The UK Parliamentary Commission on Banking Standards report “Changing banking for good” is, unfortunately, incomplete.

Sir, I refer to your “Holding UK banks to higher standards” were you comment on the just published report by “The Parliamentary Commission on Banking Standards” June 19. Unfortunately, it is seriously incomplete.

Current bank regulations allow for different capital requirements for different bank assets, based on their perceived risk. But, since these perceived risks are already cleared for by interest rates, amounts of exposures and other terms, this introduces a distortion that makes it impossible for the banks to perform with efficiency, their vital function of allocating resources in the real economy.

In fact, the risk-weighting calibration procedure used in Basel II is absolute lunacy and only the result of the regulators not having been sufficiently questioned by weak egos who do not want anyone to know that they don´t understand an iota about it all.

And, I am not the only one arguing this. For instance in a recent paper titled “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked” Anat Admati and Martin Hellwig write: “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

And therefore, the report, which starts so correctly by referencing “The UK banking sector’s ability both to perform its crucial role in support of the real economy” should, as a minimum, have asked regulators to explain, satisfactorily, why their capital requirements based on perceived risks are not flawed, meaningless and highly distortive. But, of course, FT should also have asked the regulators those same questions, a long time ago.

And what about a revival of ethics in the bank regulatory establishment?

Sir, ‘Day of shame’ sparks call for a revival of ethics, writes George Parker, February 7, with respect to many loud and outspoken demands from politicians to hold the financial sector to higher standards.  

But though Andrew Tyrie, the Tory chairman of the Commons treasury committee rightly said "that high-quality regulation was not just morally right but would attract business to the UK”, there is not one single of them urging the bank regulators to come clean on their outright immoral (and dumb) concoctions.

Because it is indeed immoral to impose on the banks capital requirements which favor bank lending to those who already find themselves favored by banks and markets, “The Infallible”, while odiously discriminating against bank lending to those already discriminated against by banks and markets, The Risky”.

Because the regulators with those regulations have in fact, without having been authorized thereto, castrated the banks, and, with it, blocked the will of a nation to take the risks it needs in order to move forward, so as not to stall and fall… and that my friends, might not only be immoral, but it might even be an outright act of high treason, even if unwittingly committed

Oh please, don’t come with that never ending BS of banks taking excessive risks by creating excessive exposures to what was perceived ex ante as “risky” and which therefore required the banks to hold any substantial amount of capital against it. Give me just one example of that, or shut up!

Mr. Bank Regulators “Tear down that wall!” or that electrified ringfence

Sir, Andrew Tyrie, the chairman of the parliamentary commission on banking standards, argues well to “Electrify the ringfence to shock banks into real reform” January 28, and I like his call for “rebuilding trust in the banks and restoring pride among their employees”.

That said the best way forward to rebuild the banks though, is for the regulators to trust banks and immediately stop interfering with what banks do, by means of imposing capital requirements, and now also liquidity requirements, which are based on an ex ante perceived risk, and mostly as perceived by others, the credit rating agencies.

In fact there is a high voltage electrified wall or fence that needs to be taken down. And I refer to the one which imposes on banks much higher capital requirements on exposures to “The Risky” than to exposures to “The Infallible”. That wall has forced the banks to avoid having relations with for example small and medium businesses and entrepreneurs, and instead indulge in relations with “The Infallible”, to such a degree that we can notice evidence of clear degenerative incest, now especially between the banks and the infallible sovereigns.

Tyrie mentions the bank's lobbying strength, and this can indeed be a big problem. But it would be much more useful if he helps those without a voice, those already being correctly discriminated against by the banks, "The Risky", not having also to be discriminated against by bank regulators. As is "The Risky" those actors who on the margin are the most important for the real economy, get much less access to bank credit and have to pay much more interest rates only because of these regulations. Mr. Tyrie help to tear down that wall! 

PS. Anyone building a wall must always be aware of that he might end up on the wrong side of it. In this case, bank regulators ended up on the side of "The Infallible", precisely those who always cause a bank crisis, because as they should have known those perceived as "The Risky" never do.

Should insurance companies hold more capital for insuring “The Unhealthy” than when insuring “The Healthy One Percent”?

Sir you refer to the discussions on the issue of separating of splitting up banks in retail and capital market units, as suggested by The Vickers Reports and the Parliamentary Commission on Banking Standards chaired by Andrew Tyrie, “Banking reform”, December 21. 

That is OK but let me remind you that though there have been many scandals which may have resulted from these two activities occurring under one roof, the current crisis, like for instance the losses in loans to Irish banks, in AAA rated securities, in loans to sovereigns, and in real estate financing in Spain, has absolutely nothing to do with that. 

No!, as long as you are able for instance to be more concerned with interest rates manipulation in The Libor Affair, than you are about the much more significant and perverse interest rate manipulation produced in The Basel Affair with its capital requirements for banks based on perceived risk, you stand no chance of achieving any type of real useful fundamental banking reform. 

As I see it anyone who for whatever reason on purpose ignores what Basel II really did to our banking system is an immoral co-conspirator of The Basel Affair. 

Today The Libor Affair has most probably ended with fines paid and no one really being sure who won and who lost, but The Basel Affair, is still going strong, immorally discriminating as much as always, and perhaps even more, in favor of “The Infallible” and against “The Risky”. 

I wonder what you would have to say if insurance companies were ordered to hold more capital when insuring “The Unhealthy” those with preexisting conditions or belonging to the poorer which now are reported to have a lower life expectancy, than when insuring “The Healthy of the One Percent”. 

That would mean that “The unhealthy” would have to pay even higher premiums than what their unhealthy status would explain and merit; and that the “The Healthy of the One Percent” would have to pay lower premiums than what their healthy status would explain and merit. And my friends that is in terms of access to bank credit, precisely what those regulators in “The Basel Affair” are up to.

Andrew Tyrie and the Parliamentary Commission on Banking Standards should start with the capital requirements for banks

Sir, Andrew Tyrie, the chairman of the Parliamentary Commission on Banking Standards, in “A mandate to tackle the deep-rooted failures of our banks” October 2, states that “banks are not serving the real economy”. 

Indeed, and, if the commission really wants to get to the most important root of why is that, it needs to look into how current capital requirements for banks distort the economic efficient resource allocation role of the banks. These capital requirements discriminate hugely in favor of banks lending to the “not risky” and against those perceived ex ante as “risky”, like the small businesses and entrepreneurs… and that is of course not how you really can serve the real economy. 

The only thing those regulations do serve is to instill some overly concerned regulatory nannies with a false sense of security; false because never ever has a major bank crisis resulted from excessive exposure to those perceived as “risky” (consult with Mark Twain), these have always resulted from excessive exposures to what was ex ante erroneously considered as “absolutely-not-risky”.