It is the lower capital requirements when lending to AAArisktocracy that stops banks from lending to “The Risky”.

Sir, Gillian Tett writes about the growing sector of private funds that, instead of banks, are now lending to the “riskier”, like SMEs and entrepreneurs. “Ham-fisted rules spark the creativity of lenders” October 13.

That is explained with: “these funds only exist because there is a tangible need: mid-market companies need cash, and banks are reluctant to provide this because the regulations introduced after the 2008 global financial crisis make it too costly for them to lend to risky, small clients.”

No! Before risk-weighted capital requirements were introduced, all cost and risk adjusted interest rates were treated equally whether these we offered by sovereigns, AAA rated, mortgages, small and medium unrated businesses or anyone else. Not now, and especially not since Basel II of 2004.

Now banks can leverage those offers more when lending to “The Safe”, so they earn higher risk adjusted returns on equity when lending to The Risky, so they lost all interest in lending to The Risky.

In this respect the de facto cost of trying to make banks safer has therefore been reducing the opportunities to bank credit of those perceived as riskier, which of course increases inequalities.

Sir, please try to find any bank crisis that resulted from excessive exposures to The Risky. These always resulted from excessive exposures to what was ex ante perceived as belonging to The Safe.

@PerKurowski

Martin Wolf seems slightly lost in the oceans of global bank regulations

“A natural connection exists between liberal democracy.. and capitalism... They share the belief that people should make their own choices as individuals and as citizens.” “Democratic capitalism is in peril” August 31.

Absolutely! But Martin Wolf seems not to agree with the right of accessing bank credit freely, and gladly accepts regulators distort with risk weighted capital requirements for banks.

Wolf opines: “Capitalism is inegalitarian, at least in terms of outcomes”

Absolutely not! Capitalism both takes away from the lazy and by offering opportunities, gives to those with initiatives and is therefore extremely egalitarian! It is when besserwissers, like those in the Basel Committee intervene, that capitalism stands no chance to deliver opportunities for all.

Wolf writes: “Today, however, capitalism is finding it far more difficult to generate such improvements in prosperity.”

Yes, how could it not, when regulators allow banks to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky.

Wolf writes: “Controlled national capitalism would then replace global capitalism”

Frankly, has that not already happened with the risk weights of the sovereigns set at 0% and that of We the People at 100%?

Wolf writes “My view increasingly echoes that of Prof Lawrence Summers of Harvard, who has argued that “international agreements [should] be judged not by how much is harmonised or by how many barriers are torn down but whether citizens are empowered… if the legitimacy of our democratic political systems is to be maintained, economic policy must be orientated towards promoting the interests of …the citizenry”

Sir, frankly, how can citizens be empowered when bank regulators decide that the risk weight of the sovereign is 0%, that of the AAArisktocracy 20%, and that of We the People 100%?

Democratic capitalism is in peril? No it has already been defeated. To recover it let’s get rid of current bank regulators and their dumb regulations.

PS. Here is one new attempt to get people like Martin Wolf to understand what has happened. 

@PerKurowski ©

“Progressives” can promote fairness and growth by stopping bank regulator’s despicable discrimination against “risky”

Sir, Lawrence Summers writes: “Often in economics there are trade-offs. But not always. We can and must promote both fairness and growth. “The progressive case for championing pro-growth policies” August 8.

And for that he recommends: “more demand for the product of business. This is the core of the case for policy approaches to raising public investment, increasing workers’ purchasing power and promoting competitiveness”

Again Summers seems to ignore completely what one could believe would be a great cause for “progressives”, namely to combat how the last decades those who are perceived as risky, when compared to those perceived as “safe”, have had their access to credit made much more difficult by the risk weighted capital requirements for banks

Who are “the risky”? In terms of growth, the all important SMEs and entrepreneurs, those risk weighted 100% (and more).

Who are “the risky”? In terms of fairness, the weaker, the poorer, the not yet up there, the ones praying for fair opportunities.

So how can we explain that progressives do not give much attention to these regulations that so odiously discriminate in favor of the AAArisktocracy and against "the risky"? Perhaps because these also include the risk-weight of 0% for the government, and most progressives are foremost statist.

Perhaps because it is not in the nature of progressives to understand, and much less admit, that regulators can get it so wrong.

@PerKurowski ©

Jamie Dimon should consider the long-term interest of his and of JPMorgan’s shareholders’ children and grandchildren

Sir, Ben McLannahan reports on Jamie Dimon’s letter to JPMorgan’s shareholders’. “JPMorgan chief Dimon warns on dangers of undermining US banks” April 7.

In his letter Dimon argues that tougher rules can weaken the competitiveness of US banks, for instance against the Chinese banks. That’s true! Especially in the short-term.

And McLannahan reminds us that “In 2014 Dimon argued that tougher rules would mean that customers faced more expensive credit, or would be denied certain financial products altogether.” That is also true!

But Dimon must also be perfectly aware that current bank capital requirement rules, for when lending to those ex ante perceived as “risky”, are much tougher than those for exposures to the “safe”.

And I refuse to think that Dimon does not know that distorting the access to bank credit in favor of the “safe” government and the AAArisktocracy, against that of the “risky” SMEs and entrepreneurs, only guarantees to sooner or later weaken tremendously the real economy of US. 

And I also refuse to think that Dimon does not know that no US bank should expect to be able to stand solid amid the rubbles of a ruined US economy… not even JPMorgan.

Dimon states: “The US financial services industry does not conform to simple narratives. It is a complex ecosystem that depends on diverse business models coexisting because there is no other way to effectively serve America’s vast array of customers and clients.”

And surely Dimon knows perfectly well, that a complex ecosystem is not made better by regulators who, with much hubris and little wisdom, believe they can help it with their distorting concoctions.

And so Jamie Dimon, instead of writing a letter to JPMorgan’s shareholders considering their short-term interest, should write them a letter that considers the long-term interests of theirs and his own children and grandchildren.

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

God make us daring!

@PerKurowski ©

Why did not Mark Carney warn long ago entrepreneurs and SMEs, they would no longer have fair access to bank credit?

Sir, Pilita Clark reports on how Mark Carney, the current chairman of the Financial Stability Board “warns investors of ‘huge’ hit as climate action ‘strands’ fossil fuel assets” September 30.

Because nervous regulators thought bankers did not see or responded sufficiently to the credit risks that were perceived, they forced banks to hold more capital when lending to the risky, than when lending to the supposedly safe, like to Sovereigns and members of the AAArisktocracy.

And so why then did not Carney long ago warn all aspiring “risky” entrepreneurs to forget their plans, since they could not any longer count on fair access to bank credit?

And is not Carney Canadian? Should he really be talking down the value of “stranded fossil fuel assets” just like that? It sounds a bit irresponsible to me.

And if Carney is so concerned, why does he then not require banks to hold capital based on the risk of the sustainability of planet earth?

For instance, if banks when financing something that supposedly helped sustainability were allowed to hold less capital, and could thereby earn higher risk adjusted returns on equity, that would at least induce them to serve a purpose. Basing it like now solely on perceived credit risk does not. It is both useless and dangerous… dangerous because big bank crisis never result from excessive financing of what is perceived risky, but from excessive financing to what is erroneously perceived as very safe.

Disclosure: My granddaughters are Canadian.

@PerKurowski

Both leftwingers and free-marketeers got lost in the world of finance, banks and regulations

Sir, Paul Marshall identifies himself as one of “those of us who want free markets to retain their legitimacy” and reacts against that “monetary policy has already extended well beyond its technocratic bounds into the realms of wealth distribution” … because of course that is what Mario Draghi, president of the European Central Bank… is doing [with quantitative easing when] “artificially distorting the bond markets so that the debt-ridden governments of peripheral Europe can continue to enjoy a low cost of capital (the eurozone’s very own Ponzi scheme)”, “Central banks have made the rich richer” September 23.

I agree, but central bankers are assisted in this scheming, by regulators who have allowed banks to hold loans to The Safe, like governments and the AAArisktocracy, against much less capital that what they need to hold when lending to The Risky, for instance SMEs and entrepreneurs.

Paul Marshall also writes: “Quantitative easing, as this policy is known, has bailed out bonus-happy banks and made the rich richer. It is a surprise that the UK opposition party and other leftwingers have not made more of this.” That is correct but in response I would also ask, where were those free-market believers like Paul Marshall when in 1988 the Basel Accord assigned risk weights of zero to sovereigns and 100 percent to the private sector… and completely distorted the free market allocation of bank credit?

As food for thought let me quote from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.” 

With current regulations banks become "bad banks" from lending excessively to the good risks... and that does not sound too egalitarian to me.

PS. Bank regulators need an App to do their job for them. An App developer would at least have asked what is the purpose of a bank and so not have ignored their function of allocating bank credit efficiently to the real economy. An App developer would also know that what is dangerous for the banking system is what is perceived safe... never what is ex ante perceived as risky

@PerKurowski

Capital requirements for banks, instead of on credit risks, should be based on the risk of loony regulators regulating.

Sir, I refer to Patrick Jenkins’ “Make advisers pay when deals go wrong” September 11. 

In it Jenkins writes: “for at least eight years, free markets have been far from genuinely free… inflated in part by the policy response to the financial crisis… market distortions… created by the tougher rules imposed on the investment banks in the aftermath of the financial crisis”. 

Evidently Jenkins does not want to contemplate the possibility that the existence of no free markets, as a consequence of distorting rules arising from Basel I and II caused the financial crisis.

And he refers to “lightly regulated banks”… Come on! Is it not high time for some intellectual honesty?

What is so light about allowing banks to leverage 60 times or more lending to sovereigns and AAArisktocracy and only 12 times lending to SMEs and entrepreneurs? What is so light about capital requirements that completely distort the allocation of credit to the real economy?

Jenkins opines: “Make advisers pay when deals go wrong” Absolutely! But what about making regulators pay when regulations go wrong? And what about making influential financial journalists pay when they completely ignored what was happening?

No Sir. Clearly the capital requirements for banks, instead of being based on credit risks, should be based on the risk of regulators being totally wrong… and it is the journalist’s responsibility to diminish that risk… so that we do not have to require banks to hold 100 percent in capital.

@PerKurowski

And the pedigree of the AAArisktocracy, thanks to Basel Committee, is worth much more than the markets ever intended.

Sir, I refer to Gillian Tett’s “Why ‘pedigree’ is the buzzword for elite employers” May 23, in order to comment on the exaggerated importance given to other pedigrees… like credit ratings.

A good credit rating pedigree naturally results in easier, cheaper and more abundant access to bank credit… and that is how it should be.

And some even thought that some market participants, like the bankers, went overboard considering that credit risk pedigree. For instance, Mark Twain has been quoted holding that a banker is the one who lends you the umbrella when the sun shines and wants it back as soon as it looks its going to drizzle a bit.

But then, in 1988 with Basel I, and later in 2004 with Basel II, some too frightened bank regulation bureaucrats, told bankers that was not enough, and that they had to consider that same credit risk pedigree in their capital [equity] too.

And as you can understand any pedigree, no matter how good and correct it is, if it becomes considered too much, will generate the wrong response to that pedigree.

And so Boom! with that manipulation, a tremendous distortion was introduced into the markets of bank-credit… and which has had the real economy suffering from too much and too cheap credit to the AAArisktocracy, which includes the “infallible sovereigns”, and too little and too expensive credit to “The Risky”, like SMEs and entrepreneurs.

And I must say I find it fascinating how an anthropologist like Gillian Tett, writing in the Financial Times, does not find the introduction of such regulatory risk-aversion, to be interesting enough to comment on it. There’s got to be something more to it.

PS. I admit without problem to an obsession against these bank regulations that are destroying the world where my grandchildren will want to find good jobs in. What I do not understand is others´ obsession in ignoring this problem. 

@PerKurowski

Gillian Tett would do better advising “the risky” on how to fend off bank regulators… pro-bono of course

Sir, Gillian Tett hands out her disinterested advice on “How savvy asset managers can fend off the regulators” May 15. Although most of them are grown up men who can take care of themselves, some of “Society’s lottery winners” might indeed appreciate her concerns about their wellbeing.

That said I believe that the small businesses and entrepreneurs would be much more appreciative of Ms. Tett’s efforts on how they can fend off the regulators. You see Sir, these borrowers have seen their access to bank credit drastically curtailed, as a result of regulators allowing banks to hold much less equity when lending to the infallible sovereign or to members of the AAArisktocracy than when lending to them.

Ms. Tett who has so much access to hotshots, could she perhaps put a word in for “the risky”, by reminding regulators that these borrowers, though they do suffer a lot from bank crises, they have never ever caused one? It could perhaps also be useful for Ms. Tett to remind regulators that the future health of the economy, that on which banks’ stability most depends on, is helped by “the risky” having fair access to bank credit.

Please Ms. Tett… look at is as a good pro-bono community service. 

@PerKurowski

Basing equity requirements for banks based on cuckoo-calls, could be better than using current risk weights

Sir, Satyajit Das writes “Where assets are not adjusted for relative risk, banks are encouraged to increase risk without having to hold additional capital”, “Rules to cut bank risk work in theory but not necessarily in practice”, April 28.

Wrong! Adjusted to relative risk has all to do with expected risks, with unexpected losses, those that bankers should be able to manage or have to fail, fast. Capital requirements should create a shield against the unexpected, something which definitely does not include the expected risks that banks are already clearing for.

For instance, if the probability of a cuckoo calling out more than x times during x month was 8 percent, then that percentage or required equity applied to all bank assets would make more sense that current risk-weights.

As is banks are not taking sufficient risk on what is perceived as risky, like lending to SMEs, but taking excessive risks on what is perceived as “safe”, like lending to the sovereigns or to the AAArisktocracy

The cuckoos in the forest would serve us better than the cuckoos in the Basel Committee.

The problem is that regulators, behind our backs, empowered an AAArisktocracy to have special access to bank credit.

If we tax and redistribute all wealth, what shall we do the morning after the party? That question, which could be asked to Piketty, is similar in nature to the question we could make to John Plender, “The corporate aristocracy holding out against fiscal revolution” March 3.

Mr. Plender After getting rid of all that corporate cash by paying dividends, by paying taxes or by building private bridges to nowhere, then what?

Also, all that cash is not just forgotten cash lying under a mattress. Plender himself even mentions that “the corporate sector… in several big economies… now acts as a net lender to governments” which means, that the government already uses those funds, perhaps even paying negative interest rates on these.

Current regulations do not allow bank credit to flow in a fair way to those “smaller companies, which innovate and create jobs”, only because they are perceived as “risky”. That is why the liquidity coming from QEs is trapped, and blows bubbles around already existing assets. But Plender, like many others, just does not want to see this…I wonder why?

What “corporate aristocracy”, what we have is an AAArisktocracy that has been appointed by regulators as those who really merit bank credit.

PS. I have for many years argued that when corporations pay taxes, they dilute the citizens’ tax representation. And that is why when Plender writes that in the US corporate taxes were down to 1.6 percent by 2013, my first impulse would be, bring it down to zero now and save yourselves a lot of expensive economic and political distortions.

PS. Also, as a shareholder, in these times of possible extreme volatility, I do not like to hold shares in any company that has not hoarded ample reserves of cash… to fend off threats or to capitalize on opportunities

Perhaps crony-relation-weighted equity requirements for banks could be useful in Ukraine and other places?

Sir, I refer to Martin Wolf’s “Help Ukraine seize this chance” February 11.

Wolf writes: “Also important will be the reform of banking, particularly the elimination of lending by banks to the connected parts of larger business entities. This is aimed at limiting the dominance of the oligarchs, most of whom seized wealth in the early years after independence.”

That describes well a problem which affects the allocation of bank credit in many developing countries, and I would hold that has been the direct cause of most serious bank crises there.

In that respect perhaps crony-relation-weighted equity requirements for banks should substitute for those credit-risk-weighted regulations currently favored by the Basel Committee, and which so much benefits the "infallible" sovereigns and other members of the AAArisktocracy.

More-coziness-more equity… but then again there might not be someone daring o able to rate those relations objectively.

An excessive risk aversion, an “Après nous le deluge”, is the bequest of what kind of generation?

Sir, I refer to John Kay’s “Inequality is the bequest of an unequal generation” January 21. To it, I would like to add the following:

Our forefathers’ central banks and bank regulators, unless they lived in dictatorships or in communist lands, never told banks who to lend or not to lend. And as a consequence banks took many risks that have played out right for us.

Our generation on the contrary, represented by the Basel Committee, by means of credit risk weighted equity requirements, are de facto instructing banks to stay away from what is perceived risky and to favor the access to bank credit of the “infallible” sovereigns, the AAArisktocracy and the housing sector. 

John Kay, that sissy and perfectly useless risk-aversion, and which like in neon lights screams out “Après nous le deluge”, makes us what kind of generation? 

I am sure that our grandchildren are going to pay dearly for our banks not lending sufficiently and in fair terms to small businesses and entrepreneurs... and once they understand what happened they will not be kind on the current generation of bank regulators.

Basel Committee, Financial Stability Board: Hear hear… Tim Harford’s "The Power of saying ‘NO’"

Sir, hear hear… Tim Harford’s, “The Power of saying ‘no’”, January 17.

“Please, please, dear bank regulator, allow us lower equity requirements on these ultra safe exposures and we promise that will stay away from what’s risky”

Absolutely NOT! The real bank crises have always occurred when something ex ante was considered as “absolutely safe” so I will not run the risk of next time that happens, you will, because of me, stand there with your pants down and no equity. Copy: finance.historians@gmail.com

Absolutely NOT! If I allow this, then I will not be able to look into the eyes of all those small businesses and entrepreneurs, who will be denied credit as a result of favoring the AAArisktocracy; or into the eyes of all those young unemployed, who could become a lost generation if I did so. Copy: risky.borrowers@gmail.com unemployed.youth@gmail.com

PS. But, unfortunately, bank regulators did not have it in them to say “NO!” to bankers.

When will we stop investing with so much power not so much caring whimsy central bank bureaucrats, to try to bet against the markets... with our money?

Sir, back in the eighties, in Venezuela, some friends and I purchased one year of the harvest of many mango trees. When time came, with much love and care, we send each mango beautifully wrapped, first class freight, prepaid in Pounds, very expensive, on British Airways to Harrods. The mangoes were a success! “We’ve made it!”… Forget it!

The same day we got paid in London, back in Caracas, a big shot in the government decided that the value of the Bolivar was too low, and instructed our Central Bank to do what it could in order to revalue it, about 20 percent. And down went the Bolivars per US Dollar, and so down went the Bolivars per Pound, and so we were unable to recover our investment. Had we exported a few more mangoes, I would have lost my shirt.

And that is why my heart goes out to all those who make efforts and take risks, and then see those efforts turn into nothing, only because of the excessive powers accumulated by some whimsy central bankers who, at their desks, care little to nothing about the real-real economy… only about their GDP growths, their deflations… or whatever monster is in fashion... and go and bet against the market... with our money.

Obviously I was reminded of this incident, when reading about what the Swiss National Bank has been up to, January 16. Where do they get so much power? Are they never held accountable for anything?

For instance, on a related issue you know Sir is very close to my heart, where do these bureaucrats get so much power so as to be able to order banks to have more equity against loans to the risky”, than against loans to the AAArisktocracy? That makes us “risky” mango exporters have less fair access to bank credit, when in fact, at the end of the day, sometimes it is their actions that pose the greatest risks to us?

JP Morgan Chase, Jamie Dimon, welcome to the club! Small businesses and entrepreneurs have been attacked for years!

Sir Tom Braithwaite reports that, because of proliferation of regulators and legal bills, “Dimon says banks ‘under assault’” January 15

Indeed, no question about it, Dimon is absolutely right, but, as I see it, he has to stand in line with his compliant; at least until all those perceived as “risky” have been able to voice theirs, because they have in fact been under attack for much longer.

In those old days when regulators were very chummy with banks, days of Basel II, banks were allowed to hold very little equity against assets perceived as absolutely safe. And that allowed banks to make risk-adjusted returns on equity, on “safe” exposures, we normal citizens could never even dream of. And, in doing so, the regulators de facto removed all incentives for banks to give credit to “risky” small businesses and entrepreneurs. I can almost hear Jamie Dimon asking his Board “Why should we give loans to a “risky” when doing so we can only leverage JPMorgan Chase’s equity 12 to 1, when giving loans to the AAArisktocracy we can leverage 60 times or even more?”

But, that said, the “risky” and the banks do have a mutual complaint they can raise with respect to the fines or the penalties for bank’s misdeeds. Because, were it not for these, banks could have more equity available that could be leveraged with loans to the risky.

Perhaps judges should listen to them and force all bank fines to be placed in special bank equity accounts, available exclusively to be leveraged lending to small businesses and entrepreneurs… and I am sure all unemployed would also support that motion.