Banks and regulators managing the same ex ante perceived risks, simultaneously, can only result in chaos and tears

Sir, Ian Cormack writes of “Banks´ deadly blend of complexity and leverage” October 9. And he holds that though many large businesses are very complex “the differentiator for banking is risk… demanding rigorous risk managing and risk reporting”. That is true but that does not even remotely describe the real difficulties, or impossibility, of managing bank risks today.

Banks look at the ex ante perceived risk of assets and adjust to these (in the numerator) by means of interest rates, size of exposures and other ways like hedging or contractual terms. But then come the bank regulators and adjust for basically the same ex ante perceived risk (in the denominator) by means of their risk weighted capital requirements.

That creates all sort of feed-back noises and, of course… the whole system overdoses on ex ante perceived risks, and all result in chaos.

God, make these regulators understand what they are doing!

“Rigorous capital allocation” currently means banks abandon those officially, ex-ante, perceived as “The Risky”

Sir, Tom Braithwaite and Shahien Nasiripour report “Pandit´s exit restores air of calamity at Citigroup”, October 17. 

In it, in reference to Mike O´Neill, its chairman, they write that people who have worked with him say “he is no nonsense and rigorous about capital allocation, willing to shut underperforming businesses without compunction”. 

I would hope they would try to set that description in the context of regulatory capital requirements for banks based on the ex-ante perceived risk. 

If so they will better understand that the banks, maximizing their returns on equity, will concentrate on those for which the regulators do not require a lot of equity, “The infallible” and, without compunction, ignore those which require holding more equity, “The Risky”, like the small businesses and entrepreneurs. 

And of course, those bankers who dare not to be that rigorous about capital allocation, might soon find themselves out of a job.

Please do not sell US assets at bargain basement prices!

Sir reading John Gapper’s “America must live with being a bargain basement” December 1, and the sale of 4.9 percent of Citigroup to an investment arm of the Abu Dhabi government, it somehow led me to think about the “Memoirs of a Geisha” that describes the creation of a vicious competitive bidding process in order to maximize the value of a young girl's virginity. I just wonder whether if someone had previously set a maximum limit to how much of a Citigroup could be sold to middle east countries before being blocked similar to how the takeover of some US ports were one would not have been able to generate that scarcity value that could have led the investor to gladly fork out at least twice what they paid for those shares. Sincerely, in these days when we read of billions of run away losses in a world that has no idea where to invest, one could believe that the shares of the bank that never sleeps in the US and that is one of those that has seemingly become too large to fail should be worth a bit more.

There are other strengths in the US of course but the assets of America are the main line of defence when it comes to hold up the value of those dollars we are all holding and so if these assets start going at bargain basement prices, then we are all really in a jam.