September 19, 2018

The silenced conversation on the risk weighted capital requirements for banks.

Sir, Thomas Hale writes, “From the eighties onwards, a focus on capital constraints on bank balance sheets encouraged banks to sell mortgages and other loans through securitisation. The regulatory framework meant that profitability had become at least in part a function of state-directed regulatory rules around capital — a fact that persists today. For this reason, lending against a house might be preferable to lending to a business, even if the former represents, for whatever reason, a greater risk.”, “The broken conversation about financial regulation”, Alphaville, September 19.

Hale’s “even if the former represents, for whatever reason, a greater risk” does not explain the whole problem because, being perceived as safe, and therefore subject to some regulatory subsidies, is precisely what can most make this house-lending dangerous to our bank systems.

The safety of the banking sector is also a secondary issue because, for the long term good of the economy, lending to “risky” entrepreneurs seems to be preferably than the “safe” financing of house purchases.

Hale writes: “Discussion of post-crisis regulations really only take place in extremely rarefied and specialist settings… there are a few people talking about regulating the banks, but the conversation is mostly inaccessible.”

Inaccessible? Read some of the over 2.800 letters that I have written to FT over the years, which includes even some to Thomas Hale, related precisely to the problem with the risk weighted capital requirements for banks; those that distort the allocation of bank credit; those that are based on the flawed theory that what’s perceived as risky is more dangerous to bank systems that what’s perceived as safe.

These letters, even when I could show some credentials as having formally spoken out against these regulations while being an Executive Director at the World Bank, in times of Basel II preparations, were for all practical purposes ignored. Someone in FT told me that I was obsessed with that problem. Of course I am, and as a grandfather I should be. But much more obsessed has the Financial Times been in ignoring it. 

Sir, a lot of internal soul searching on the why of FT’s silence on the risk weighted capital requirements for banks, should be a much-needed exercise for a paper that as its motto has “Without fear and without favour”.

I was also told to write a book. Why should I, the only book I have written “Voice and Noise”, and that contains some clear pointers to this problem, I believe that not including those I purchased to give away, sold only 51 exemplars.

But perhaps there might be a future book based on all the letters to the Financial Time that are included in this my TeaWithFT blog.