How do you come up with a good bank strategy knowing current regulations are unsustainable and will change?

Sir, I refer to your reporters’ article on the fate of new chiefs grappling with problems at Barclays, Deutsche Bank and Credit Suisse “Banking trio seek clean sweep with investors” December 28.

For that capital that is supposed to allow banks cover for some unexpected losses, the regulators have imposed credit risk weighted capital requirements; more risk, more capital – less risk, less capital.

But, the excessive exposures that could endanger the bank system are never created with assets perceived as risky and always with assets perceived as safe.

But, the safer something is perceived, the larger is its potential to deliver unexpected losses.

But, to base some requirements for the unexpected on the expected credit risks, makes absolutely no sense.

But, since credit risk is about the only risk that is already cleared for by banks, with interest rates and size of exposure, clearing for it again in the capital, signifies that credit risks are given too much consideration and, any risk, no matter how well it is perceived, leads to wrong actions if excessively considered.

And so now we suffer from a catastrophic distortion in the allocation of bank credit to the real economy. Way too much credit to what is perceived or deemed to be safe, like in mortgages and to Greece, and way too little credit to what is perceived as risky, like to SMEs and entrepreneurs.

I am absolutely sure that this trio of bank chiefs, or at least some of those surrounding them, know that this kind of regulations are unsustainable and will be changed, hopefully sooner than later. Since any new regulations would most certainly entail holding more capital against all assets, something unwelcomed by their shareholders, the chiefs can’t even address this issue openly. It must certainly be no easy task to prepare for the ground moving beneath you.

@PerKurowski

Mr. Bob Diamond. Is not a level playing field for borrowers in the real economy accessing bank credit, even more important?

Sir, Bob Diamond, a banker, holds that “A level [regulatory] playing field… is essential to ensure banks have consistent and predictable financial targets” “‘Too big to fail’ is still a threat to the financial system”, September 16.

But, is not a level playing field for when the actors in the real economy access bank credit even more important? Because, there is no level playing field there as long as bank regulators allow for different capital requirements based on perceived risk.

Currently banks are earning much much higher risk-adjusted returns on equity when lending to “The Infallible”, like to some sovereigns, housing and the AAAristocracy, than when lending to “The Risky”, like to SMEs, entrepreneurs and start-ups.

And that as you of course would understand, but that bankers prefer to conveniently ignore, causes, consistently and predictably, our banks to lend too much, at too low interest rates and in too lenient terms to “The Infallible”, and too little, at too high rates and in too strict terms to “The Risky”. And that is a distortion inflicted on the real economy, and therefore also a threat to the financial system.

Barclay’s has and projects leveraging its equity 45-35 to 1 times. Would not 10-15 to 1 be sufficient?

Sir, I refer to Patrick Jenkins and Daniel Schäfer’s “European banks move to bolster equity level”, as well as to The Lex Column note on Barclays, July 31.

Both mention the current leverage ratio of 2.2 percent of Barclay and the recent goal of 3 percent established by global regulators.

Those leverage ratios, translated to usual historic equity leverage indicators, those used in the pre-risk weighting days of the Basel Committee, would be 45 to 1 and 33 to 1 respectively.

Sincerely, do you not believe these leverages to be somewhat on the high side? Would not leverages between 10 and 15 be more than sufficient?

Lex holds that having to move from 2.2 percent leverage ratio to 3 percent “has delayed the date when Barclay’s return on equity will beat its 11.5 per cent cost of equity by a year to 2016.”

And that also begs the question whether shareholder would not be happy with a lower return of equity, if that came hand in hand with much lower assets to equity ratio?

We need to see the hiding-behind-regulatory-risk-weighting index of the banks

Sir Patrick Jenkins and Daniel Schäfer at the end of their “Banks in cash calls to meet Basel III” state the caveat with respect of the numbers shown that “Regulators [will] either raise risk-weightings and/or give more emphasis to nominal balance sheets.” Indeed, but it can also be, like the current crisis has clearly evidenced, that the risk-weights could also simply turn out to be very wrong.

And that is why I consider the illustration that shows Basel III core tier one capital ratios of 12 large banks to be quite opaque. As a minimum, next to each Basel III ratio they should have given us each banks capital to nominal balance sheet ratio.

That way, by dividing the first ratio by the second (or the other way round) we can build an index which allows us to identify how each bank hides behind risk-weights, whether these are calculated by themselves or by the regulators.

More than protecting banks from future crisis, we need to protect our real economy from dysfunctional banks

Sir, Philip Augar, writes “Britain´s regulators were feted for their light touch” “Salz offers a prescription to protect banks from future crisis” April 9.

What? If Augar believes regulations which intrude on the markets through capital requirements for banks which allow banks to leverage 60 times or more on their equity any interest rates paid by “The Infallible” while restricting to a 12 to 1 leverage interest rates paid by “The Risky”, are “light touch” he has just not informed himself of what has been happening.

Augar writes that the most important recommendation by the recent Salz Review, commissioned by Barclays to study its culture and business practices, is the “necessity of creating the right environment for feedback… and to question accepted wisdom constantly”.

Indeed, I have for years been trying to ask regulators about their reasons for capital requirements for banks which are based on perceived risks, when those perceived risks are already cleared for by the banks in the interest rate they charge, the size of the exposure and other terms. And I have never ever received an explanation more than the normal “more risk more capital, less risk less capital that sounds logical” mumbo jumbo.

Those differential capital requirements are distorting all common sense out of the real economy. Let us remember that much more important than to protect our banks from future crisis is to protect our real economy from being assaulted by banks made dysfunctional by regulators.

And so much more urgent than opening up the boardrooms of banks, is opening up The Basel Committee, the mother of all the non-accountable to anyone mutual admiration clubs.

Regulators bully banks, banks bully “The Risky”, and “The Infallible”, they just have a blast.

Sir, Brooke Masters, Claire Jones and Patrick Jenkins report “Big banks’ capital needs under microscope” November 30. 

"Regulators suspect banks have understated possible losses and need a 'material' amount of extra capital"

Of course I favor more capital in the banks, at least for their exposures to ‘The Infallible”, which are seriously under-capitalized as a result of overly generous capital requirements. 

But what regulators must remember is that while different capital requirements for different assets exists, their pressures on banks to increase their capital, will be mostly felt by those who generate the largest capital requirements, namely “The Risky”, like small business and entrepreneurs. 

Regulators bully banks, banks bully “The Risky”, the small businesses and entrepreneurs, and “The Infallible”, sovereigns and triple-A ,they just have a blast getting even more bank funds at even lower interest rates.

PS. Could these type of capital adjustments not trigger the conversion into zero clause of Barclays' recent $3bn contingent capital notes deal?   

Has someone really gone bonkers with Barclay’s contingent capital notes?

Sir, I refer to Mary Watkins’ “Barclays’ total loss bond poses test for ‘coco’ markets” November 23, as well as to Patrick Jenkins’ “Banks unnerved by BoE’s extreme focus on capital” November 20.

There is something I cannot figure out about these bonds, perhaps you can help me, or perhaps it is just one of those “blind spots” to which Gillian Tett refers to in “Investors must search for the next financial blind spot” November 23.

It states that under the terms of the deal, that the bonds will be automatically written down to zero if the bank's Common Equity Tier 1 ratio falls below 7% , and I assume that this is on a risk-weighted basis since I Barclay surely holds less than 7 percent in capital against all its assets.

If so, what happens if Barclays’ management decides, own its own, to move some assets with low risk-weights, “The Infallible”, which require holding little capital, into assets with a higher risk-weight, “The Risky”, and which therefore require holding more capital, and therefore cause the bank’s Common Equity Tier 1 ratio to fall below 7%?

Or, alternatively, what happens if the regulators decide to change the risk-weights and thereby Barclay's Common Equity Tier 1 ratio to fall below 7%? 

If it is as I do not want to believe it is then management (or regulators) can, without Barclays losing a cent on its assets, get all these bonds written off. Sounds crazy! And, if so, would management be able to collect a bonus on that very real profit?

PS. Will shareholders require management to adjust the bank portfolio in such a way that Barclay's Common Equity Tier 1 ratio falls below 7% and it does not have to repay the bondholders? 

PS. Will bondholders require management to adjust the bank portfolio in such a way that Barclay's Common Equity Tier 1 ratio stays over 7%, so that they will be repaid? 

PS. Have regulators now been de-facto impeded to change the risk-weights? 

PS. Who is going to sue who?

What bankers are really scared of, are the regulators becoming less Taliban.

Sir, Patrick Jenkins writes that bankers in London talk these days about “the Taliban” referring to the Bank of England’s Financial Policy Committee, “Banks unnerved by BoE’s extreme focus on capital” November 20. 

But bank regulators do act like full-fledged Taliban. Their regulatory discrimination in favor of “The Infallible” and against “The Risky” is as odious and as without reasons than the Taliban’s discrimination against women. 

Jenkins also reports on Barclays raising a couple of billions in contingent capital bonds and which will be wiped out if the ratio of the bank’s core tier one capital to assets weighted for risk, falls below 7 percent. 

But what if regulators became less Taliban and decided that “The Infallible” “the men”, was not that infallible, and that the risk-weight for lending to them, the men, should be the same as for women? That would wipe out all bank capital, immediately. Just Think for instance of a 7 percent capital requirement on exposures to the infallible sovereign? 

And so what bankers are really praying for in London, is for the regulatory Taliban to remain true orthodox Taliban.

FT, why do you go so much softer on regulators than on bankers?

JP Morgan Chase’s recent losses, Barclays’ manipulation of Libor, RBS’s IT failures and the money laundering assistance provided by HSBC, though all absolutely unpardonable, some most probably criminal, amount, in terms of real damages to the economy, to not more than some pick-pocketing, when compared to the harm that the bank regulations did, with their capital requirements for banks based on perceived risks already cleared for. 

All of which makes me wonder again, for the umpteenth time, why the Financial Times treats the bureaucrats of financial regulations with kid gloves when compared to how they treat the bad bad bankers, as for instance in Patrick Jenkins’ and Brooke Master’s “London’s precarious position” July 30, 2012.

The mother of all (official) interest rates manipulation.

Sir, capital requirements for banks are larger when these lend to something perceived as risky and lower when to something perceived as not risky. It is an utterly absurd proposition, because what is perceived as risky has never caused a major bank crisis. But, much worse, it also signifies that those perceived as risky must pay higher interest rates and those perceived as not risky lower interest rates, than would have been the case absent these regulations. And this amounts to an extraordinarily large official interest rate manipulation… and its effect is way more than some few basis points… and the widening of the spread between risky and not risky according to my calculations is way over hundred basis points. 

So let’s see what all those perceived as risky, usually correlated with the have-nots, who already pay higher interest rates, would have to say about regulations that made them pay one percent more in additional interest on all their bank loans, while those perceived as not-risky, usually correlated with the haves, who already pay lower rates, had to pay one percent less. 

I have now at least registered a general complaint at the Consumer Financial Protection Bureau CFPB, established in the Dodd-Frank Act, indicating that this odious discrimination against the “risky” does not seem to be allowed under the Equal Credit Opportunity Act (Regulation B).

And with respect to the intellectual capture of FT, where does the buck stop?

Sir, of course, Barclays´ fiddling with Libor affair is a scandal, and you are entirely correct to question whether its Chairman´s resignation based, on a the buck stops here, suffices, “Barclays scandal” July 3. 

But much more scandalous than that, at least with respect to its implications, is how the buck, of how regulators, fiddling with risk weights, manipulated the interest rates in favor of those perceived as not risky and against those perceived as risky, and that does not even appear on the radar-screen. 

It will be interesting to see in the future, where in FT the buck for withholding the analysis that places the largest blame for the crisis in the lap of regulators stops. 

Really, how did you allow yourself to become so intellectually captured by that so dangerous nonsense of capital requirements for banks which discriminate based on perceived risks elsewhere already discriminate for? 

As is, in my mind, FT is in part responsible for the fact that our banks might all end up gasping for oxygen and capital on the last safest shores, which at this moment would seem to be the US Treasury and the Bundesbank.

Sorry, Gillian, try acting like a better financial journalist

Sir, Gillian Tett holds that “banks need to redefine why they exist. A new sense of mission and modus operandi is required, “Don´t just say sorry, Bob, try acting like a steward” July 3. 

But in a much similar vein, I could also ask Gillian Tett to try acting as a better financial journalist, and inform her readers that, in all the bank regulations produced by the Basel Committee, there is not one single word that pertains to what the purpose of the banks is and, notwithstanding that, the regulators still gladly proceed to regulate, totally unencumbered. 

Ms. Tett also mentions Mr. John Taft of Royal Bank of Canada´s request that banks act as wise stewards of the nation´s cash. How are they supposed to do that? Ms. Tett must know by now that function has already been usurped by the bank regulators who, with great hubris, act like the self appointed risk managers of the world, and allocate, in a very haphazardous way, the risk-weights which determine the capital requirements for the banks… and thereby really determine the directions of the nation´s cash. 

Over to you Ms. Tett, try to inform your readers more completely.

And what about conceit in journalism?

Sir, Gillian Tett writes correctly that “Libor affair exposes big conceit at the heart of banking” June 29, but there might equally be some big conceit going on at the heart of journalism. 

Two questions: What is the most important dollar reference rate… the risk free US Treasury rate or Libor? And, who has effectively manipulated those rates the most, Barclays the Libor rate, or the bank regulators the US Treasury rate by means of allowing the banks to hold these instruments with less capital than other assets? 

Clearly, in terms of its significance, the manipulation of the US Treasury “risk free” rate has been much more significant than whatever Barclays can have done to Libor but that, Gillian and her colleagues at FT decided to ignore, with much conceit.


Should not an anthropologist be about the most humble of all professionals? 

And when regulators manipulate interest rates, is that ok?

Sir, when regulators set the capital requirements for banks based on perceived risks, even though these perceived risks are already priced in by the bankers in the interest rates, they are though perhaps unwittingly, effectively manipulating the interest rates. The direct consequence of it is that those officially perceived as not-risky, have to pay much less in interests than what would have been the case without this distortion, and those officially perceived as risky need to pay much more… and all for absolutely no good reason at all. 

And so when reading “Barclays fined a record $450m” for manipulating interest rates, my first thought was, “well done, but where can the “risky” small businesses and entrepreneurs also sue the regulators for all the monstrously excessive interests they have had to pay over the years? 

Simple calculations indicate to me that a not-rated bank client, exclusively on account of this odious regulatory discrimination, has to pay about 270 bp (2.7%) more in interest rates when compared to an AAA rated bank client… or, like now, in times of extremely scarce bank capital, suffer the consequences of being excluded from access to bank credit.