Is Commerzbank earning more on small and medium sized companies because of more lending or higher interests?

Sir, I refer to Alice Ross’ “Commerzbank buoyed by rise in core lending” November 7.

I was pleasantly surprised when reading of “a rise in operating profits… in the core bank, which includes lending to private customers and Germany’s small and medium-sized companies, the Mittelstand.”

But, since I do not understand how banks can lend to that type of clients, as that requires them to hold more equity, perhaps that does not signify more lending but rather that these borrowers are more desperate for credit, and therefore accept paying interest rates which are higher than their riskiness merits.

It would be great if Ross takes this opportunity to deepen an analysis of what really is happening with the access to credit of these "risky" bank clients.

Europe is about to throw away €489m to obtain fairly insignificant new information about its banks.

Sir, Claire Jones, Sam Fleming and Alice Ross report “Consultants to reap €490m from Europe’s banking audit” August 21.

First, we should not ignore that money, if bank capital, and if leveraged at the 3% leverage ratio allowed for banks in Europe, would permit bank credits to the tune of €16.3bn.

But we should also think about what that money can buy, and in that respect I believe it will buy regulators preciously little.

And I say that because we should not have to take a too close look at the balance sheets of banks to know that, because of the risk-weighted capital requirements they have:

Too little equity as a result of being allowed to have too little equity for much of those exposures that gort into real problems, like AAA-rated securities, sovereign like Greece, and real estate in general; and

Too much dangerously large exposures to what is perceived as absolutely safe, like the “infallible sovereigns, because those are the exposures that require the banks to have the least capital of that scarce capital; and

Perhaps even more dangerous because its implications too little exposures to what being perceived as risky requires banks to hold more capital, like loans to medium and small businesses, entrepreneurs and start ups.

What could the fees for that type of consultancy analysis be? Tops €1m? If so Europe will really be throwing away €489m in order to obtain information that on the margin seems to be quite insignificant.

And that does not even consider the fact that quite often, especially in the case of banks, the bliss of ignorance, is a quite valuable commodity.

FT, How can you allow such a blatant misrepresentation of financial history?

Sir, Alice Ross reporting on the Landesbanks in Germany refers to “the disastrous lead in to the financial crisis that saw ill advised investments in US mortgage backed securities”, and it is just another monstrous example how financial history is being miswritten, “Bank balance” July 31.

And we are also told of how former or current board members… went to trial accused of failing to disclose the risks involved in buying certain asset-backed securities in 2005.

If I had been the defense lawyer at that trial, I would just have called one of any German bank regulators who had been involved with the approval of Basel II in June 2004, and asked the following questions.

Q. Is it not so that a bank was authorized to acquire AAA rated securities against only 1.6% in capital meaning they could leverage their equity 62.5 times to 1.

A. Yes

Q. Is it not so that allowing such a monstrously high leverage signified that the regulators trusted almost unlimited the capacity of the credit rating agencies?

A. Yes.

Q. Would it have been reasonable for a German bank to travel to US and go through the AAA rated securities in detail knowing that the credit rating agencies which the regulators so much trusted had already done so?

A. No.

Q. If those securities had turned out to be worthy of the AAA rating but the directors of one bank had foregone the opportunity to earn its shareholders huge returns on equity while other banks were doing so, would the shareholders not have thought of firing these directors?

A. Yes.

Your honor, for the bank to under those circumstances have purchased those AAA rated securities was not in any way shape or form an ill advised investment. What was though clearly ill advised, were these bank regulations. I rest my case.

Who is going to prosecute the bank regulators?

PS. It was absolutely clear something like this had to happen… You yourself published a letter of mine in January 2003, in which I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

What if an Eric Schneiderman dared to stand up against those causing the greatest unfairness in the financial markets?

Sir, Kara Scannell, James Shotter, Daniel Schäfer and Alice Ross report on how New York attorney-general Eric Schneiderman is investigating unfairness in the financial markets, “Banks hit by dark pools probe” July 30.

But Sir, you know that those perceived as “absolutely safe” from a credit risk point of view, and who are therefore already the beneficiaries of lower interest rates, larger loans and on softer terms, get even lower interests, even larger loans and on even softer terms, because regulators allow banks to hold less capital against assets deemed as absolutely safe.

And you also know that those perceived as risky from a credit risk point of view, and who are therefore already paying higher interest rates, getting smaller loans and must accept harsher terms, are charged even higher interests, get even smaller loans and must accept even harsher terms, only because regulators require banks to hold more capital against assets deemed as risky.

And so I ask you Sir, does not the regulatory distortion produced by the risk-weighted capital requirements cause more unfairness in the capital markets than all the dark pools, and all the high frequency trading, and all the Libor manipulation and all the other misdeeds currently scrutinized put together? Of course it does!

What a shame there are no Attorney Generals willing to stand up to bank regulators discriminating based on perceived risk (in the Home of the Brave) … even when equipped with such formidable tools as the Equal Credit Opportunity Act – Regulation B. and all other non-discrimination and non-profiling rulings.

PS. Yesterday I was also censored in my homeland :-)

Can bank regulators keep silence on the conversion to equity probabilities of cocos?

Sir, I have one question in reference to Alice Ross’ and Christopher Thompson’s “German banks line up to join coco party”, April 24.

Do regulators have any moral or formal duty to reveal to any interested buyers of cocos if they suspect the possibilities of these having to be converted into bank equity being very high? I say this because if so, and if they keep silent on it, that would make them sort of accomplices of bankers. Would it not?

Of course banks need capital, lots of it, but tricking investors into it, does not seem like the right way for getting it.

Daniėle Nouy, new chair of Single Supervisory Mechanism, should hear out those like me who detest current bank regulations.

Sir, I refer to Sam Fleming´s, Alice Ross’s and Claire Jones’s “ECB Super>regulator prepares to be unpopular” February 10.

Of course, as you know from my more than a thousand letters, I much welcome that Daniėle Nouy “As one of the regulators who presided over the setting up of the Basel II accord on bank capital, which stressed risk-weighted assets as the best measure of a lender’s health… now admits her thinking on how banks are assessed has evolved… and now [at least] believes the leverage ratio¸ which compares a bank’s capital with its entire assets, is also a crucial measure.”

And of course, having held that bank regulators should be faster on the trigger, so that adequate pruning was done, I also fully agree with her opinion of “Let weak banks fail”, as reported on the front page by the same reporters.

But, when Ms Nouy there holds that “One of the biggest lessons of the current crisis is that there is no risk-free assets so sovereign assets are not risk free”, I just can’t refrain from asking, why on earth did it take the current crisis to find out that, when history is so full of examples? Sincerely it is hard to believe that regulators were so naïve to believe that… so one has at least the right to suspect some other motivation.

And also, when Ms Nouy speaks about the “health check” of banks “which will include an asset quality review and stress test”, I get the feeling she has not fully realized the Basel Mistake, in the sense of the worst not being what is on the banks’ books, but what is NOT there, like all the loans to the “risky” medium and small businesses, entrepreneurs and start-ups, which were never made, only because of discriminating risk-weighted capital requirements.

I would dare Ms Nouy to sit down one hour with me to give her a piece of my mind on what wrongs the Basel Committee has made, primarily letting expected losses stand in for unexpected losses, and then on what I believe should be done. And she should not be nervous about that, since I absolutely share all her concerns about “it’s not the best moment in the middle of the crisis to change the rules”… though surely transitioning has to be initiated… without making it worse.

European savers, leveraging only once their capital, stand no chance to compete with banks for good rates on “safe” savings

Sir, I refer to Alice Ross’ “Central bankers seeks to quell rate anger” November 14. In it she refers to the problem of German savers finding extremely low returns when placing their money, into what is supposedly very low risk.

Jens Weidmann, the president of the Bundesbank, argues that there is no discrimination among European savers and that they are all equally affected. That may be… but there is an underlying regulatory distortion that discriminates strongly against all individual savers, in favor of the banks.

When European banks are allowed to leverage their capital 60 or more times for exposures to absolutely-safe havens, rates will be very low in these. And the poor individual saver, leveraging his own capital just once, stands no chance to compete for a decent rate.