To prevent the next unpreventable financial crisis, let us at least try better and more accountable bank regulators.

Sir, Axel Weber a co-author of the Group of Thirty report writes: “Following the global financial crisis, we have significantly improved the resilience of the financial system, strengthened the capital and liquidity positions of banks and increased our ability to deal with failing lenders.” “Preventive measures will not stop the next financial crisis” September 18.

I have been arguing, for more than a decade, that what primarily caused the crisis, were the distortions in the allocation of credit produced by the risk weighted capital requirements. AS that distortion has not been eliminated, and given that generally higher capital requirements might on the margins even intensify those distortions, not enough has been done to improve the resilience of the financial system; nor that of the real economy on which so much the real long term financial stability really depends on.

So, to prevent the next crisis we must prevent having regulators who believe that what’s perceived as risky is more dangerous to our bank system than what’s perceived as safe. 

There’s no reference at all to that distortion in the Group of Thirty report that Mr Weber helped to author, though that should perhaps not surprise us. Looking at the members of that mutual admiration club, one could suspect that all have a vested interest in keeping that distortion as one that shall not be named. 

In an Op-ed of 1998 I wrote: “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared. Sometimes it is good faith... sometimes it is only pure faith… History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

But in that Op-ed I also wrote, “I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the opposite, what I propose is that it assumes it correctly”

Sir, the State assuming correctly its regulatory functions must, sine qua non, include holding the regulators accountable for their mistakes, not promoting them, and much less allowing them to keep on regulating, covering up their own mistakes.

By the way, when is FT going to stop having such a prominent role in that cover-up?

@PerKurowski

It is only the bankers’ responsibility to clear for risks. The regulators should only prepare banks for uncertainty.

Gillian Tett writes that Axel Weber, the chairman of UBS, “suggests investors urgently need to think about the difference between ‘risk’ and ‘uncertainty’: the former refers to events that can be predicted with a certain probability; the latter refers to unknown future shocks.” “Emerging markets offer clues for investors in 2017: Extraordinary political events have upended western assumptions about risk and uncertainty” January 1.

Let us see if this distinction helps Ms Tett to see that with risk weighted capital requirements for banks, both bankers and regulators are clearing for risk. The result is that “risk” is excessively considered while “uncertainty” plays a secondary role. Seemingly it is too hard for regulators and anthropologists to understand the simple truth that any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

To subject banks to this double counting of risk means banks will lend too much to what is ex ante perceived, decreed or concocted as “safe” like AAA rated securities and sovereigns like Greece, and too little to what is perceived “risky” like SMEs and entrepreneurs.

Only the exclusive use of a leverage ratio, which represents a capital requirement that has nothing to do with perceived risk, is what could help banks prepare for uncertainty, without distorting the allocation of bank credit to the real economy.

@PerKurowski

Who is able to measure how much risk weighted capital requirements for banks distort the real economy?

Sir, Gillian Tett quotes Axel Weber, former head of the Bundesbank, now chairman of UBS with “I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention” “Investors are ill equipped for our unfathomable future” October 14.

And much less can anyone know what the appropriate price of an asset he buys is, if you take out all the distortions the risk weighting of the capital requirements for banks produce. Just look at houses. How could anyone believe their prices would be the same as now, if bankers were required to hold as much capital when financing houses than when financing SMEs and entrepreneurs?

Sovereigns being risk weighted at 0%, while We the People at 100%, is one of the strongest statist statements ever, and it has been allowed to go unnoticed for way too long.

With central bankers’ QEs there is at least some transparency… but I guess Sir that, with respect to negative interests, no one knows either how to really measure their impact… it does really seem to be a huge leap of faith into the unknown.

@PerKurowski ©

There’s an economic war raging out there, so we need ministers and bank regulators with vision, not janitors and nannies!

Sir, Josef Joffe’s “Merkel’s case of good politics and bad economics” September 5, makes a solid case for buying gold and go to church and pray (and perhaps buy a gun) 

What can I say? There’s an economic war raging out there and we need our finance ministers and bank regulators to be men of vision, not janitors or nannies! Has anyone seen a Lord Keynes lately? 

Personally, and not as a Lord Keynes by any means, but as a simple consultant with quite a lot of workout experience, on a recent Labor-With-No-Jobs-Day, I thought that the following could be a good idea for Europe and America to explore: 

There is currently a tremendous scarcity of bank capital, and all fresh capital raised is going to plug holes instead of generating the new business needed… and so we are in dire need of traditional bank capital, not that silly modern stuff. 

In this respect I would gladly contemplate granting a 15 years full exoneration from corporate and dividend taxes, to whatever bank capital is raised by a banks that agrees to hold 15 percent in capital against any asset, no matter how safe or risky it might seem. 

There is a world of productive risk-taking waiting out there to get our youngster their generation of good jobs… let’s give them a chance. 

I would love to see 500 billion Euros (dollars) in this type of fresh bank capital...which could be leveraged into over 3 trillion Euros (dollars) in loans which do not discriminate based on perceived risks more than what they should ordinary do in a free market. 

That could mean a fresh start for our economies and a full-stop to that other war our current bank-nannies are waging against the "risky".