want your young ones to have a chance to get a good job in the future, you’ve got to urgently get rid of all statist/communist Basel Accord bank regulations.

@PerKurowski

The pricing distortions by QEs are leveraged manifold by the regulatory distortion of bank credit.

Sir, Scott Minerd holds: “But in the long run, classical economics would tell us that the pricing distortions created by QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and standards of living over time” “QE likely to impair living standards for generations” March 26.

And Minerd writes: “The long-term consequence of the new monetary orthodoxy is likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity.”

It is so much worse than that:

The long-term consequence of the new bank regulatory orthodoxy, that of weighing equity requirements for perceived credit risk, is going to permanently impair living standards for generations to come, while creating a false illusion of making our banks safer.

It is regulating in favor of what is perceived as safe and against what is perceived as risky, as if what’s “safe” is not already benefitted and as if what’s “risky” does not already suffers. That has introduced the mother of all distortions in bank credit allocation… which blocks much of the liquidity provided by QEs to reach what it should reach…and... this is not even an issue!

And all that does it not help to make our banks safer? Of course not! What is perceived as risky is never threat to the banking system, only what is perceived as “safe” is.

@PerKurowski

Since development seems not really mean the same for UK than for China, why should UK join AIIB?

Sir, I am from Venezuela, and the United States has at least recently criticized what is happening in my country, while China in most non-transparent ways has mostly dedicated itself to finance and take advantage of what is happening in my country. And that I confess is one subjective reason for why I find it so hard to agree with Martin Wolf’s “It is folly to rebuff China’s bank”, March 24.

But that said I also feel that in order not to lose yourself in the new globalized world, you need to be able to reassert who you really are, now more than ever. And in that respect, few are so close as the US and Britain. In April 1999, feeling that the UK could become slightly uncomfortable with EU and with the Euro, and having heard about the ideas of Conrad Black and Paul Johnson, I even speculated in an Op-Ed about “A new English language empire”.

In essence I find no good reason why the UK should lend some credibility, against what is clearly no real influence, to an organization that does not really share its values. I am certain that, at least for the time being, when Wolf and I, UK and US, speak about development, we mean something quite different than what current China does… or at least so I hope.

PS. And, sincerely, I find Martin Wolf’s “As a former staff member of the World Bank” statement, indicating that as far as not living up to the “highest global standards”, AIIB and World Bank would stand on similar ground, to be clearly out of line.

PS. And by the way, to present oneself as a development buff, while at the same time not objecting to those credit-risk-weighted equity requirements for banks that clearly stand in the way of development, is sort of silly.

@PerKurowski

In order to avoid political extremism, Europe needs to rid itself of bank regulation extremists.

Sir, I refer to Gideon Rachman’s “Growth will not save Europe from extremists” March 24. But there will not be any sustainable sturdy growth in Europe, while the regulation of its banks is in the hands of extremist. Only extremist could, for purposes of bank equity requirements, assign a risk weight of zero percent to central government debt and that of 100 percent to an unrated SME or entrepreneur.

Rachman writes “France and the rest of the member states… need mainstream politicians that can paint a convincing and optimistic picture of the future”. Indeed, and that message should go somewhat along the following lines:

“Europeans, we were horribly sabotaged by regulators who completely distorted the allocation of bank credit. Because of them we lost 25 years but, once we get rid of them, we will be able to resume the creation of the jobs our future generations require and deserve.”

@PerKurowski

Sir, sorry to be disrespectful but…are you all in FT statists, communists or simply daft?

Sir, Claire Jones, in “Eurozone jobless outlook points up fears of persistent stagnation” March 24 writes of “ECB projections, highlighting deep scars left by the bloc’s financial and debt crisis”. What is wrong with you all? Have I not explained it to you all in hundreds of letters?

Again: It has been more than 25 years since Basel I redirected banks to lend more to the public sector than to the private sector; and more than 10 years since Basel II also within the private sector, redirected banks to lend to those perceived as safe and to avoid the “risky”.

And that means effectively the Basel Accord has ruled that government bureaucrats, because they represent “an absolutely safe borrower”, are more capable to efficiently use bank credit and generate jobs than what the so “risky” SMEs and entrepreneurs can do.

If you really cannot understand what that signifies for the medium and long-term potential of an economy to generate jobs… you are either statists, communists or simply daft… I hope it is the latter.

Jones writes: “ECB believes government can dent unemployment by pressing on with making their labor markets more flexible and competitive.” That would help, but before you get rid of the regulators’ heavy hand guiding where bank credit should go, there’s really little to do. Unfortunately, ECB’s Mario Draghi, as a former Chair of the Financial Stability Board, is one of the guilty of the regulatory distortion… and so there is a reputational conflict.

PS. Do you still not understand that if bank regulations had not been tilted so much in favor of “the infallible sovereigns”, then Greece, no matter how much it shaded its accounts, would not have been able to rack up as much public debt as it did? Do you not know that if European banks had not been allowed to leverage their equity, and the taxpayer support they receive, more than 60 times to 1 when investing in securities that carried an AAA rating, that the subprime crisis might never have happened? And of course that same line of arguments explains much of the mishaps when lending to Icelandic banks or financing real estate in Spain. 

Sir, again, no bank lending to what was not perceived as safe and therefore did not allow banks’ to hold little equity, had anything to do with causing the crisis. Of course, after the crisis has broken out all suffer, and, so unfairly, the innocent “risky” usually suffer most of all. But that has to do with ex-post consequences and not with ex-ante perceptions.

@PerKurowski

When regulators layer their concerns with risk on top of bankers’, the “risky” (SMEs), get no fair access to credit.

Sir, Wolfgang Münchau writes: “The link between a government buying bonds and a company in Sicily creating local jobs is long, indirect and uncertain… The truth is that we just do not know the impact of QE until we collect evidence of how the policy transmits to the real economy”, “The success of eurozone QE relies on a confidence trick”, March 24.

I am not entirely sure it was Münchau’s intention, but that translates directly in the question of: Do Mario Draghi and his colleagues have any idea of what they’re doing?

On that Sir, you know my opinion: No! They don’t… as evidenced by their acceptance of credit risk weighted equity requirements for banks that so dangerously distorts the allocation of bank credit to the real economy.

Here Münchau insists in the popular mantra of “Investors will only invest in plant and machinery if they see a rise in demand”. But, that covers only one type of investors, since there are other who believe, foolishly or not, that what they want to do, would help to create demand… and, as they say, those are the tough ones we need to get going, when the going gets tough.

Unfortunately this type of investors, SMEs and entrepreneurs, would need fair access to bank credit, that which is currently denied them, on account of regulators layering their concerns about credit risks on top of bankers’.

Creativity needs a chair in any mutual admiration club to somewhat dent any ongoing groupthink

Sir I agree with Gillian Tett in that “A degree of creativity should be on the college curriculum” March 21. But that must also include making sure that creativity has a chair wherever important decisions are taken.

I say it again… had there for instance been some genuine representation in the Basel Committee of historians, and why not of anthropologists, these would have questioned the wisdom of the risk-weighted equity requirements for banks that have so completely distorted the allocation of bank credit to the real economy.

At least the chance of having someone able to quote Mark Twain in that “bankers are those who lend you the umbrella when the sun shines and want to take it away as soon as it looks like it is going to rain” could have given those central-banker-regulators some second thoughts, while they were doing their groupthink, in their cozy mutual admiration club.

@PerKurowski

Pär Boman, at the end of the day, your children and grandchildren, and your nation, are your most important customers

Sir, Andrew Hill refers to that the chief executive of Handelsbanken told the “FT in 2013 that he had studied 5,000 years of credit risk, while the bank draws on minutes of board meetings from the past 140 years to inform its attitude to customer loans and business cycle”, “Creative forces”, “Boldness in business” March 20.

What a splendid occasion that would have been to ask Pär Boman whether in all that information, he had found any sort of evidence supporting that bank regulators should require banks to hold more equity against what is from a credit point of view perceived as risky from, than against what is perceived as absolutely safe.

That as you know Sir, has in my opinion introduced the most serious disruptive distortion in the allocation of bank credit to the real economy.

Unfortunately, in “Customers first”, Richard Milne later reports that Boman opines: “I don’t think it’s our role to have an opinion on whether the democratic system has taken the right or wrong decision. We see regulation more as a signal system from parliament on how we want banks to behave”.

That’s a shame. My opinion is that it is precisely persons like Pär Boman who owe their customers’ society, the duty to speak out if they feel signals provided by regulations could be taking banks down the wrong route.

Richard Milne quotes Boman in that the “main lesson [from] the 140 years of board minutes that lie in the basement… is that about every 17 years there is a financial crisis.”

That could be… but another lesson that should be extracted from that data is when did banks do the most for their nation between crisis and crisis… and I doubt the answer to that would be… “When we took no risks.”

On the web I find that Pär Boman has three kids… and one of this days he might have grandchildren too. He should never forget that, at the end of the day, they and his nation are his most important customers. And I am absolutely sure they do not need regulators like the Basel Committee and the Financial Stability Board to infuse their banks with dumb credit-risk aversion. That is no way how to finance their future. 

And Andrew Hill and Richard Milne, your duty, that is to press Pär Boman and others to speak out.

God make us daring!

@PerKurowski

Britain, Martin Wolf, how can you walk tall with banks who have been instructed to behave as wimps?

Martin Wolf holds that “Britain can only walk tall if productivity is reignited” March 20.

To “walk tall” means to be brave and self-assured. Sincerely how on earth can Martin Wolf believe that Britain could walk tall or regain productivity with wimpy regulators who tell banks to go an make their highest risk adjusted returns on equity with assets perceived as safe and to stay away from assets perceived as risky?

Wolf refers rightly to problems inherited by the financial crisis but still phrases it as a consequence of a widely shared “overconfidence in finance”… which shows he still does not get it.

When you impose credit-risk-weighted equity requirements on banks it is clearly not a sign of confidence but a sign of a lack of confidence. You are in essence telling the banks “We do not trust you to assign to the credit risk you perceive sufficient importance to clear for these in the size of your exposures and with the risk-premiums you charge… so we are also going to clear those credit risks for you in your equity.”

And Wolf also keep on referring to the need of less fiscal austerity, especially as “government is able to borrow at sub-zero real rates of interest” blithely ignoring that with the Basel Accord of 1988 banks were allowed to lend central governments against zero equity while, when lending to the private sector they needed to hold 8 percent of it.

Thus government borrowing costs became subsidized in a very nontransparent way… and the cost of that subsidy is paid by the lower productivity that results from the misallocation of bank credit.

But what do you mean Kurowski with banks not taking risks, have you not seen the disaster they caused?

Indeed I have, and all their problems were caused by excessive exposures to what was perceived as safe, by bankers and regulators alike, and could be held against very little equity. That to me is more a sign of excessive risk-aversion than of excessive risk-taking.

@PerKurowski

Interest rates must go up… but that must also be compensated eliminating the distortions of bank regulations.

Sir I refer to Sam Fleming’s “Fed loses ‘patience’ and opens way to first rate rise in a decade” March 19. All the hullaballoo, by so many actors, around the Fed’s intentions, as if it was all up to the Fed to make the economy work, is just mind-blowing. 

I have no doubt interest rates should be increased, considerably, because rates lower than what the authorities are targeting the inflation rate, in your face, isn’t natural, in any financial market.

But, in order for that not to cause excessive recessionary impact, absolutely all the regulatory discrimination against the fair access of “the risky” to bank credit needs to be eliminated.

Please regulators, let the SMEs, the entrepreneurs, the start-ups ride to the rescue of our real economy, before its too late... these "risky" borrowers never ever caused a major bank crisis... as bankers are more than enough scared of their credit risk. 

How? There are different options… here is a link to one I suggested for Europe.

@PerKurowski

The regulation of the finance industry might need more male skills.

Sir, John Kay referring to linkages between “testosterone and risk-taking” writes “We might have better banks if there was rather less male risk-taking and more female regulating and organizing”, “The finance industry needs more female skill” March 18.

If we in a game of roulette bet one dollar on either a safe color or a risky number, we are talking about exactly the same expected financial results, in this case a loss because of the zero the house reserves to itself. But, from that testosterone risk taking point of view are they really similar bets?

Currently we have bank regulations which, even though all major bank crisis have resulted from excessive betting on what was ex ante perceived as safe but that ex post turned out to be risky, allow banks to leverage much more their equity with what is perceived safe.

Since for instance they give a risk weight of only 20% to an AAA rated private borrower but a 100% risk-weight to an unrated borrower, the regulator is indicating, in roulette terms, that betting one dollar on the safe color, gives you five times the expected risk adjusted return than betting that same dollar on a risky number.

And all that while the real economy needs banks to give fair access to bank credit to “risky” numbers, the SMEs and entrepreneurs.

So, since regulators seem to have been blinded by some excessive misguided risk-aversion, what might most be needed, is instead more male risk-taking among regulators.

PS. http://subprimeregulations.blogspot.com/2012/12/the-basel-ii-roulette-manipulation.html

@PerKurowski

Before Greece asks Europe to give it a chance it should stop hindering the free fair flow of bank credit to Greeks.

Sir, I refer to Yannis Dragasakis’, Yanis Varoufakis’ and Euclid Tsakalotos’ “All we ask is that Europe give Greece a chance” March 18.

Before they have the right to ask that of Europe they should give their own citizens a chance.

They write of “Many of the 60 per cent of young people out of work will one day be reclassified as long-tem unemployed”… and yet they play along with bank regulations which by favoring credit to the government, hinders the free flow of fair credit to SMEs and entrepreneurs, those who stand the best chance to create the sustainable jobs the Greek youth so urgently need.

In Paris, March 25-26 OECD will hold its Integrity Forum 2015 titled Curbing Corruption Investing in Growth. To me, when regulators tilt the access of bank credit in favor of their employers, here by means of risk-weighted equity requirements, it sounds like a sort of corruption, and it definitely stops medium and long-term growth. I hope OECD, though also government dependent dares to analyze that issue.

@PerKurowski

Martin Wolf, bank regulators hindered savings from reaching investment projects… and so secular stagnation resulted.

Sir, Martin Wolf asks and answers: “Why are interest rates so low? The best answer is that the advanced countries are still in a “managed depression”. This malady is deep. It will not end soon.”, “Strong currents that keep rates down” March 18.

And Wolf argues: “The most plausible explanation [for what] Lawrence Summers… has labelled the forces “secular stagnation” — by which is meant a tendency towards chronically deficient demand… lies in a glut of savings and a dearth of good investment projects”.

No Wolf! There are indeed a glut of savings but the reason for the “dearth of good investment projects” is that the savings are hindered from reaching the prime drivers of investment projects, SMEs and entrepreneurs; because bank regulators considered them too risky, and favored bank credit to go where it was perceived as safe.

In 1988 regulators launched the Basel Accord. In it, if banks lent to the government, so that some bureaucrats were to decide how to allocate those resources, the banks needed to hold cero equity.

But, if banks lent that money to some SMEs and entrepreneurs, so that these were given a chance tried to come up with growth, then banks needed to hold 8 percent in equity.

Could the explanation be any clearer? Of course banks stopped lending to “the risky” because “the safe” suddenly provided them with much higher risk adjusted returns.

So when Wolf writes: Ultra-low interest rates are not a plot by central bankers. They are a consequence of contractionary forces in the world economy” it just shows that he still cannot understand what contractionary forces can be powered by means of regulatory risk-aversion.

Wolf holds “We should view central banks not as masters of the world economy, but as apes on a treadmill” Indeed, but what to do when central bankers act like masters of the universe?

@PerKurowski

Bank regulators lost touch with economic fundamentals back in 1988, with their Basel Accord.

John Plender writes: “If the essence of a bubble is that prices lose touch with fundamentals, that is where eurozone sovereign bonds are going. Market participants will be recycling government IOUs into the hands of the central bank regardless of relative risk. At the same time, the central bank-induced search for yield will reach new levels and create new distortions.” “Draghi QE is stoking bond bubble risk” March 17.

Sir, the Basel Accord of July 1988 determined that when banks lent to the private sector then they needed 8 percent equity but, when lending to the central government, they needed cero equity.

And that tilted bank credit towards governments being the constructor of the future, and away from that private sector who had been the principal constructor of the future in the past.

That was a defining moment for our economies, and many of the Eurozone’s current troubles are a direct result of it.

Now since government bureaucrats cannot deliver it, there are less perspectives of future growth, and therefore more need to get a share of what there is… and negative rates, joblessness, the disappearance of annuities, asset bubbles and all what have you, is just part of that struggle.

Frankly, at least our children and grandchildren cannot afford to have bank regulators like those in the Basel Committee.

@PerKurowski

Why worry about bank’s risk models, when the regulators’ own “standardized” risk weights are more than bad enough?

Sir, Laura Noonan writes about the regulators increased concern with how financial modeling by banks can influence their risk weighted assets and thereby the equity they need to hold, “Regulators push banks hard on capital ratio flexibility” March 16.

I care little for those discussions because as I see it, the regulators’ own “standardized” risk weights are more than bad enough.

In 1988, the Basel Accord, Basel I, approved that banks had to hold 8 percent in equity when lending to the private sector but the banks were allowed to lend to OECD’s central governments against no equity at all.

The introduction of such an amazing pro-government bias, I would even call it outright communism, distorted all common sense out of the allocation of bank credit to the real economy. And with Basel II in 2004 they made it worse. And now with Basel III they are digging us even deeper into the hole.

Perhaps, with luck, banks’ own risk models do not assign the same “infallibility” to the sovereigns as regulators do.

@PerKurowski

Bank regulators have not even begun to learn from their mistakes

Sir, I refer to Brooke Master’s “Banks are still struggling to learn from their mistakes” March 14.

Master writes: “bankers say that the real problem with the US stress tests is that they are too complicated, opaque and difficult to predict. Regulators counter that financial meltdowns can come from unexpected sources and banks need to be ready”.

But I would ask the regulators: “If you think that financial meltdowns can come from unexpected sources, and banks need to be ready… then please explain the rationale behind the current risk weighted equity requirements for banks.”

Sir, bank regulators have not even begun to learn from their mistakes… just look at Basel III digging our banks and our economies even deeper into the hole they made.

Just look at how central banks are launching QEs, without even noticing how blocked the channels of bank finance are.

@PerKurowski

Yes Tim Harford, where are the independent bank regulator robots when we really need them?

Sir Tim Harford writes: “bored with blaming bankers, we blame robots too, and not entirely without reasons. Inequality has risen over the past 30 years” “Man versus machine again” March 14.

But Tim Harford ends asking: Where are the robots when we need them?

I agree. Robots would never ever have come up with something like the Basel Accord, which, in 1988, decreed that banks were required to hold 8 percent in equity when lending to the private sector but 0 percent when lending to central governments of OECD countries.

Reasonably designed robots, not preprogrammed by statist or communists, would know that the last thing they could do while regulating banks, was to distort the allocation of bank credit to the real economy.

@PerKurowski

Gillian Tett should indeed try to write more as an anthropologist than as a financial expert.

Sir, Gillian Tett, as an anthropologist who believes “that discipline to be woefully underappreciated”, applauds Ford “hiring a group of social scientist… to study the culture of modern carmaking”, “The drive to make a more humane car” March 14.

Great idea! That would at least give me some comfort that if automobile engineers were so dumb so as to design a car that would rev up especially fast, whenever the driver perceived everything as safe, and slow it down more than normal, whenever drivers thought it to be risky, an anthropologist would probably inform him that was a very bad idea.

Like they would equally consider it to be a bad idea to have both a driver learner and his instructor driving simultaneously a car with two driving wheels.

But of course these social scientists must have enough character to speak up and not be blinded in awe by car engineers’ supposed expertise.

For instance I wish Ms Tett hade believed more in herself as an anthropologist, so as to speak out against those risk adverse bank regulations that have us and our banks, driving fast off the road of prosperity.

@PerKurowski

FT, do you not realize the urgency we have to get rid of the current bunch of dangerous and failed regulators?

Sir, John Dizard opines that “the advent of negative yields for the best European government or corporate issuers… is the breakdown of the policy world’s response to the global financial crisis”; and he quotes a European bank’s credit strategy saying: “We have searched through the records and asked the ECB how they think their [asset purchase strategy] will work, and there is no evidence they know the answer” “Investor should embrace the inherent contradictions of quantitative easing” March 14.

Indeed that is truly scary stuff, but it is what I have been writing to you for over a decade. Mario Draghi and colleagues, simply have not the faintest idea of what they are doing.

The negative interest is just one tip of the iceberg. The real intellectual breakdown came in 1988 with the Basel Accord, Basel I; followed up in 2004 with Basel II. At that moment, regulators, with their risk-weighted equity requirements, ordered bankers to perceive safe assets as safer yet and risky assets as riskier yet.

The banks, consequentially, started to compete with pension funds, widows and orphans in chasing too much what was perceived as safe and evading too much what was perceived as risky. Sir, please, what do you think caused problems with AAA rated securities, Iceland’s banks, real estate in Spain, or lending to Greece, that they were perceived as risky? Of course not!

Now we have run out of safe assets, but regulators still pay banks with low equity requirements to go for these, and now, by means of Solvency II, they want even to impose that same stupidity on insurance companies.

What will happen? That the real “risky”, like SMEs, will still not have access to bank credit because, as Jeremy Stein of Harvard has argued, banks are too busy “getting high quality stuff by swapping, or ‘transforming’ it, with low quality paper”… to keep the regulators happy and pass stress tests that will allow them to pay dividends and repurchase stock. How crazy can it be?

Do you not realize the urgency Europe and the whole world has to get rid of the current bunch of dangerous and failed regulators?

PS. Dizard write "Regulators and politicians are insisting that risks be taken without taking risks". That in a nutshell is the message I have sent FT in more than a thousand letters, but that it has preferred to ignore.

@PerKurowski

The pro-big-governments Basel Accord trumped the pro-private sector Washington Consensus

In July 1988 the Basel Committee on Banking Supervision put in place the Basel Accord, “The International Convergence of Capital Measurement and Capital Standards” Basel I.

Those standard imposed the following risk-weights, which would determine the equity banks needed to hold against different assets:

0% - For cash, central bank and government debt and any OECD government debt

0%, 10%, 20% or 50% - For public sector debt

20% - For development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection

50% - For residential mortgages

100% - For all private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks

Those risk weights, applied to a basic equity requirement of 8 percent, translated into that banks were then allowed to leverage much more their equity when lending to governments, banks, developing banks and residential mortgages than when lending to the private sector.

And that meant that banks would find it much harder to obtain comparable risk-adjusted returns on equity when lending to the 100 percent weighted private sector than when lending to all other favored with lower risk-weights.

And that meant that the banks of the Western World were de-facto distorted into lending primarily to the public sector, to other banks, and to residential mortgages.

That of course meant that regulators tripped and fouled the efficient allocation of bank credit mechanism.

With Basel II of June 2004, all was made worse because different risk weights were also assigned then to the private sector based on credit ratings.

What did this mean?

That banks would allocate resources preferentially to the public sector.

That banks would allocate more resources for financing the house we live than for financing the creation of the jobs we need in order to pay the utilities and mortgages of our houses.

That banks would concentrate almost entirely on financing what is safe, refinancing the past, and stay away almost entirely from financing the riskier future.

And of course, it all started to go down hill from then.

And here we are more than 25 years later and read Philip Stephens’ "Why the business of risk is booming” without one single reference to what the regulatory forced risk aversion introduced in our banks have done or is doing to our economies.

To think that the Basel Accord with all its pro-big-government implications was introduced about the same time the pro-private sector Washington Consensus was discussed and vilified is truly mindboggling.

@PerKurowski

The ultra-low interest rates might not reflect real market rates but only mumbo jumbo rates.

Sir, we are giving banks permission to load up their balance sheets with a lot of sovereign and highly rated corporate debt against much less capital than what they need to have for holding “riskier” assets, and we think this has nothing to do with current low and even negative rates for the “safe” assets.

We have our central banks buying up, at no personal cost for central bankers such amazing quantities of sovereign debt the markets run out of it... and we still think we can talk about market rates? And, of course the rates we see are the marginal rates and not the average rates. It would be interesting to know at what rate sovereigns could refinance all of their debt in truly genuine markets.

Sir, when I saw the title of Gillian Tett’s “An ultra-low interest rate show that could run and run” March 13, I got enthusiastic, as I thought she would approach the issue as an anthropologists. That she would try to explain how come people could accept lending their in many cases hard earned savings, for instance to Germany at .25 percent for ten years… even when their central banks announce their determination of achieving the target of 2 percent inflation. As a minimum it sounds like freely giving away 17.5 percent of their money to the government. Or perhaps real people do not do such things others do it for them.

But unfortunately, at least for now, Ms. Tett took refuge in the discussion of swaps, basis points and other technicalities. We eagerly wait for the anthropologist to get working at it.

PS. For all of you financial experts using US Treasury as the “risk-free rate” remember that is now a subsidized risk-free rate. 

@PerKurowski

EBRD, Manfred Schepers, what EU really needs most are better-capitalized banks and much less distorting regulators.

Sir Manfred Schepers writes: “European growth is being held back by the inability of small and medium-sized businesses to benefit from the efficiencies of the single market and currency. Growth and employment will come from mid-cap companies that can innovate and compete to become Europe’s new multinationals” “EU needs more equity finance and less debt to move forward” March 12.

Absolutely! But why on earth keeps a senior advisor, and a former CFO at the European Bank for Reconstruction and Development, from understanding what current credit risk weighted equity requirements for banks does to negate the fair access of “risky” small and medium-sized businesses to bank credit.

What EU really needs first are better-capitalized banks and much less intrusive and distorting regulators.

@PerKurowski

The Federal Reserve failed by submitting banks to an incomplete stress test.

Sir I refer to Tom Braithwaite, Ben McLannahan and Barney Jopson’s report on the recent stress tests performed by the Federal Reserve ad that that have given the US banks a clean bill of health, “European banks fail US stress tests”, March 12.

It is the Federal Reserve who has really failed the test by only testing for the assets banks have on their balance sheet, and not for the assets that should have been there. In other words, one thing is for banks to have sufficient equity for what they are doing, and another quite different sufficient equity for what they should be doing, if complying with their societal purpose of efficient credit allocation.

Banks have been made dysfunctional by the introduction of distorting credit-risk weighted equity requirements which favors assets perceived as “safe” As a result of this, banks in America (and in Europe) are not giving “risky” SMEs and entrepreneurs a fair and sufficient access to bank credit. For the banks to become functional again all differences in equity requirements against assets need to be eliminated. And to make room for such a leveling, basically all banks must increase their equity.

Our young, in order to have jobs and a decent future, need banks to take risks on “risky” small businesses and entrepreneurs. How many of these borrowers will now not be able to get credit, only because of the dividends and the buy-backs of shares the Federal Reserve’s incomplete stress tests stimulate?

@PerKurowski

Utterly failed but yet promoted bank regulators, evidence the mother of all lack of accountabilities.

Sir, Robert Jenkins holds that “For the good of his own reputation as well as that of his institutions and British banking, Mr Flint should go”, “How the HSBC chairman can restore accountability at his bank” March 11.

Agree, but so should also all regulators who had anything to do with those failed and outright stupid regulations which caused the current crisis, and which keep on dangerously distorting the allocation of bank credit to the real economy.

These regulators were so dumb that, instead of looking at whether bankers were perceiving credit risks correctly or not, and at how they were managing those perceived risks, they decided to look at the same risk bankers were perceiving in order to set their equity requirements for banks. And, obviously, clearing for the same perceptions a second time, distorted all common sense out of the allocation of bank credit… and caused banks to create excessive and dangerous exposures to the AAArisktocracy.

The Jaime Caruana, Mario Draghi and Mark Carneys of the bank regulatory world, instead of being sent home in shame after the Basel II flop, were promoted and some of them even instructed to proceed with elaborating Basel III.

As a result they still do not even acknowledge their mistake

Talk about lack of accountability!

@PerKurowski

What would Martin Wolf tell the Basel Committee for Banking Supervision, if he were India’s Development Minister?

Sir, I refer to Martin Wolf’s “India has a real chance to excel on growth” March 11.

Suppose Martin Wolf was a developing minister in a developing country like India and was presented with bank regulations which would allow banks in India to leverage much more their equity when lending to what from a credit risk was perceived as safe than when lending to what was perceived as risky; which of course means banks will be able to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky; which of course means banks will lend too much at low rates to what is perceived as safe and too little at relative too high rates to those perceived as risky… namely SMEs and entrepreneurs.

What would Martin Wolf say? Would he apply those regulations or would he show the proponents the door with a “Get out! Don’t you know that risk-taking is the essence of development? Do you really think your developed countries would have been able to develop with that type of regulations? Don’t you know that our safest of tomorrow might be among our riskiest of today?”

@PerKurowski

http://financefordevelopment.blogspot.com

When what is safe is becoming less and less sufficient for our needs, is it not high time we take some risks?

Sir I refer to Claire Jones’ and Elaine Moore’s “ECB launches QE amid negative yields” March 10.

The IMF "Report on the Global Financial Stability 2012" lists 74.4 trillion U.S. dollars of Global Safe Assets: 33.2 (45%) in sovereign bonds AAA / AA; 5 (7%) in sovereign bonds A / BBB; 16.2 (21%) in securities with special guarantees; 8.2 (11%) in corporate bonds rated investment grade, 3.4 (5%) in other governmental or supranational debt; and 8.4 (11%) in gold.

At this moment gold, though clearly safer than in 2012, represents smaller amount; and much of sovereign bonds have become so safe that with negative interest rates it already guarantees a loss. And so when what is very safe disappears in front of our eyes, should we not begin to worry something is very wrong?

Once again, for the umpteenth time, what is wrong is that regulators imposed on banks credit risk weighted equity requirements which work like hallucinogens, intensifying banks’ perceptions of credit risk, making what’s perceived as safe look much safer yet, and what is perceived as risky so much riskier. Yes it is insane. It demonstrates the Basel Committee, Financial Stability Board, ECB, Mario Draghi and so many more are way over their heads in Europe.

If Europe cannot find in itself the strength to shake off those crazy bank regulations, so as to allow bank credit to flow to “risky” not really risky SMEs, entrepreneurs and start-ups, those who stand the best chance of producing something new to advance the European economies… it looks like the dark ages are here again.

The Fed, surprising banks with visits is ok, but surprising them with surprise regulatory criteria, sounds illegal

Sir, amazed I read Ben McLannahan reporting that “Fed officials say that they want to preserve some mystery in their methods, so that banks stay on their toes”, “Tougher US stress test challenge looms for lenders in round two”, March 9.

Amazing, the Fed is becoming truly Kafkaesque. Who on earth does it believe it is to preserve some mystery in their method which when released might affect all us who invest in bank shares?

If it springs a surprise on the bank I have invested in, and as a result I suffer losses, should I not be able to sue the Fed?

The most urgent financial sector reform in Europe is getting rid of its dangerous credit-risk-adverse bank regulations

Sir, Wolfgang Münchau describes the immense problems low interest rates cause the pension fund industry, and we can only hope that is no news to those supporting low interest rates “Real danger lies in Mitteleuropa’s financial sector” March 9.

But then Münchau states: “Low interest rates are, of course, not the cause of this slow moving wreck. The cause is, of course, the train” and goes on to proclaim: “If there is anything in Europe that requires urgent reform, it is not the Greek product market, but the German and Austrian financial sector… if Germany continues with its policy of forcing a deflationary adjustment in the eurozone and running large saving surpluses with an unreformed financial sector at home, we should prepare for the next big financial crisis”.

I am curious, what financial sector reform does Münchau refer to? Is he not aligned with Basel III?

Sir, for more than a decade I have known for sure that what no economy can afford, in order to remain sturdy, is someone giving its banks special incentives to lend to those perceived as safe and to stay away from those perceived as risky; something which the Basel Committee has foolishly done by means of credit-risk weighted equity requirements.

For reasons that escape me, Münchau and most other at FT have decided to ignore that argument.

So if there is one urgent financial sector reform pending in Europe (and other places) that is getting rid of current bank regulators and their senseless aversion of credit risk.

But sadly it just looks only to get worse as its insurance sector is now also being threatened with similar mistaken regulations, Solvency II.

To focus on “the collective good” begins by denouncing the bad distortions produced by bank regulations.

Sir, Gillian Tett calls “eminently sensible advice”, that provided by John Taft arguing that bankers need “to take a more collectivist approach, focusing on the collective good, rather than acting as short term, profit maximizing individualists”, “The benefits of blue-sky thinking” March 7.

Sounds good, hard to argue with the intention of that… but is it really the role of bankers to interpret and decide what is the collective good… especially when even their regulators so completely ignore “the collective good” in favor of some ill perceived short term risk avoidance?

Bank borrowers can be creditworthy but also worthy of credit, and quite often, perhaps most often, they’re not the same.

To focus exclusively on creditworthiness, as regulators do with their risk-weighted equity requirements, causes without any doubt that many, who from a collectivist point of view are really worthy of credit, are excluded from having fair access to bank credit.

If regulators had included in the purpose of banks that of allocating bank credit efficiently to the real economy, they would never ever have come up with current extreme credit-risk adverse regulations.

If bankers really want to focus on the collective good, then they should vehemently protest the distortions regulations cause, even if that means making the dreams of bankers come true, namely being able to earn much higher risk adjusted returns on equity on what is safe than on what is risky.

And if Gillian Tett wants to focus on the collective good, then also she must stop being so silent about regulatory distortions.

What are European banks to do when ECB has cornered sovereign debt, which perceived as safe, allows them to hold little equity?

Sir, I refer to your “Good news at last from the eurozone economy” March 6 and in which you, acting something like an ECB/Draghi groupie, egg ECB on to proceed with its quantitative easing. Sincerely I have no idea what good that would do at this moment.

For instance what is a poor equity lacking European bank to do, when ECB buys up even more of that relative scarce inventory of safe European assets which allows banks to hold little equity? And what are pension funds to do? And in what should widow and orphans invest?

Someone is cornering the market of the safe, right in front of your eyes, and you do not even notice it? Are you part of the great European risk aversion scam?

Europe does not need ECB or banks to finance what is safe… they need banks to finance what will keep it safe… namely the risky... the SMEs and the entrepreneurs.

Don’t we wish productivity increases could be achieved by simply increasing demand, as Martin Wolf seems to believe?

Sir, Martin Wolf writes: “Blame feeble productivity growth for stagnant living standards” March 6.

I agree. But then Martin Wolf goes of in a strange direction and introduces the possibility that the “dramatically poor productivity outcome”, because of a “flexible labor market”, has been caused by a policy-induced weakness of demand”, and I lose him. I thought productivity had to do with other variables than sustaining demand or getting yourself some inflexible labor markets. Don’t we all wish it were so easy to increase productivity?

In my humble opinion, for about the umpteenth time, what currently most affects the productivity in the UK, and in the rest of the Western world, is that silly regulatory notion that banks should better stay away from productivity agents like small businesses and entrepreneurs, because these are too damn risky.

PS. One of these days perhaps Martin Wolf is going to become more mono-themathic with his "chronic demand deficiency" than myself with my "portfolio invariant credit-risk-equity requirements for banks"... though I doubt it :-)

Real stress tests on banks are not performed, since these would evidence the failure of regulations.

Sir, Gillian Tett writes “One reason the banks got into such trouble before 2007 was that they had all learnt to game the regulatory system in a similar way”, “Stress tests are predictable act of public theatre” Marc 6.

That’s not so. There was no reason to game regulations that explicitly allowed banks to hold little or no equity against exposures to sovereigns (like Greece), exposures to AAA rated (like the securities collateralized with mortgages to the subprime sector) or to real estate (Spain).

But the current stress tests are indeed useless spectacles.

Societies give their banks a lot of supports. And obviously that is not only so that banks will repay deposits, since for that a storage center for matrasses containing cash would be more efficient. We support banks because, one way or another, we expect banks to support our economies. And so in this respect any real stress test would have to analyze whether banks were performing and under stress would be able to perform with what is expected of them… like continuously giving small businesses and entrepreneurs, reasonable fair access to bank credit.

Those real stress tests are not performed because they simply would put in evidence the total failure of current bank regulations. If banks are not performing now... how on earth will they perform if subjected to stress?

PS. Gillian Tett mentions that “the same consultants, now offering advice about stress tests”, aided banks gaming before 2007. If so, those consultants, who should be named, do represent a systemic risk, the Systemic Important Consulting Groups. Those SICGs and might be even more part of the Systemic Important Financial Institutions, the SIFIs than anyone of the Too-Big-To-Fail banks.

The more you trust someone to be telling you the truth, the more you might come to believe something not true.

Sir, Robert Shrimsley writes on the always incredibly interesting and incredibly difficult issue of finding who are to be trusted for telling the truth… for instance on the web, “Google searches go beyond #Thedress to a bigger truth” March 6.

And Shrimsley refers to a Google research paper proposal to “move away from the wisdom of crowds and back to established authority”.

With respect to “wisdom of crowds”, I fully agree with that as a minimum a major revision is in order since those “crowds” on the web cannot be taken as being real crowds in the traditional sense.

But, on the use of “established authority”, these might neither have much to do with what we think (or hope) they used to be... These now represent more something like network authorities or ideological affinity authorities.

So how would I proceed if Google?

For a starter, and since I know gaming is always a possibility, I would leave the door open for at least 25 percent of pretending Truth-Sayers to be ushered in by Lady Luck, meaning presenting varied opinions from those who have done no merits at all to be telling the truth, picked out by means of a lottery.

Second I would use an algorithm that takes away qualifying points from any established authority that uses incestuous cross-references… meaning the “you quote me and I quote you” kind of affairs.

Third, I would use an algorithm that equally takes away qualifying points from any established authority that conforms excessively with political or ideological point of views held by anyone side of the big divide.

And finally I would end all publishing of possible truths with the following: Warning: the more trusted someone can be to be telling you the truth, the greater the possibility that you fall for something that is not true.

The haircuts that will result from the mother of all market riggings... will be staggering.

Caroline Binham writes about the Bank of England’ “potential rigging of money market auctions”, “BoE embroiled in fraud probe of crisis-era liquidity moves” March 5.

Sir, whatever those rigging could have been, they must be really minuscule when compared to the mother of all riggings; that which occurred when regulators rigged bank regulations in favor of the sovereigns, to the extent of considering some of these infallible.

Sir, when a sovereign takes on too much credit, it will either pay you back a fraction, this is known as a regular haircut, like that Greece wants to do; or give you a negative interest rate haircut, like Germany does; or give you an inflation haircut, as that which they officially target; or give you a tax increase haircut (we citizens hold de-facto CoCos of our sovereigns); or give foreign currency based investors, a devaluation haircut, like that currently given by the Euro. And there might even be other haircuts I have missed.

And so, giving many sovereigns a zero risk-weight for the purpose of setting the capital requirements for banks, defies all rationality, and can only be explained in terms of the regulators rigging the regulations; whether for ideological reasons or only to ingratiate themselves with their bosses, the governments.

The consequence of a zero risk weight is that banks are able to leverage their equity immensely when lending to the sovereign and so, guaranteed, banks will lend the sovereign too much at too low interest rates… and so the consequential sovereign haircuts, in any which shape or form they come, will be staggering large.

Especially so when governments are, by for instance Martin Wolf, egged on to take advantage of “favorable market conditions for public borrowings”, in order to take on major infrastructure projects.

Bank regulators caused lenders to also argue borrowers’ creditworthiness. Not so smart!

Sir I refer to Frank Partnoy’ “The Fed’s magic tricks will not make risk disappear” March 5.

In it Partnoy to that “complex rules create incentives for banks to… hide risks”, and he is perhaps more right than he knows.

For instance, what did we have before Basel Committee´s credit risk weighted equity requirements? We hade the banks interested in arguing the credit risk of the borrowers, so to be able to charge them higher interest rates; and the borrowers interested in proving they were very creditworthy safe, so to get larger loans at lower rates.

This of course created a certain tension that could only benefit a regulator… and helped foster an efficient allocation of bank credit.

What do we have now? We now have bankers and borrowers on the same side. Now the banker also wants to convince the regulator that the borrower is very creditworthy, so as to be able to hold less equity when lending to it, and thereby generate higher risk-adjusted returns on its equity. That cannot be helpful for a regulator, and can only lead to an inefficient allocation of bank credit. Not so smart!

The most extreme example of the previous is the alliance between banks and sovereigns. That one is based on: “I the sovereign lend you the bank my full support; and in return you the bank lend me the sovereign a lot of money; and to facilitate all that we both assume that I am an infallible sovereign, and represent no credit risk whatsoever, and so therefore, you banker, need to hold no equity when lending to me.

So Sir, when it comes to gaming regulations, the regulators, who work for governments, they also know how to game regulations, in order to take care of themselves, by taking care of their bosses’ wishes.

PS. How do you fire a regulatory mandarin who sucks up to his boss so much that he defines him to be an infallible sovereign?

Is ECB's Mario Draghi upbeat because markets believe he can be trusted to be a greater fool?

Sir, I refer to Claire Jones “Upbeat Draghi says landmark €1.1tn ECB bond-buying starts on Monday” March 6.

So what is Draghi upbeat about? “The QE plan… had eased borrowing conditions before a single government bond had been bought”? That to me sounds like the market having been convinced there’s a greater fool behind them. Is that it?

Or is Draghi upbeat because he feels the ECB has been able to fend of the danger that oil prices would trigger a deflationary spiral? That to me seems like strangely indicating that lower oil prices had been a damned nuisance for Europe and for the ECB.

Sir, honestly, I think many, all over Europe, have lost screws.

And I just know that anyone launching a huge QE, without making sure its liquidity can reach where it is most needed, like by means of bank credits to the risky SMEs and entrepreneurs, surely must be one of those missing at least one of those missing screws.

Abusive regulators used a cat o’ nine tails whip on banks, and FT insists on calling that ‘light touch’

Sir, once again you refer to “light touch” bank regulations, “In defence of eyebrows and cosy fireside chats” March 4.

No Sir, the portfolio invariant credit risk weighted equity requirements for banks functioned, as effectively as a cat o’ nine tails whip, to keep banks away from exploring risky but productive bays, and to force these to dangerously overpopulate supposedly safe havens.

That bankers absolutely loved to be able to earn much higher risk-adjusted returns on equity on what is perceived as safe than on what is perceived as risky, is an entirely different matter, which has more to do with a design flaw of this particular cat o’ nine tails whip.

You quote Mark Carney on that BoE has managed to cause “42 cases of potential market abuse being referred to the Financial Conduct Authority”. Great, but I just wonder when the regulatory abuse of these equity requirements, those that so distorts the allocation of bank credit to the real economy, is also going to be reported to FCA.

Sooner than later, FT is going to be questioned on its silence on this whole issue and, hopefully, also be held accountable, one way or another.

FT, odious regulatory discrimination against “the risky” is described on you pages; yet you prefer to play dumb and ignore the issue.

Sir FT, amazingly, because it is not a good book, handed over the book of the year award to Thomas Piketty’s ‘Capital in the 21st century’, arguing “it provoked a debate over inequality”.

And yet not a word about regulators who, with their credit risk weighted equity requirements for banks, odiously discriminate the access to fair bank credit of those perceived as “risky”, those already disfavored by bankers, while favoring that of those perceived as “safe”, those already favored by bankers.

Today Ben McLannahan reports that ”Citi is gravitating towards wealthier customers to whom it can offer more products, while holding less capital against them”, "Citi shrinks ’bad bank’ with $4.3bn sale of subprime lender to Springleaf.”

Most probably, notwithstanding your motto, you will sweep this under the rug again.