Don’t keep adding bank regulations for what is ex ante perceived risky. It is what is ex ante perceived as very safe that should concern us the most.

Sir, I refer to Sheila Bair discussion of how much banks are to set aside in order to cover for loan losses. “Congress should stay out of new bank rules for loan losses” August 5.

Bair mentions, “that FASB wants to switch to a new rule, known by the name of “current expected credit losses” or “CECL.” That rule “says that banks should set aside enough to cover expected losses throughout the life of a loan, taking into account a wide variety of factors, including historic loss rates, market conditions, and the maturity of the economic cycle.”

Bair argues the new rule has two key benefits. “First, banks will start putting aside money on day one of each loan so when trouble hits — as it did in 2008 — they will not be trying to play catch-up with their reserves.” 

Really, what money would they have had to put aside for the AAA rated securities gone bad? What money would they have had to put aside for loans with a default guarantee issued by an AAA rated entity like AIG?

Then “Second, it should make bankers a little more cautious in their lending decisions, as they will have to account for likely losses when the loan is made, not kick the can down the road until the borrower is actually in arrears.”

That all has me concerned with that we might be adding a new layer of discrimination against the access to credit of the risky.

Those perceived ex ante as risky already get less credit and pay higher risk premiums. Those perceived ex ante as risky already cause banks to have to hold more equity against loans to them. 

If those perceived ex ante as risky must now also require banks to set aside reserves earlier than what is required for those perceived as safe, banks might stop altogether lending to the risky, like to entrepreneurs, and that will absolutely hurt the economy.

And Sir, it would all be for nothing, because major bank crises are never caused by excessive exposures to what was ex ante perceived as risky when placed on banks’ balance sheets. 

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

Much needed bank capital reforms are hindered by bank lobbying, and by regulators unwilling to discuss their mistakes.

Sir, Benoît Lallemand, Secretary-General of Finance Watch writes: “European bank supervisors last year found ‘unjustified underestimations’ of risk in nearly half of the 105 banks they investigated” “Banks should submit to logic of reform on capital allocation”, March 6.

For those regulators who assigned a risk weight of 150% for what is so innocuous for our bank systems as what is rated below BB-, is not assigning a meager 20% for what could really endanger our bank systems, precisely because it is ex ante rated a very safe AAA to AA, a much worse ‘unjustified underestimations’ of risk?

Surprisingly Lallemand opines that “Risk-based capital measures could still serve their original purpose: as an internal instrument to guide banks’ capital allocation processes.

What? Where in all Basel I or II regulations has he seen stated their purpose was of being “an internal instrument to guide banks’ capital allocation processes”?

It is only the complete elimination of risk weighting that could “encourage banks to lend more productively because it would lessen the regulatory skew towards seemingly safe assets, which has done so much to deprive the real economy of capital, inflate housing and land prices, and feed financial instability.”

Because, even with a 5% leverage ratio, something Lallemand favors, keeping risk weighting would keep on distorting the allocation of bank credit on the margin, there where it matters the most.

Lallemand ends arguing, “that such reforms have still not happened is testament to the power of the banking lobby”. No, much more than that, it has been the refusal by bank regulators to admit their mistakes.

Would there have been any type 2008 crisis if European and American investment banks had not been allowed to leverage a mind-blowing 62.5 times with assets rated AAA to AA, or with assets for which an AAA rated entity like AIG had sold a default guarantee? The answer to that is, an absolute definitive, NO!

@PerKurowski

The worse the mortgages packaged, the higher the potential of securitization profits was (is)

Sir, FT’s big read by Mark Vandevelde and Joe Rennison “The story of a house” September 6, leaves out two important facts:

First: Christopher Cruise, who ran popular courses in mortgage origination, is quoted with “You had no incentive whatsoever to be concerned about the quality of the loan or whether it was suitable for the borrower” 

But yes you did, only in a direction quite different than usual. The worse the borrower and the worse the mortgagor, the higher the potential of profits of packaging it in a securitization sausage bound for a high credit rating. All involved in that securitization would profit, immensely, except of course those who were being packaged into that sausage. Imagine, if that sausage obtained an AAA to AA rating, US investment banks and European banks were allowed by the regulators to leverage 62.5 times their capital with these.

Second: “Société Générale, the French bank, was one of those that took out insurance against a collapse in the value of Davis Square, buying exotic derivatives contracts from the insurance group AIG.”

That was not solely for insurance. Because AIG was AAA rated, whatever lower rated securitized mortgages it added its signatures to also gave the banks the possibility of a mindboggling 62.5 times leverage. 

Profit potential: If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy profit of $210.000

Sir, credit rating agencies using fallible humans did not stand a chance to get it right! 

@PerKurowski

The US 2008 financial crisis was born April 28, 2004

Sir, Janan Ganesh writes: “A financial crisis that was experienced as a fragmented chain of events is being commemorated as just one: the fall of Lehman Brothers, 10 years ago next month",” “Political distemper preceded the financial crisis” August 30.

That is only because the truth shall not be named. In the case of the United States, that crisis started on April 28, 2004 when the SEC decided that the supervised investment bank holding company ("SIBHC"), like Lehman Brothers, “would be required periodically to provide the Commission with consolidated computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards." 

When the Basel standards approved in June 2004 included allowing banks to leverage a mind-boggling 62.5 times with any asset that have been assigned by human fallible credit rating agencies an AAA to AA rating, or had been guaranteed by an AAA rated corporation like AIG, the crisis began its construction. That in the European Union the authorities also included allowing banks to lend to sovereigns like Greece against no capital at all would only worsen the explosion.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Auditing is important, but what causes a disaster, is more important than how it is being accounted.

Sir, “FT Big Read. Auditing in crisis: Setting flawed standards” of August 2, discusses, among other, the huge divergence of figures in the auditing of the value of derivative exposures of AIG and of Goldman Sachs, even though their auditor was the same, in this case PricewaterhouseCoopers. 

That it was “striking how little was verifiable, that there were few credible market prices, let alone transactions, to support the key valuations”, explains much of the divergence.

Sharon Bowles, former chair of the European Parliament’s economic and monetary affairs committee explains it with: “Accounts have always contained estimates; think of the provisions companies make against foreseeable future losses, but the un-anchoring of auditing from verifiable fact has become endemic.”

That “un-anchoring from verifiable facts” is not limited to auditing. 

Sir, for the umpteenth time, without absolutely no verifiable facts, regulators concocted their risk weighted capital requirements for banks, based on the quite infantile feeling that what was perceived risky must be more risky to the bank system than what was perceived safe. In fact what could have been verified, if only they had looked for it, was the opposite, namely that what’s perceived safe is more dangerous to our bank systems than what’s perceived risky.

With that the regulators assigned to AAA rated AIG, by only attaching its name to guarantee an asset, the power to reduce the capital requirements for investment banks in the US, and for all banks in Europe, to a meager 1.6%. That translated into an allowed 62.5 times leverage. Let me assure you Sir that without this the whole AIG and Goldman Sachs incident described would never have happened. 

As always, what causes the problems is much more important than how the problems are accounted for. Though of course I agree, sometimes bad-accounting could in itself be the direct cause of the problems. 

The article also refers to “the so-called efficient markets hypothesis… that now somewhat discredited theory”. Sir, no markets have any chance to be credited with performing efficiently with such kind of distortions. For instance how verifiable is it now that sovereign debt is as risk-free as markets would currently indicate, when statist regulators have assigned it a 0% risk free weight, and are thereby subsidizing it?

@PerKurowski

Without the endorsement by regulators, banks would never have leveraged their equity 60 times to 1 with any asset.

Sir, Gary Silverman writes: “exempting the derivatives known as credit default swaps from more rigorous federal regulation…[was] one of the biggest mistake leading to the financial crisis”, “Why it is wrong to forget Lehman’s fall” September 20.

That is not so. Again, for the umpteenth time, I will explain prime cause of the financial crisis, namely the capital requirements for banks, and this by using the examples of Lehman Brothers, AIG and Greece.

The regulators in June 2004, with Basel II, decided that against AAA rated private sector assets, and against any sovereign rated as Greece was until November 2009, banks needed to hold only 1.6 percent in capital, meaning banks could leverage their equity with those assets over 60 times to 1. In comparison, when holding “risky” assets like loans to entrepreneurs and SMEs, banks were only allowed to leverage 12 times to 1. 

On April 28, 2004 the SEC decided that what was good for the Basel Committee was good enough for them, and so allowed Lehman to leverage over 60 times to 1 with AAA rated securities guaranteed with mortgages to the subprime sector… Since Europe were allowing their banks to do the same… the demand for these AAA securities became so huge that it overpowered all the quality controls in their manufacturing and packaging process… and Bang!

If AAA rated AIG guaranteed an asset, banks could also dramatically reduce the capital they needed to hold against that assets, and this overwhelmed AIG’s capacity to resist selling “very profitable” loan default guarantees… and Bang!

And Greece was of coursed offered loans in such amounts, and in such generous terms, so that its governments could not resist the temptations… and Bang!

As can be seen the above has nothing to do with deregulation, or with exempting anything from rigorous federal regulation, and all to do with imposing extremely bad and distorting regulations. On their own, and without the direct endorsement of regulators, banks would never ever have dreamt of leveraging their equity 60 times or more, with any asset… no matter how safe it looked.

If we are not going to spell out the real reasons why Lehman Brothers fell, then we better all forget Lehman’s fall.

PS. Here are 7 questions US Congressmen and Governors should ask bank regulators.

@PerKurowski

The next crisis will have the same origin as the last, too much bank exposure to what is blessed as safe by regulators.

Sir, Avinash Persaud writes: “Exotic assets, and the crippling losses that big and indispensable financial institutions suffered after buying too many of them, bore much of the blame for the last financial crisis. The next one might have a more paradoxical cause. Instead of being overexposed to assets of dubious provenance, many of the same institutions may be buying too many of the assets that the authorities deem safe.”, “The assets made combustible when regulators call them ‘safe’” June 2.

What “Exotic assets that bore much of the blame for the last financial crisis” is Persaud talking about? Where has he been? Was it not AAA rated securities, loans to Greece, any assets backed by default guarantees issued by an AAA rated like AIG, loans to the real estate sector in Spain, and similar “safe assets” that caused the crisis? Every single one of these problematic assets had one thing in common, namely that bank were allowed to hold very little equity against these because these were perceived as safe.

But Avinash Persaud is absolutely correct when he ends stating: “In the popular narrative, the financial crisis was caused by the willful wrongdoing of the banks. Regulators should know better. In financial markets, risky behavior is less often born of recklessness than of a false sense of safety.”

I wonder though if he will dare to honestly extrapolate from what he is saying… and understand that current capital requirements for banks should perhaps be higher for what is perceived as safe than for what is perceived as risky? And then dare to state that current bank regulators have been 180 degrees wrong?

CDS were bought more for their capacity to reduce equity requirements for banks, than as insurance against defaults.

Sir, I refer to Joe Rennison’s report “Wall St looks to revive niche CDS” May 20.

It states: “single-name credit default swaps, a derivative contract that tracks the risk of default by a company that sells bonds. Regulators sought to clamp down on the market after the crisis because it was widely blamed for helping to inflate the credit bubble”.

That is not telling it like it really was!

According to Basel II, if a bank wanted to hold a bond that for instance was rated BBB+, it needed to hold 8 percent in equity… meaning it could leverage about 12 to 1.

But, if it bought a CDS for that bond from an AAA rated company, like from AAA rated AIG, then it needed to hold only 1.6 percent in equity and could therefore leverage about 60 to 1.

And that is what really drove the incredible artificial demand for these CDS that helped to inflate the credit bubble.

If CDS are to work, as they should, they need to be traded on their own merits of how they provide insurance against defaults, and not because of regulatory distortions.

Do not let failed regulators get away with their own favorite version of history!

@PerKurowski

God help our grandchildren if our insurance sector, like our banks also fall into the hands of a Sissy Brigade.

Sir, You hold that “Global insurers should be supervised at scale”, May 4. One reason for why you think that should be, is “the pivotal role of American International Group in the 2008 financial crisis. AIG… was belatedly found to have an insolvent derivatives trading unit, heavily intertwined with large banks and investment banks.”

That’s correct, but the real cause for that excessive intertwinement was that since AIG was AAA rated, if it assumed the risk of a bank asset, then according to Basel II, banks could leverage their equity with that exposure more than 60 to 1. What a temptation! So in fact it was the regulators’ own dumb risk-aversion that caused AIGs problems.

I find it amazing that the world has allowed itself to fall into hands of a shortsighted bank regulator who thinks that banks can remain safe by avoiding to take the risks needed to adequately take care of the real economies’ financing needs.

With its credit-risk weighted equity requirements, those which allow banks to earn higher risk adjusted returns on equity when financing what is perceived as safe, than when financing what is perceived as risky, the Basel Committee (and the Financial Stability Board) has completely distorted the allocation of bank credit to the real economy.

And now another risk-aversion centered Sissy Brigade, the EU with its Solvency II, is also in pursuit of the insurance sector, which will make sure its investments will be completely distorted too. And FT, tough not explicitly in this editorial, even seems to be egging them on. God help us. God especially help our children and our grandchildren, those most in need of banks taking risks, with reasoned audacity.

@PerKurowski

Regulators who darkened the banks in the sun, should not be allowed to shine light on those in the shadows

Sir, I refer to your “Regulators shine a light on the banking shadows” October 15. Therein your argue: “FSB’s rules on short-term securities lending are a sensible start” since “The shadow banking system was at the heart of the financial crisis” and then you refer to “the meltdowns of Lehman Brothers and AIG”

Quite a distorted view I would say… both Lehman Brothers and AIG troubles had little to do with the shadows and most to do with the regulations that applied to the banks in the sun.

On April 28, 2004, two months before Basel II was formally approved, SEC decided that " for Broker-Dealers that are Part of Consolidated Supervised Facilities and Supervised Investment Bank Holding Companies… computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards" should apply.

And that meant that, for instance Lehman Brothers, would be able to leverage its equity 62.5 times to 1 when investing in AAA rated securities, such as those that detonated the disaster.

And the same Basel Standards implied that, if a company like AIG, proud bearer of an AAA rating, puts its name to a debt instrument, banks would be able to leverage these investments 62.5 times to 1… and so of course everyone wanted to hire AIG’s AAA rating… at a reasonable price.

And, if someone does not understand the temptations a 62.5 to 1 leverage implies for a financial company, he knows nothing about finance and less about regulations. As a reference, hedge funds, those animals of speculation, these can rarely leverage their equity more than 10 to 1.

Sir, I am not at all sure that current regulators, those who so much helped to darken the prospects of our banks, should even be allowed to try to shine a light on the banks in the shadows… they done enough damage as is.

May I here remind you of some minimum terms we need to lay down before we allow regulators to regulate any banks?

IMF, Mme. Lagarde, Martin Wolf: Get it! Bank regulators have prescribed the “new mediocrity”.

Sir, I refer to Martin Wolf’s “How to do better than the new mediocrity” October 15.

Wolf writes: “It is important not to exaggerate the story of slowdown in the world economy. Yet it is also vital to avoid a progressive downward slide in growth. To address this risk it is necessary to launch well-crafted reforms in both emerging and high-income economies...”

Current capital requirements for banks direct banks to hold assets, not based on their pure economic returns, but based on those higher risk adjusted equity returns they can obtain by adjusting to the ex ante perceived credit risks, those which have already been cleared for in interest rates and size of exposure. And that IMF, Martin Wolf and so many others cannot understand that excessive credit-risk aversion can only lead to mediocrity, is a real mystery to me.

And so the number one reform the world needs is to abandon all credit risk weighing when setting the capital (equity) requirements for banks.

That would unfortunately not be an easy task because, while bank credit redirects itself to serve the needs of the real economy and not the wishes of the Basel Committee; and while banks are made to have stronger capital (equity) levels, it is important to make certain that the overall liquidity provided by banks does not shrink and become a recessionary factor.

In the absence of such reform, “more public investment in infrastructure” capitalizing on regulatory subsidies that makes public debt less expensive that it would otherwise be, and like what the IMF and Martin Wolf with so much gusto propose, could make it all so much worse… and, of course, so much more mediocre.

The Basel Committee, with its Basel II, was at least 90% responsible for AAA rated AIG´s collapse.

Sir, of course “Insurers may be at the centre of the next big crisis” as Patrick Jenkins writes, December 27.

But when Jenkins describes AIG´s collapse in terms of it becoming “diversified so fast that it became impossible to manage and regulate”, he does not explain with sufficient clarity what really happened.

AIG, by having an AAA rating, was granted by bank regulators the gift of by lending its name, being able to reduce immensely the capital requirements for the banks. And that was worth so much in the market, that the banks went crazy borrowing AIG´s name and AIG lending it out… and no credit rating agency was fast enough to pick that up.

Had not Basel II been approved, something else bad could have happened to AIG, but not what happened. And I just wonder why this insistence on shielding the regulators from the truth that they were (and are) the party most responsible for the crisis, because of how they distorted all bank resource allocation, with their stupid capital requirements based on some perceived risks which are already cleared for by other means.

The members of the Basel Committee should be made to parade down our avenues wearing dunce caps. If there is one single spot where total accountability must be absolutely required, that should be in those committees that take upon them to design global rules for all.

The thought of having the same failed bank regulators given some powers to also regulate the insurers, “now a crucial part of the so called shadow banking sector” is as scary as can be.

AIG, instead of suing those who bailed them out, should sue those who got them in problem, namely the bank regulators.

Sir, Tom Braithwaite reports that “AIG considers suing US over bailout terms” January 9, something that sounds indeed a bit surrealistic.

Basel II’s 8 percent basic capital requirement for banks allowed a 12.5 times to 1 leverage of bank equity. But it could be reduced to a minimal 1.6 percent, pushing up the allowed leverage to 62.5 to 1, if the bank exposure could be construed as guaranteed by something possessing an AAA rating.

Therefore, had bank regulators not turned the AAA-rating of AIG into an amazing magical capital requirement for banks shrinking machine; something which created an insatiable demand for AIG's credit default swaps, absolutely nothing bad would have happened, as even the whole 2007-08 financial crisis would have been avoided.

Therefore, if the AIG board absolutely must sue someone, because it feels that is the only way it can discharge its responsibilities, according to current traditions, then instead of suing those who bailed them out, they should sue those who got them in problem, the bank regulators.... and perhaps even the US tax-payers would join them in order to turn it all into a class action.

“Misunderstanding Financial Crises”... Indeed Professor Gorton

Sir, Gary Gorton a Professor of financial economics at Yale, and consultant for over ten years to AIG Financial Products writes “Banking must not be left to lurk in the shadows”, November 21, in which he concludes with “we know now… privately created bank money is subject to runs in the absence of government regulation”. 

"Absence of government regulation”, what does the Professor mean?” Does he not understand that there never ever have been such intrusive and distortive regulations as when regulators took upon themselves to play the risk managers of the world, and ordered risk-weights to be applied when calculating the effective capital banks needed to hold against individual assets? 

Does the consulting Professor not know that the sole reason for AIG getting into trouble selling an extraordinarily excessive amount of credit default swaps, was that bank regulations allowed banks who bought such product, when issued by an AAA rated entity, like AIG was, to hold that asset against only 1.6 percent of capital, a mindboggling authorized leverage of over 60 to 1? 

In his recent book, “Misunderstanding Financial Crises”, Professor Gorton briefly refers to “risk-based capital requirements” in the context of forcing “banks with low capital ratios to increase them”. He is wrong. What the risk weights mostly produced was a reduction of the capital banks had to hold. Basel II, required 8 percent in capital, but, when a risk-weight of 20 percent was present, like when lending to Greece, banks needed to hold only a meager 1.6 percent in capital. Clearly when the Professor writes “The commercial banks that failed in the recent crisis held on average more capital than Basel III required” is because he is not really ware of how the risk-weights weighted. 

But what really gets me up in arms is when a Yale Professor in finance, several years after this crisis has started, can write in a book:”There is no evidence that links capital to bank failure”. 

Professor Gorton should know that the correlation between all bank assets that ran into troubles and caused the current crisis, with the fact that banks were allowed to hold these assets against extraordinarily little capital, and therefore allowed the banks to earn extraordinarily high expected risk-adjusted returns on capital on these assets, was 1. And I guarantee the Professor there was causality involved. 

Yes Professor Gorton, I agree that regulators should have looked to the history of financial crisis. If they had done so they would have noted that these are never ever caused by excessive exposures to “The Risky” these are always the result, no exclusions, of excessive exposures to “The Infallible”.

It is high time to work on how banks, risk-takers and risk-taking can contribute net to taxpayers

Sir, Manmohan Singh, of the IMF, but in his own name, writes “It’s time to land the levy on risk takers, not taxpayers”, October 18, and he might be right and he might be wrong. Personally I lean towards the second because, if you really do not know what you are taxing might be producing it is hard to avoid any unforeseen consequences.

First of all, what we have to do is not to concentrate blindly on minimizing the direct cost for taxpayers of any financial failure, but instead analyze how to maximize the net result of what the financial sector produced was to the taxpayer. 

In fact one of the saddest aspects of the recent crisis is that the costs of cleaning it up might very well have been surpassed by all that opportunity cost which resulted from regulations that favored bank lending to “The Infallible”, and discriminated against “The Risky”, the small businesses and entrepreneurs. Who can swear that had the bank regulators not done that we could not perhaps have tons of good jobs for all our unemployed youth? 

In this respect I would appreciate regulators, IMF economists, and alike, first define to us with clarity what they believe is purpose of our financial system, and only thereafter opine how his proposal can better help us for that sector to fulfill its purpose. Most often than not, I am sure the answer would be, by not distorting its functioning like for instance with special levies. 

As a taxpayer let me be clear. I do not mind paying plentiful taxes if I am making plentiful income… so please do not try to save taxes by reducing my income. 

That of course does not mean that I would not oppose all the regulatory subsidies that help make some sophisticated bank dealings so sophisticatedly profitable, as these just distort just as much as taxes, sometimes more 

By the way, a reminder, the most severe real losses sustained the last years, have not been in derivatives but in plain vanilla operations, like securities backed with very real but very badly awarded mortgages to the subprime sector and which managed to get an AAA rating, the Spanish real estate sector, or loans to some “infallible sovereigns”.

By the way, a reminder, AIG would never have become a problem, had not the regulators enriched the value of their AAA rating so much.

If you thing “sustainability” is important, propose something that impacts it sustainably.

Sir, if you really cared so much about “Sustainability” in finance, as you want for the world to see you do, then you would be arguing for capital requirements for banks based on sustainability ratings, instead of the useless credit ratings that distort and leads our bank off into productive nowhere.

Sometimes bad credit ratings are pure bliss.

As a citizen from a country that no matter how bad the credit ratings were they should always have been worse so as to help us to stop our governments from taking on debts, and therefore quite knowledgeable about the bliss that sometimes follows bad news, I cannot but agree with John Kay´s “Learn to love the candid bearer of bad news”.

The fundamental problem with using credit ratings is that if they are 100% right on the dot then a financial transaction based on it would be just but would not provide any party with a profit. In order for credit ratings to generate profit, for a borrower or a lender, for a buyer or a seller, they have to be wrong… and to blindly base your regulations on something that needs to be wrong in order to generate profits does not sound like the wisest thing to do.

PS. You might like to read “The riskiness of country risk” which I published in 2002.

http://unsustainabledebtsustainability.blogspot.com/2002/09/riskiness-of-country-risk.html

Should we not have a serious man to man conversation with our bank regulating chaps at the Basel Committee?

Sir, if you and I were going to design some capital requirements for banks based on the risk of default of borrowers as measured by the credit rating agencies, would we use the default rates those credit ratings generally imply, or would we use the default rates suffered by the banks after the bankers received that credit rating information? I am sure you and I would agree on using the second alternative, since the first really makes no sense as it would imply that bankers do not take notice of the credit ratings, something that with the capital requirements based on these ratings, we are really making sure they do.

If we so then use the default risk for banks after credit rating information, would we also adjust our risk-weights to the fact that those perceived as riskier are charged much higher interest by the banks than those perceived as less risky? I am sure we would definitely consider that important risk mitigation factor and do so, since otherwise we would be perceived as foolishly assuming that all borrowers paid the bank the same interest rate.

But since we now know that our bank regulating chaps at the Basel Committee did nothing of the sort, they just used gross default rates unfiltered by the bankers applying their own credit analysis criteria, and they completely ignored the mitigation of a higher default risk provided by higher interest rates, isn´t it time we call them home so as to have a serious man to man conversation about what they are up to? I mean before they go on to tackle even much bigger problems like counter-cyclicality and systemic risk. I mean so as to inform them about the fact that they, in their own right, are becoming our greatest source of systemic risk.

 

I believe we should. Just consider the mess they did by making the banks stampede after some lousy securities just because these were rated triple-A; and all the small businesses and entrepreneurs who have seen their access to bank credit curtailed or made more expensive just because their odious regulatory discrimination against perceived risk.

A verse of a Swedish Psalm reads: “God, from your house, our refuge, you call us out to a world where many risks await us. As one with your world, you want us to live. God make us daring!”

“God make us daring!” That is indeed a prayer that the members of the Basel Committee do not even begin to understand the need for.

Psalm 288 Text: F Kaan 1968 B G Hallqvist 1970, Music Chartres1784

If only the UK was rated BB+ to B-…

Then a UK small business would be able to compete with the government on equal grounds for bank credit, because only then would the bank have to post the same capital for both.

The nannies in the Basel Committee decided to hand out, through very low capital requirements for banks, generous incentives for these to go and play in “safe” places, even though, as regulators, they should have known that financial and bank crisis only occur where the perceived safety attracts the excessive volumes that pose a risk for the system… swamp land with alligators might now and again eat up a citizen, but never pose a threat to a nation.

But on top of it all, the Basel nannies also turned out to be communists in disguise, as they ordained that if a bank gave loans to a sovereign rated AAA by their risk kommissars then the bank needed no capital at all… and what small business can compete with that?

More than two years after the crisis started we read in a report by Brooke Masters and Patrick Jenkins that Lord Turner is now announcing tougher bank capital regime. But since he, like Basel III, does not mention a review of the arbitrary and regressive risk-weights that were the real causes of the disaster, we can only conclude he is not really fit to be a regulator, at least not in war time.

Madame Guillotine could be better than assisted euthanasia

Sir, Martin Wolf is absolutely right when in “Do not learn the wrong lessons from Lehman’s fall” September 16 he writes that “No normal profit-seeking business can operate without a credible threat of bankruptcy”. But then he goes into some mumbling about living-wills and assisted euthanasia and though it sounds kind and gentle both these alternatives start when it might already be too late, and so we should not forget that what we could really require is for Madame Guillotine to enter swifter into action.