Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 

@PerKurowski

What if all finance help provided house buyers in Canada, which increases demand, reflects 30% of current house prices?

Sir, with respect to Ben McLannahan’s extensive report on the Canadian house market February 9, “Canada’s home loans crisis”, I would just want to ask:

What if regulatory and all other support developed in order to provide house buyers in Canada easier financing, something that obviously increases the demand for houses, translates into being, let us say, 30% of the current house prices in Canada?

Who has that then benefitted, buyers or vendors?

Does this mean Canada must now help with new financing to house buyers only in order to pay for old financing help?

How could something like that not end in a disaster?

As I see it much more important than helping our young to affordable houses, is helping our young to afford houses. Ce n'est pas la même chose!

http://perkurowski.blogspot.com/2018/01/many-of-our-young-will-be-without-jobs.html

@PerKurowski

Bankers instead of being savvy loan officers generating growth, have turned into dangerous addicted equity minimizers

Sir, Ben McLannahan quotes Paul D’Onofrio, the chief financial officer at Bank of America, with that he welcomed any “refinement” to rules that “allows us more access and control over our capital [and] liquidity in support of responsible growth”, “End of the crisis-era growth taboo at US banks”, October 19.

Sir, that is a recipe for disaster. First it will of course lead to that banks will go on minimizing the equity they hold, trying to leverage more, so as to earn higher risk adjusted returns on equity. That will not make banks safer or, most importantly, make them allocate credit efficiently to the real economy. 

The result is that banks will keep on lending too much to what is perceived, decreed or concocted as safe, against too little capital; something which is the perfect recipe for bank system failures.

And that banks will lend much less than what they should, to those that are perceived as risky, like for instance to SMEs and entrepreneurs, something which is the perfect recipe for a stagnating economy.

Tim Adams, president and chief executive of the Institute of International Finance, with reference to the Fed’s mandate mentions: “I think there’s a different mandate now, [which is:] how do you ensure the system is safe and sound and resilient while also ensuring you have balanced growth and that financial institutions can support economic activity?”

Sir let me tell you how! By having one single capital requirement, like a reasonable ten percent, to apply to all assets, except cash.

McLannahan also writes that Mike Mattioli, a portfolio manager at Manulife Asset Management in Boston opines: “Reasons to be upbeat include growth in mortgages, a return of “animal spirits” in small-business borrowing, and a “little bit more leverage” in balance sheets, as regulators allow banks to return more capital in the form of dividends and share buybacks.”

“Growth in mortgages”: Sir, do we really need much of that?

“A return of “animal spirits” in small-business borrowing”: Sir, while that requires banks to hold more capital than against other assets, the banks will not be there to lend to these “risky” borrowers.

“Regulators allow banks to return more capital in the form of dividends and share buybacks so “little bit more leverage”: Sir, that really sounds scary, as that would indicate regulators have not understood anything about what is going on. Bankers instead of maximizing returns on equity by being savvy loan appraisers have now for that turned into addicted equity minimizers.

​PS. FT​'s continuing lack of curiosity is astonishing

@PerKurowski

Do subprime borrowers or investors in mortgages benefit from securitization? No, now all profits go to intermediaries

Sir, Ben McLannahan, with respect to securitization of subprime mortgages quotes Julian Hebron, head of sales at RPM Mortgage with: “Making credit available to borrowers who are subprime is national policy and it is an important part of economic growth” “Financial crisis: 10 years on: The return of subprime” September 2.

Q. Do the subprime borrowers get any interest reduction from having their mortgages securitized, such reduction that could make these mortgage a safer investments for those investor who acquires these at lower rates? A. No!

Convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years, packaging it in a security, and then with a little help from the credit rating agencies convincing risk-adverse Fred that this mortgage is so safe that a six percent return is adequate, allows that mortgage to be sold for $510.000.

The $210.000 profit is now shared in it entirety by those originating the subprime mortgage, those packaging it, and those obtaining the excellent credit rating for the resulting security.

If that is “an important part of economic growth” that merits being part of a national policy, I don’t get it. Do you Sir?

If for instance 70% of those profits were paid back to those borrowers who lived up to their obligations, that would indeed imply a different and much more positive incentive structure.

Is that not something like for which cooperatives are often intended but not always achieve?

@PerKurowski

Congresswoman Maxine Waters… stop rooting for bank regulations that puts inequality on steroids.

Sir, I refer to Ben McLannahan’s and Barney Jopson’s “Republican puts forward alternative to ‘nightmare’ Dodd-Frank” April 27.

Jeb Hensarling, the chairman of the House financial services committee’s Choice Act includes a provision of requiring banks to hold “at least 10 per cent of gross assets, if they want relief from some of the toughest standards on supervision and regulation”

“Congresswoman Maxine Waters, the top Democrat on the committee, told the hearing that the proposals — known as the Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs — would unleash more “risky and predatory” practices on Wall Street.”

Holding 10 percent, against all assets, would eliminate that odious discrimination against the access to the opportunities of bank credit of "the risky", which result from the current risk weighted capital requirements for banks.

John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote:

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Allowing banks to hold less capital against what is perceived as safe than against what is perceived as risky; allows banks to leverage more with what is perceived as safe than with what is perceived as risky; which allows banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived as risky; which means banks will lend more than usual to what is perceived as safe, at even lower rates, which could be very dangerous; and less than usual to what is perceived as risky, unless its done at much higher rates than usual… which unfortunately makes the risky even riskier.

So, as I see it this proposal by Chairman Hensarling should not be applied only to those who want “relief from some of the toughest standards on supervision and regulation” but to all banks.

Of course, I pray that 10% capital requirement applies also to loans to the public sector. As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course pure statism, totally false and absolutely unsustainable.

http://subprimeregulations.blogspot.com/2016/03/decreed-inequality.html

@PerKurowski

Minimal capital requirements are a potent growth hormone for too big to fail banks.

Sir, I refer to Ben McLannahan’s “Kashkari scheme to end ‘too big to fail’ deserves a fair hearing” November 20.

Neel Kashkari, Jeb Hensarling and Thomas Hoenig are all correct in requiring banks to hold more equity… the minimum capital requirements of 1.6% and less, meaning leverages 62 times to 1, and more, have been the most potent growth hormones ever for the too big to fail banks.

But, since I sincerely believe that one of the greatest dangers for the banks, and for the real economy, is the distortions produced by risk-weighted capital requirements, were this source of distortion to be completely removed, then I think that a 8 to10 percent capital on all assets would suffice… especially if there is a clear reduction in the moral hazard producing government guarantees… especially if the prosecutors of wrong-doings begin to go after the responsible executives and not just shareholders’ capital.

That fixed capital requirement of 8 to 10% should of course also be applied to sovereign debt.

Though I am not a US citizen, I do have immense respect for USA’s Declaration of Independence and Constitution, and I must say, pardon me, that the risk weights of 0% the Sovereign and 100% We the People, reads to me like a slap in the face of the Founding Fathers.

PS. Clearly there is a conflict between wanting the banks to hold more capital, which would be the result of eliminating current risk weighted capital requirements, with wanting the banks to also serve the credit needs of weak economies. But there are ways to harmonize, like grandfathering any changes in the capital rules meaning leaving them as is for all the current assets of banks.

PS. You might ask yourselves what do I have to do with all this. Let me be clear, as a Venezuelan, and a Polish citizen, one whose father was liberated by American soldiers from a concentration camp in 1945, and as a grandfather of two Canadians, I am absolutely sure we all have much skin in the game with respect to how it goes for America… (And that goes for you too Sir… much more that you would naturally want to admit) 

@PerKurowski

I am a whistleblower on Basel Committee’s monstrous mistakes, but FT might not have seen my 2.375 letters either

Sir, Ben McLannahan discussing whistleblowers and the fake-account scandal at Wells Fargo writes: “One even wrote an email in exasperation to John Stumpf, the former chairman and chief executive. (He said he had not seen it.)” “Providing incentives for whistleblowers will improve bank culture” October 21.

Well I have been denouncing, for over a decade, among other with 2.375 letters to FT, this one not included, that the risk weighted capital requirements for banks concocted by the Basel Committee for Banking Supervision and supported by the Financial Stability Board, and not questioned by for instance IMF, is a dangerous monstrosity.

Not only does it distort the allocation of bank credit to the real economy, but it also does so for no good purpose at all, since major bank crises never result from excessive exposures to something that was perceived as risky when booked.

Perhaps one of these days its editor, and many of its columnists, will also argue they never saw these letters.

If someone who like me has argued consistently and extensively against these globally imposed regulations, cannot be helped by a Financial Times to at least obtain from the regulators clear and unequivocal the responses to his objections, then it could seem those regulators might also be using some very insidious pressures to silence those who “Without fear and without favour” are supposedly best equipped to give whistleblowers some voice.

PS. Here again is an aide memoire with some of my objections.

@PerKurowski ©

The Federal Reserve’s stress tests of banks are dangerously incomplete.

Sir, Ben McLannahan and Gillian Tett write that the US Federal Reserve reported that “Every one of the 33 US banks that took the first part of the annual “stress test” passed it” “US lenders face higher stress test hurdle”, June 25.

That is good news. But the bad news though is that, as I have said time after time, those stress tests are incomplete. They only include what is on the balance sheets of banks, and not what these should include but perhaps do not include. And that means that the all-important social role of banks of allocating credit efficiently to the real economy is completely ignored.

If banks run into problems because of allocating credit in accordance to the needs of the real economy, that is a much lesser problem than if the real economy does not have adequate access to bank credit.

What do I suggest? Analyze for example the evolution of how many credits, not guaranteed with house mortgages, have been given over the years to “risky” SMEs and entrepreneurs, and I am sure you will be shocked with how the credit risk weighted capital requirements for banks have distorted.

@PerKurowski ©

Hardheaded bank regulators still believe they’re up against the expected while the real enemy is always the unexpected

Sir, Ben McLannahan discusses the consequences of changing “the current regime [in which] banks can hold off adding to reserves until the point at which losses on the loan become probable…[to one in which] banks will be made to log all expected losses over the life of the loan on day one, based on a combination of experience, their own forecasts and the state of the economy”, “Big lenders raise concerns over new loan loss rules” June 22.

One direct consequence of that is that those borrowers who are ex ante perceived as risky, will therefore force banks to recognize losses earlier than “when probable”. That might sound correct, but the real effect is that, when compared to those ex ante perceived as safe and which have lower probability of losses, it will discriminate against the risky.

And so when you layer this on top of the discriminations already produced by the risk weighted capital requirements for banks, the access to bank credit for those perceived as risky will only become more difficult. And all really without making banks much safer. The expected never causes major bank crises, it is always the unexpected losses for what had erroneously been perceived as safe that does.

McLannahan reports that Hal Schroeder, a board member at FASB, opines that the new rule — known as the Current Expected Credit Loss, or CECL — “aligns the accounting with the economics of underwriting, and the informational needs of investors”.

And to justify it Schroeder “noted that in the four years before the crisis, loans held by banks in the US rose 45 per cent, while reserves set aside for losses fell 10 per cent. That meant that loan-loss reserves as a percentage of gross loans were near a multi-decade low on the eve of the Lehman collapse.”

But why was that? That was the result of banks increasing their exposures to what was perceived as safe, because of lower capital requirements, and lowering their exposures to what was perceived as risky, because of lower capital requirements… and then being surprised when “super-safe” AAA-rated securities, backed with “super-safe” residential housing mortgages, and loans to sovereigns decreed as “super-safe”, like Greece, turn out, ex post, un-expectedly, against probabilities, to be very risky.

Sir, what’s being done here, especially without eliminating the risk-weighted capital requirements, evidences that the regulators still don’t understand that they are not up against the expected, their real challenge is the unexpected. Since what is perceived as safe has much more potential of providing unpleasant surprises than what is perceived as risky, their regulations just makes the bank system more brittle and fragile.

And to top it up by discriminating against the risky they hinder the banking system from taking the risks the real economy needs to move forward.

We need our banks to work for all, not just for the banks, and for those perceived as safe.

We need our banks to finance the riskier future of our young, not just refinancing the safer past of their parents.

@PerKurowski ©

Jamie Dimon should consider the long-term interest of his and of JPMorgan’s shareholders’ children and grandchildren

Sir, Ben McLannahan reports on Jamie Dimon’s letter to JPMorgan’s shareholders’. “JPMorgan chief Dimon warns on dangers of undermining US banks” April 7.

In his letter Dimon argues that tougher rules can weaken the competitiveness of US banks, for instance against the Chinese banks. That’s true! Especially in the short-term.

And McLannahan reminds us that “In 2014 Dimon argued that tougher rules would mean that customers faced more expensive credit, or would be denied certain financial products altogether.” That is also true!

But Dimon must also be perfectly aware that current bank capital requirement rules, for when lending to those ex ante perceived as “risky”, are much tougher than those for exposures to the “safe”.

And I refuse to think that Dimon does not know that distorting the access to bank credit in favor of the “safe” government and the AAArisktocracy, against that of the “risky” SMEs and entrepreneurs, only guarantees to sooner or later weaken tremendously the real economy of US. 

And I also refuse to think that Dimon does not know that no US bank should expect to be able to stand solid amid the rubbles of a ruined US economy… not even JPMorgan.

Dimon states: “The US financial services industry does not conform to simple narratives. It is a complex ecosystem that depends on diverse business models coexisting because there is no other way to effectively serve America’s vast array of customers and clients.”

And surely Dimon knows perfectly well, that a complex ecosystem is not made better by regulators who, with much hubris and little wisdom, believe they can help it with their distorting concoctions.

And so Jamie Dimon, instead of writing a letter to JPMorgan’s shareholders considering their short-term interest, should write them a letter that considers the long-term interests of theirs and his own children and grandchildren.

“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd 1850-1926 

God make us daring!

@PerKurowski ©

How many small bank loans to SMEs and entrepreneurs has Basel Committee’s regulations hindered? Millions?

Sir, Shawn Donnan reports that in his annual economic report to Congress president Obama portrayed an American economy in relatively rude health after weathering one of the most brutal crises in its history. But Obama also acknowledged rising inequality, and that “a lot of Americans feel anxious”, blaming that on an economy that thanks to technological advances had been “changing in profound ways, starting long before the Great Recession”. “Obama rejects allegations economy is on the slide” February 23.

I would suggest to Mr. Obama he poses the following question to some economist at universities and at the Federal Reserve: 

How many bank loans to SMEs and entrepreneurs have not been awarded in America and Europe the last decade because of the risk weighted capital requirements for banks, ten thousands, hundred thousands, millions? I expect their answer to be frightening.

One way to obtain that number would be to look at how many of these loans were on the balance sheets of banks pre Basel II and how many are to be found today.

There is no way in hell America and Europe can regain sturdy and sustainable economic growth with bank regulators who distort the allocation of bank credit to the real economy with a silly and dangerous credit risk aversion.

Ben McLannahan in “US lenders blast proposed capital buffer rules”, reports on the ongoing discussions about rules on banks’ “total loss absorbing capacity” (TLAC). There he writes: “The top lobby groups for banks in the US have blasted proposals to make them build bigger capital buffers against losses, saying the “excessive” requirements could restrict the flow of credit to the world’s biggest economy.”

But, no matter at what percentage they are set, the required total loss absorbing capacity is still based on risk weighted assets (RWAs). And that means banks must hold more TLAC for assets considered as risky than for assets considered as safe.

And so that means those capital requirements especially restrict the flow of credit to those perceived as “risky”, the SMEs and entrepreneurs.

In this world were lobbying has sadly become a part of the government process, how sad it is that “The Risky” have no powerful lobbyist on their side.

The first arguments such a lobbyist could produce is to inform regulators about the fact that SMEs and entrepreneurs, precisely because they are perceived as risky, already count with less and more expensive access to bank credit, and so they never ever set of major bank crises.

And to address the inequality issue they could cite J.K. Galbraith’s “Money: Whence it came where it went” 1975 with: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

“A ship in harbor is safe, but that is not what ships are for.” (John Augustus Shedd, 1850-1926) America, Europe, the World, what goes for ships goes for banks too!

America, Europe, the World, for the sake of next generations, allow your banks to finance the risky future and not only be refinancing the safer past!

@PerKurowski ©

The most important risk with banks will most probably be totally ignored again in the stress tests

Sir, Ben McLannahan reports on the Federal Reserve stress tests of the biggest US banks “designed to assess whether banks have enough loss-absorbing capital to keep trading through a shock to the system similar to the collapse of investment bank Lehman Brothers in 2008.” “US banks face tougher stress tests” February 22.

Again those tests will probably totally ignore the biggest risk with banks, that of these not allocating credit efficiently to the real economy.

In Yuval Noah Harari’s “Sapiens: A brief history of humankind” we read:

Over the last few years, [central]-banks and governments have been frenziedly printing money. Everybody is terrified that the current economic crisis may stop the growth of the economy. So they are creating trillions of dollars, euros and yens out of thin air, pumping cheap credit into the system, and hoping that the scientists, technicians and engineers will manage to come up with something really big, before the bubble bursts…

Everything depends on the people in the labs. New discoveries in fields such as biotechnology and nanotechnology could create entire new industries, whose profits could back the trillions of make believe money that the banks and governments have created since 2008. If the labs do not fulfill these expectations before the bubble bursts, we are heading towards very rough times.

And substitute there “the real economy with its SMEs and entrepreneurs” for “the labs”. 

Since banks are allowed to leverage their equity, and the support they receive from the society, many times more with assets perceived as safe than with assets perceived as risky; and banks therefore earn higher expected risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky, banks have no incentives to lend to “risky” SMEs and entrepreneurs. And much less so when most banks suffer a scarcity of capital.

And central bankers should dare to ask themselves: How many millions of small bank loans to SMEs and entrepreneurs, has the Basel Committee’s regulations impeded?

And so any sensible stress test of banks should not only consider what is on banks’ balance sheets but also what is absent.

And regulators should opine on whether banks are fulfilling their number one social purpose, which is that of allocating credit efficiently to the real economy.

But because banks no longer finance the risky future, and only refinance the safer past, that might be just to stressful for the great distorters.

@PerKurowski ©

Risk weighted TLAC intensifies the irresponsible regulatory distortion of bank credit allocation to the real economy

Sir, I refer to Eric Platt’s and Ben McLannahan’s “S&P downgrades 8 US lenders on support fears” and to Lex’s “US banks: losing their safety harness”, December 4.

It is mentioned: “Since the financial crisis of 2008-09 regulators have launched a succession of measures designed to ensure that taxpayers will not be burdened again in the event of another Lehman-like crisis, forcing banks to hold more capital and liquid assets while limiting the amounts they can return to shareholders through buybacks and dividends” “Banks are expected to hold total loss absorbing capacity — TLAC — of at least 18 per cent of their risk-weighted assets.” “S&P on Wednesday pronounced the US Federal Reserve’s latest capital rules as up to the task”

So, on top of the distortions produced by the risk weighted capital requirements now regulators want to add this.

18 percent of risk weighted assets means that normal unrated creditors, and those rated between BBB+ to BB-, will generate the bank an 18 percent TLAC requirement, while for example private sector assets rated AAA to AA will only generate a 3.6 percent requirements TLAC. Those unlucky to have a rating below BB- they will generate a 27 percent TLAC requirement, which of course will not make their plight any easier to solve.

I am so amazed at how bank regulators seem to not care one iota about whether their regulations distort the allocation of bank credit to the real economy. Might it be that they have still not defined the purpose of those banks they are regulating? God, save us from this type of irresponsible regulators.

@PerKurowski ©

Here is what the Primary Bank’s game changing Manifesto could state.

Sir, I read with much interest Ben McLannahan’s “Rare US bank launch targets ‘It’s a Wonderful Life’ values” May12.

And it came to me that the following could be The Primary Bank’s vey important and game changing Manifesto.

We, in the Home of the Brave, we refuse to hold less equity against those perceived as safe than against those perceived as risky. That discriminates against the fair access to bank credit of those SMEs and start-ups that build the foundations of our economy.

If we are required to hold 8 percent against a loan to a citizen, that is what we will hold if lending to the government, because we, in the Land of the Free, refuse to think of the American citizens as more risky than their government.

That means we will hold more equity than we are required to, and so risk-adjusted returns on equity will be somewhat lower than what other banks can generate.

But, our shareholders, and us the management, we are certain our way will, sooner or later, lead to much higher returns for all.

Reasoned audacity and pure crazy risk-taking is what brought us here and so, no matter how much regulators wants us to become risk-adverse, we refuse to deny our children and grandchildren the risk-taking that is necessary for them to have a good future with plenty of jobs.

God make us daring!

PS. We remit to “The Parable of the Talents” Matthew 25:14-30

@PerKurowski

The Federal Reserve failed by submitting banks to an incomplete stress test.

Sir I refer to Tom Braithwaite, Ben McLannahan and Barney Jopson’s report on the recent stress tests performed by the Federal Reserve ad that that have given the US banks a clean bill of health, “European banks fail US stress tests”, March 12.

It is the Federal Reserve who has really failed the test by only testing for the assets banks have on their balance sheet, and not for the assets that should have been there. In other words, one thing is for banks to have sufficient equity for what they are doing, and another quite different sufficient equity for what they should be doing, if complying with their societal purpose of efficient credit allocation.

Banks have been made dysfunctional by the introduction of distorting credit-risk weighted equity requirements which favors assets perceived as “safe” As a result of this, banks in America (and in Europe) are not giving “risky” SMEs and entrepreneurs a fair and sufficient access to bank credit. For the banks to become functional again all differences in equity requirements against assets need to be eliminated. And to make room for such a leveling, basically all banks must increase their equity.

Our young, in order to have jobs and a decent future, need banks to take risks on “risky” small businesses and entrepreneurs. How many of these borrowers will now not be able to get credit, only because of the dividends and the buy-backs of shares the Federal Reserve’s incomplete stress tests stimulate?

@PerKurowski

The Fed, surprising banks with visits is ok, but surprising them with surprise regulatory criteria, sounds illegal

Sir, amazed I read Ben McLannahan reporting that “Fed officials say that they want to preserve some mystery in their methods, so that banks stay on their toes”, “Tougher US stress test challenge looms for lenders in round two”, March 9.

Amazing, the Fed is becoming truly Kafkaesque. Who on earth does it believe it is to preserve some mystery in their method which when released might affect all us who invest in bank shares?

If it springs a surprise on the bank I have invested in, and as a result I suffer losses, should I not be able to sue the Fed?

FT, odious regulatory discrimination against “the risky” is described on you pages; yet you prefer to play dumb and ignore the issue.

Sir FT, amazingly, because it is not a good book, handed over the book of the year award to Thomas Piketty’s ‘Capital in the 21st century’, arguing “it provoked a debate over inequality”.

And yet not a word about regulators who, with their credit risk weighted equity requirements for banks, odiously discriminate the access to fair bank credit of those perceived as “risky”, those already disfavored by bankers, while favoring that of those perceived as “safe”, those already favored by bankers.

Today Ben McLannahan reports that ”Citi is gravitating towards wealthier customers to whom it can offer more products, while holding less capital against them”, "Citi shrinks ’bad bank’ with $4.3bn sale of subprime lender to Springleaf.”

Most probably, notwithstanding your motto, you will sweep this under the rug again.

Mark Carney, FSB, to begin, stop giving the Too-Big-To-Fail banks growth hormones.

Sir I refer to Sam Fleming, Ben McLannahan and Gina Chon reporting “BoE chief leads push to break ‘too big to fail’ impasse at G20”, July 21.

There they report on the efforts of Mark Carney as the current chairman of the Financial Stability Board to try to clinch a deal on bailing in creditors of globally significant, cross border banks that get into trouble”.

Mark Carney, to begin with should start by stopping giving the growth hormones that minimalist capital requirements for what is officially perceived as absolutely safe, represents for the Too-Big-to-Fail banks.

And then I would also suggest they think a little bit more about the implications of the Contingent Convertibles. The CoCos, hard to manage even in the presence of solely a leverage ratio rule, are mindboggling difficult when the capital requirements for banks are risk-weighted.

Perhaps Mr. Carney should read what George Banks had to say about CoCos when asked by his Board of Directors at theDawes Tomes Mousley Grubbs Fidelity Fiduciary Bank

The banks are made to jump from one huge pro-cyclicality to another.

Sir, Ben McLannahan reports, “IMF sounds alarm on Japanese lenders”, October 11, and this as a result of “domestic bank holdings of government bonds in the country could rise to a third of their total assets within five years now”.

I do not get it! Is it not what they wanted? They must obviously have understood that this would be only the natural consequence of allowing the banks to hold basically no capital at all against exposures to “The Infallible”, while at the same time requiring them to hold around 8 percent in capital when lending to “The Risky”, like the small businesses and entrepreneurs.

But, I am indeed worried, because it means that precisely at the moment the public sector might be hit by higher borrowing cost, will be precisely the moment they will need to bail out the banks because of their losses on public bonds. 

The article also states “Japan’s interest rates have been kept low in recent years by strong support from the banks”, but that must be a typo. I guess they meant “strong support from the bank regulators”. 

Indeed it would seem like the regulators are intent on having our banks jumping from one huge pro-cyclicality to another.