On FT’s Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance

Sir, I refer to Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance this month”; as “decoded by a sceptic”, “Trump’s battle with red tape will hurt consumers and world” February 14.

1. “A swipe at the Consumer Financial Protection Bureau, the new body that has returned $12bn to more than 25m Americans ill-treated by financial groups.”

That comes to an average of $480 per person, which leaves open the questions of: At what cost? Should Americans because of CFPB’s feel safer and, if they do so, are they really safer? What has happened to good and useful old “Caveat emptor”?

2. “Mr Gary Cohn blamed regulatory capital requirements for a shortage of credit to the economy: “Banks do not lend money to companies . . . because they’re forced to hoard capital,” he said. Nonsense, given that equity capital is free to be used for lending.” What? Has Patrick Jenkins not yet understood how for instance requiring banks to hold more capital against “risky” SMEs than against the sovereign and the “safe” AAA-risktocracy, distorts the allocation of bank credit?

3. “There has in any case been pretty strong credit growth, about 6 per cent a year since 2012.”

Credit for what? Yes: for corporation repurchasing their shares; for more loans to “safe” sovereign; for increased automobile financing portfolios; for residential mortgages… but what about the financing of the riskier future our kids and grandchildren need to be financed?

4. “It may also be a pop at the Financial Stability Oversight Council, the only US federal body that assesses risk across banks and non-banks… disbanding FSOC, would… be dangerous”

No! All those involved with bank regulations that do not understand the fundamental reality that what is perceived as very safe, is much more dangerous to the bank system than what is perceived as very risky, should be disbanded… the faster the better.

5. “Enable American companies to be competitive with foreign groups in domestic and foreign markets. A natural adjunct of the president’s all-encompassing call for national greatness… is likely to translate into… deregulation.”

What? If banks have needed to hold the same amount of capital against loans to Greece or AAA rated securities that they needed to hold against loans to SMEs and entrepreneurs we might have had other type of crisis, but not the 2007/08 one, nor would we be suffering such lazy economic responses to all the huge stimuli doled out?

6. “be in no doubt: this president will deregulate”

If that means to take away what distorts the allocation of bank credit to the real economy then welcome, not a moment too soon. To just modify the regulations is not to deregulate, but only to neo-misregulate.

7. “Restore public accountability within Federal financial regulatory agencies”

That would be not a second too late. Not only the Federal financial regulatory agencies, but also most of the world’s bank regulators, refuse to answer some simple questions such as: Why do you assign a low 20% risk weight to the so dangerous for the banking system AAA rated, and a whopping 150% to the so innocuous below BB- rated?

@PerKurowski

Elizabeth Warren, as a member of United States Senate Committee on Banking, might not perform entirely her own duties

Sir, Barney Jopson reports that Senator Elizabeth Warren is requesting the replacement of Mary Jo White as Chair of the Security and Exchange Commission “Warren wants SEC head fired for ‘undermining’ administration” October 15.

I have no opinion on how Mary Jo White has been performing her duties at the SEC but, the United States Senate Committee on Banking, Housing, and Urban Affairs, of which Ms Warren is a standing member, is lacking carrying out in its own responsibilities.

I hold that since to this date I have not seen any effort on part of that committee to ascertain if, and if so how much, the risk weighted capital requirements distort the allocation of bank credit.

This is not a minor issue. For a starter it could ask bank regulators for a full explanation of the risk weights of 0% when financing the sovereign (the King), 20% the AAArisktocracy, 35% housing and 100% “We the People” like SMEs and entrepreneurs, those with the best chances of generating the future jobs our grandchildren need. That regulatory credit risk aversion, layered on top of whatever risk aversion the bankers’ themselves can harbor, sounds as anathema as can be to the whole notion of the Land of the Free and the Home of the Brave.

Besides, the discrimination in access to bank credit that those risk weights produce, violates directly the spirit of the Equal Credit Opportunity Act (Regulation B). In that respect the committee should also ask the Consumer Financial Protection Bureau, CFPB, what it is doing about this.

With regulations, to favor banks lending to the “safer” past and present, over lending to the “riskier” future, is a clear violation of that holy social inter-generational bond that Edmund Burke spoke about.

To top it up, those risk weighted capital requirements do not serve one iota for making the banking system safer. All major bank crises result either from unexpected events or from excessive exposures to something erroneously perceived as safe, never ever because of excessive exposures to something ex ante perceived as risky.

PS. Elizabeth Warren, in as much as she classifies herself as a progressive, could also be interested in how these regulations decree inequality.

@PerKurowski ©

Want more opportunities and less inequality? Then scrap capital requirements for banks based on perceived risks.

Sir, Lawrence Summers, proposes university to promote economic diversity in “How the land of opportunity can combat inequality” July 16. 

Let me proposes a more immediate way, scrapping capital requirements for banks based on perceived risk. These drive in a further inequality wedge between those perceived as risky, most often the have-nots, and those perceived as safe, most often the haves, at the same time it makes it more difficult and expensive for small businesses and entrepreneurs to get an opportunity. 

What good would it make for universities to introduce opportunity slots for the poor if then, when the poor graduates, his jobs will much depend on legacy networks? 

“Ah but then our banks can become unsafe!” Don’t be silly, when have you ever heard about a bank crisis caused by too much lending to what was considered risky? 

Ps. I have recently introduced a complaint before the Consumer Financial Protection Bureau arguing that these capital requirements go against the Equal Credit Opportunity Act (Regulation B)

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).