Myths, and truths that shall not be told, is why so little has changed since the financial crash

Sir, Martin Wolf writes: “The financial crisis was a devastating failure of the free market… The persistent fealty to so much of the pre-crisis conventional wisdom is astonishing.” “Why so little has changed since the financial crash” September 4.

Myths and truths that shall not be told, so that regulators shall not be held accountable, is the cause of that, not the failure of markets that were not free by a long shot. Here follows some of the more important of these.

Lack of regulations: Wrong! Total missregulation. Regulators for their risk weighted capital requirements for banks used the perceived risk of banks assets, those that bankers were already clearing for, and not the risk that bankers would perceive and manage the risks wrongly. They seemingly never heard of conditional probabilities.

Excessive risk taking: Wrong! It was the regulators excessive risk aversion that gave banks incentive to build up excessive exposure to what was perceived safe.

Greece did it: Wrong! EU authorities did Greece in, when assigning a 0% risk weight to its debt.

But Wolf is correct when arguing, “Today’s rent-extracting economy, masquerading as a free market, is, after all, hugely rewarding to politically influential insiders”

Because yes, crony statism is all around us, beginning with the “We governments guarantee you banks, and then assign ourselves a 0% risk-weight so you need not to hold any capital when lending to us, and so then you can return the favor by lending to us. 

Sir, Wolf concludes: “If those who believe in the market economy and liberal democracy do not come up with superior policies, demagogues will sweep them away”. That is right! But let us not ignore that “We will make your bank systems safe with our risk weighted capital requirements” was and is pure unabridged besserwisser demagoguery.

PS. Of course journalists who refuse to ask regulators the right questions since they are scared that if they do they will never be invited to Davos and Jackson Hole gatherings are also part of the explanation.

PS. Here is an aide memoire on some of the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

For the complexity of banks, regulating demagogues gave us the simple solution of risk weighted capital requirements

Sir, Martin Wolf writes that current “upheavals [2007-08 Crisis, Great Recession] have, as so often before, opened the way to demagogues, promising simple solutions to complex problems… Brexit… Trump…Catalonia”, “A political shadow looms over the world economy” October 14.

Indeed, but much of the upheavals were caused directly by the members of an exclusive mutual admiration club of populist regulators, who sold the world that monumental piece of demagoguery of risk-weighted capital requirements for banks. “You all relax… we have weighted the risks.”

And though they never defined explicitly the purpose of banks, because seemingly they do not care about that, implicitly, de facto, their risk-weights indicate what the banks should do, and what not. That is so because less capital, means higher leverage, which means higher risk adjusted returns on equity.

So now we have: thou shall lend to sovereigns, to members of the AAArisktocracy and to finance residential houses; and thou shall not lend to risky SMEs and entrepreneurs.

And when the first results of those regulations, the excessive exposures to AAA rated securities, and to sovereigns like Greece appeared and caused crises, they did not rectify, they kept their risk weighting, and their central bank brothers kicked the cans down the road with QEs and ultralow interest rates.

So look at the stock market going up while becoming riskier because of the de-capitalization that results from taking up loans to pay for dividends and buybacks.

So look at house prices being overinflated, as evidenced by the lagging of rental values; while central bankers turn a blind eye to house prices not being in the consumer price index, but that rentals are.

So look at how sovereign debt levels are growing almost everywhere.

The monstrous silence about the distortions produced by bank regulations, like by influential opiners like Martin Wolf, is only helping to generate even more nutrient ingredients to all too many populists in waiting. God help us!

@PerKurowski

PS. My 2019 letter to the Financial Stability Board (FSB)

FT, it would have been easy pie to predict the crisis 2007-08 had to happen, had you only dared question bank experts

Sir, Matthew C Klein writes: “Lots of people were supposed to prevent the financial crisis…most policymakers, risk managers, and academics failed in their responsibility to protect the rest of us. After the fact, the common defence was that the crisis so complex and unusual that it would have been impossible to predict “Anyone awake in the 1980s should have known about the dangers in the 2000s” Alphaville September 13.

Complex? Not at all! And you do not, as Klein usefully suggests, need for that to go back to what happened in the 1980s and 1990s.

Sir, just dare answer! If regulators allow banks to leverage their equity 60 times or more just because an AAA rating or a friendly sovereign is present… does that not doom banks to disaster? Of course it does!

Here are some examples of what I wrote:

October 1998, Op-Ed in Venezuela: “History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

November 1999, Op-Ed Venezuela: “The possible Big Bang that scares me the most, is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

September 2002, Op-Ed Venezuela: “What a nightmare it must be to be a sovereign risk evaluator! If they underestimate the risk of a given country, it will most assuredly be inundated with fresh loans and leveraged to the hilt.”

January 2003, letter published by Financial Times: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

March 2003, in a formal discussion at the Executive Board of the World Bank: “The sole chance the world has of avoiding the risk that entities such as the Basel Committee, accounting standard boards and credit rating agencies introduce serious and fatal systemic risks, is by having an entity like the World Bank stand up to them, instead of sort of fatalistically accepting their dictates."

April 2003, commenting on the World Bank's Strategic Framework 04-06 "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

May 2003, in comments made at a workshop for regulators at the World Bank: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

May 2003, Op-Ed Venezuela: “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators, we find it so strange that the Basel Committee delegates, without protest heard, so much responsibility in the hand of so very few and human-fallible credit rating agencies”

October 2004, in a written statement delivered as an ED at the Board of the World Bank: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

November 2004, in a letter published by the Financial Times: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?”

But yet you Sir have silenced me, only because you think I am obsessed with the risk weighted capital requirements for banks. I tell you Sir, indeed I am, and you should be too!

I tell you Sir, indeed I am, and you should be too!

http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

Per Kurowski

Amazing how an anthropologist, like Gillian Tett, can believe that our financial markets are driven by lust for risks

Sir, Gillian Tett writes: “if we want to avoid a replay of 2007, we must keep questioning our assumptions — and peering at the parts of the system that seem “boring”, “geeky” and “dull”. Our mental bins can sometimes hold time-bombs” “The next crash risk is hiding in plain sight” August 10.

Indeed! And one of the greatest drivers of such time-bombs is confusing ex ante perceived risks with ex post risks.

But Ms. Tett also writes “Sometimes, market shocks occur because investors have taken obviously risky bets — just look at the tech bubble in 2001”. What? Does FT’s in house anthropologist really believe investors were taking “obviously risky bets”? Was it not much more the illusion of very high-risk adjusted returns that caught the investors’ attention?

But Ms. Tett also writes: “Most investors assume that Treasuries are the risk-free pillar of modern finance”. What? If there is anyone who has really assumed that, it is the bank regulators when they, in 1988, with Basel I, began to assign 0% risk-weights to sovereigns.

Ms. Tett also writes “precisely because the system has become so flush with cash — and seemingly calm — there is complacency; and not just about the dangers of clearly risky bets (say, Argentine bonds), but about the perils of “safe” assets too”.

Not really, the complacency about clearly risky bets is almost non-existent when compared to that related to safe assets.

As an example of riskiness Tett points out “an obscure “Inverse Vix” ETF that benefits from low volatility… the world’s 34th most actively traded equity security…[and] that has returned almost 100 per cent this year. What? Is she really arguing that something which offered the expectations of large returns and that has actually provided almost 100 per cent return this year, is riskier than holding 10 year German bunds yielding certain negative rates?

Sir, it is so hard to understand how Ms. Tett, and most of you, even when acknowledging that “The next crash risk is hiding in plain sight”, seem unable to wrap your minds around the fact that what is really dangerous, for instance to our banking system, is what is perceived as safe… and that therefore the current risk weighted capital requirements, besides dangerously distorting the allocation of bank credit to the real economy, are incredibly dumb.

Sir, were you a part of the inquisition, you would most certainly be prosecuting Galileo.

@PerKurowski

The risk weighted capital requirements give banks great incentives to hide risk from their regulators.

Sir, Eric Platt and Alistair Gray write “US regulators have joined investors in voicing concern over risky bank lending… particularly when projections make a company appear more creditworthy… ‘The agencies continue to see cases of aggressive projections used to justify pass ratings on transactions that examiners consider non-pass’… although they said the number of cases was “at much lower levels than in prior periods” “Wall Street watchdogs sound alarm over risky bank lending” July 4.

In good old banking days, around 600 years, before Basel Committee’s risk weighted capital requirements, bankers argued their clients riskiness in order to collect higher risk premiums. Now banks argue more their clients safety, in order to convince regulators that they can hold less capital. That distortion makes the efficient allocation of bank credit to the real economy.

“The Fed and its fellow regulators… give deals a pass or non-pass rating which is then used to build a picture of banks’ lending activities.”

Considering that bank crisis only result from unexpected events or excessive exposures to something perceived, concocted or decreed as safe, and never ever from something perceived as risky, does this pass or non-pass rating activity make any sense? Absolutely not! It is as silly as can be… except for those who earn their livings from working on bank regulations. 

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

“the agencies said that risks had declined slightly but remained “elevated”. Lending considered to be non-pass had fallen from 10.3 per cent to 9.7 per cent of the overall shared national credit portfolio” As I see it, we could just as well argue that where the real dangers lie, increased from 89.7% to 90.3%.

Sir, again for the umpteenth time, without the elimination of the insane risk weighted capital requirements, there is no way our banks will recover their sanity. I am amazed on how you have decided to keep silence on this.

@PerKurowski

Populist bank regulators ‘like them’ commandeered a historical triumph of emotions over facts

Sir, Sebastian Payne writes that Keith Craig “defined 2016 as the year ‘People Like Us’ — those who have been filled with despair and disbelief about populist uprisings — lost control…[to ‘People Like Them’]” Payne then describes PLT as “the folks who act on gut not reason. Emotion, not facts.” “The year People Like Them take control from People Like Us” December 28.

Payne, praising the work of PLU accepts these are also to blame for, among other, the financial crash and its after effects. In this he is wrong.

If Payne’s description of PLT applies, then at least with respect to banking, PLU lost control in 1988, when with the Basel Accord the concept of risk weighted capital requirements for banks was introduced.

This because ‘more risk more capital – less risk less capital’ is a pure guts no reason, just emotions and no facts, concept.

Why? Bank crises always result from unexpected events like devaluations, criminal behavior or excessive exposures to something ex ante perceived as safe but that ex post turned out to be very risky. What is ex ante perceived as risky never generates that kind of exposures that could endanger the banking system.

In 2004, with Basel II, the regulators doubled down on their emotions and their lack of facts. Its risk weight of 20% for what is rated AAA, and 150% for what’s rated below BB-, represents a historical triumph of emotions over fact.

That had the banks crashing with little capital into AAA rated securities and sovereigns like Greece, and that has banks impeding growth by staying away from “risky” SMEs and entrepreneurs.

With regulators ‘like them’ ‘People like us’ are toast, most especially if we, like FT, behave ‘like them’ and keep mum on what the regulators are doing.

@PerKurowski

It is Robert Jenkins and his bank-regulation buddies who, as an absolute minimum, should be placed on the naughty step

Sir, Robert Jenkins writes “Prioritizing competitiveness is precisely what led to lax regulation”, “A little longer on the naughty step will benefit banks” September 7.

While prioritizing competitiveness between banks, trying to make these follow similar rules all over the world, regulators introduced the risk weighted capital requirements for banks.

That piece of regulation impeded those borrowers perceived as risky, like SMEs and entrepreneurs to compete fairly for access to bank credit, and therefore decreed inequality and economic stagnation.

That piece of regulation, by motivating banks to build up dangerous excessive exposures to what was perceived, decreed or concocted as safe, like AAA rated securities, financing of houses and loans to sovereigns (like Greece), caused the 2007/08 crisis.

Robert Jenkins, as former member of the Bank of England’s Financial Policy Committee should, together with all his bank regulation buddies, as an absolute minimum, should be placed on the naughty step.

Personally I would prefer them having to parade down some major avenues wearing dunce caps and forever be barred from having anything to do with any type of regulations… I mean how dumb can you be to believe that what is perceived as risky is riskier for the banks than what is perceived as safe.

Info: Basel’ private sector risk weights: for AAA rated = 20% and for below BB- 150%

@PerKurowski ©

No casino roulette game would survive a Basel Committee kind of manipulation of the winnings of different bets

Sir, Adam Kucharski writes: “When math students at MIT discovered a lottery loophole in 2005, they formed a company — By the time the lottery was discontinued, they had… brought in a pre-tax profit of $3.5m.” “Investment and betting require similar skills — and luck” May 6.

The expected payout for every bet in roulette is exactly the same, and that’s why roulette has not been discontinued. So how long would Kucharski expect roulette to last if some regulators decided to multiply by some factor the winnings on the low paying “safe” bets, so that player could play for a longer time? Not long eh?

But that is exactly what bank regulators did when they allowed banks to leverage their equity more with what was perceived, decreed or concocted as safe, like when playing a color, than with what was viewed as risky, like when playing a number.

And so when Kucharski writes: “The boundaries between luck and skill, and gambling and investment, are not defined by industry or activity, but rather by the person playing, and who they are playing against”, we need to add, “and by the regulators”… especially if the regulators with hubris think they can distort for the better.

Unfortunately the bets of the banks are much more important than the bets in a casino. A bank, when it does not play a “risky” number, is in effect not giving loans to risky SMEs and entrepreneurs, those who might find the way of helping us to move forward the economy, so as it does not to stall and fall. And the banks, when they play too much the safe bets, AAA ratings, housing finance and sovereigns like Greece, then they will dangerously overpopulate safe havens, and cause crisis like the 2007-08 crash.

PS. Sports? What would be of golf if the handicap commission awarded the great players more strokes than what the lousy ones like me got?

PS. Sports? What would be of horseracing if the handicap commission reduced the weight the fast running horses had to carry, as a reward, and increased that of the slower horses, in punishment.

@PerKurowski ©

The Basel Committee’s and FSB’s bank regulators, seems to fit well the description of a Japanese “salaryman”.

Sir, Leo Lewis writes “in 2016, the [Japanese] salaryman — unassertive, allergic to risk and with a growing list of corporate debacles to his name — has switched from asset to liability. To economists who see labour market reform as Japan’s only hope, it ranks among the country’s most insidious threats”, “Curse of the salaryman” May 3

And Koichy Nakano at the Sophia University in Tokio holds that men working in offices tied to group think and respect for authority, “is the very opposite of the creativity and original behaviour that the economy needs at this point”

So what are the key words here? Risk aversion and groupthink.

Sir that is precisely two of the most usual key words I use when commenting on the Basel Committee for Banking Supervision’s and the Financial Stability Board’s work on regulations.

And on "debacles"... what about the 2007-08 crash, which resulted directly from regulators allowing banks to earn much higher expected risk adjusted returns on equity on assets perceived, decreed or concocted as safe than on assets perceived as risky.

   

Could it be that Mario Draghi, Stefan Ingves, Mark Carney and other BCBS’s FSB’s experts are “salaryman”? Well, if not, they are at least clearly not assets but liabilities. 

Here is an aide-memoire about current bank regulator’s craziness. 

@PerKurowski ©

Protecting investors and markets too much, guarantees low growth and huge catastrophes

Sir, Dennis M Kelleher, President and CEO, Better Markets, Washington, DC, US writes “that sustainable market-based finance and economic growth require robust regulation that protects investors and markets while preventing catastrophic crashes like that of 2008” “False choice between growth and regulation” April 29.

Boy is he off the tracks! The pillar of banks regulations, the risk weighted capital requirements for banks, hindered robust growth by making it harder for the risky SMEs and entrepreneurs to access bank credit, and caused the crisis by pushing banks to create dangerous and excessive exposures to what was perceived, decreed or concocted as safe… like mortgages, AAA rated securities and sovereigns like Greece.

And the continued use of the credit-risk aversion imbedded in risk weighted capital requirements guarantees that the economy will stall and fall… only setting us up to the next catastrophe, when the next safe-haven becomes overpopulated. 

Quite the contrary to what Mr Kelleher believes, making sure that banks and bad investment fail, as fast and expedient as possible, helps the economy to grow and at the same time prevents the build up of too much dangerous combustible material.

The regulations that can produce “non-bubble, non-financial sustainable growth in the real economy that produces employment and rising living standards” are those allowing the markets to work better, like antitrust legislation, not substituting with robust regulations the actions of the markets.

PS. Here is a summary of why I consider those in the Basel Committee idiots.

@PerKurowski ©

The crash was not caused by casino capitalism but by bank regulators who manipulated the odds at the casino

Sir, Simon Schama writes of “a crash engineered by the worst excesses of casino capitalism”, “New revolutionaries generate much heat but little action” April 23.

That “casino” reference is so utterly wrong!

In roulette, absolutely all bets have the exact same expected value, and if not so, there would be no casinos in which to play roulette.

In the same way all bank credits used to have the same expected risk adjusted return. That is, before regulators came up with the risk-weighted capital requirements for banks. By allowing banks to leverage their equity more with what was perceived, decreed or concocted as safe, than with what was perceived as risky, suddenly banks made higher expected risk adjusted profits with The Safe than with The Risky.

It was that manipulation of the odds, which promoted the “safe” like AAA rated securities, sovereigns like Greece and mortgages, that caused the crisis 2007-08.

And it is that manipulation of the odds, which hinders the access to bank credit of the risky like SMEs and entrepreneurs that blocks the road for an effective recovery.

All other manipulations like that of Libor put together have not caused even a fraction of the damages the full of hubris and besserwisser manipulating regulators have caused.

@PerKurowski ©

Would adequate SIFIs’ designations have helped to avert the last crisis? Of course not!

Sir, I refer to Patrick Jenkin’s “MetLife ruling poses threat to drive towards global financial stability” April 5.

Jenkin sounds very much upset: “This is absurd. The FSOC — with its expert mandate and responsibility for “identifying risks and responding to emerging threats to financial stability” — is being torpedoed by an inexpert judge.”

Sir, you know I hold that the regulator, the Basel Committee and friends, was the real responsible for the crisis that errupted in 2007-08. Its risk weighted capital requirements for banks distorted the allocation of bank credit to the real economy, and allowed banks to leverage absurdly much on assets deemed, decreed or concocted as safe… and all this when history clearly shows that “safe” assets is precisely the stuff that big bank crises are made of.

Had the oversized exposures to AAA rated securities and sovereigns to Greece anything to do with what the regulators now tries to catch with their SIFI methodology? No is the simple answer.

In fact working on how to manage SIFI’s, keeps regulators from working on mending their own mistakes. And frankly I see no reason for Jenkins to deposit so much naïve faith in the expertise of FSOC or FSB or any other member of the regulatory logia.

He writes “The time may have come for the G20 to give the FSB proper statutory powers to ensure shortsighted political interests do not put the world on the road to financial ruin once more”

He should know that there is nothing as shortsighted as the risk weighted capital requirements. These have stopped the banks from financing the risky future and have them only refinancing the, for the very short term, safer past.

If anything Sir, I would wish for that “inexpert judge” to also look into whether the unauthorized discrimination against the access to bank credit of the “risky”, which is imbedded in that regulation, should really be allowed in the Home of the Brave.

It is high time the world starts to reflect on whether it really wants to allow an Ultra Important Regulator to introduce, as it wishes and thinks fit, dangerous systemic risks into the banking system.

The absolute minimum we must ask for is for the regulator to first give us its working definition of what is the purpose of our banks, so to see if we agree.

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

@PerKurowski ©

Gillian Tett, the origin of banks’ reluctance to lend to SMEs is to be found before the post-2008 financial reforms

With Basel II of June 2004 bank regulators determined that bank equity, and the support banks received from society, could be leveraged by bank borrowers’ offers of net risk adjusted margins in the following way, depending on their credit risk.

If offered by sovereign borrowers rated AAA to AA, then there was no limit.

If offered by sovereign borrowers rated A+ to A, then 62.5 times to 1.

If offered by sovereign borrowers rated BBB+ to BBB-, then 25 times to 1.

If offered by private sector borrowers rated AAA to AA, 62.5 times to 1.

If offered by private sector borrowers rated A+ to A, then 25 times to 1

And if offered by those unrated or rated BB+ to B-, then 12.5 times to 1. 

Clearly the offers of net risk adjusted margins provided by the usually unrated SMEs and entrepreneurs, had the lowest value to the banks.

Sir, that is why I do not understand when Gillian Tett now writes: “Small business also requires a wider range of financing channels, particularly since one very unfortunate consequence of the post-2008 financial reforms is that banks are now very unwilling to provide funding for smaller companies” “New York steals Silicon Valley’s crown” December 11.

Of course the financial crisis made a huge dent in bank capital, and therefore banks are very averse to lending to those who generates them the highest capital requirements, but which are the post-2008 financial reforms that have made banks more unwilling to lend to SMEs?

In fact it was that kind of discrimination that drove banks excessively into the arms of what was perceived as safe, like AAA rated securities, loans to Greece and all other “safe” exposures, which caused the 2007-08 crisis. 

We must get to the heart of the problem since if SMEs and entrepreneurs are denied fair access to bank credit there is no future for our economies. God make us daring!

@PerKurowski ©

When final history on the bank crisis is written, it is going to be about stupid regulations, and the silencing of it

Sir, I refer to Patrick Jenkins’s and Martin Arnold’s “BEYOND BANKING: Tempestuous times” November 11 and December 9.

Therein Philipp Hildebrand, former head of the Swiss National Bank is quoted with: “The banking model is in many ways getting more like we’re turning the clock back to the early 1990s…When the history books are written, the aberration will not be the past crisis but the 15 years running up to 2007.”

Indeed, when history is written it is going to be about the regulatory aberration of allowing banks to hold so little of that capital that is to be there for unexpected losses, because the expected credit risks seemed low.

Indeed, when history is written it is going to be about how bank regulators never understood that, by allowing different capital requirement for different assets based on perceived credit risks, something which allowed different leverages of bank equity and of the support given to banks by the society, they completely distorted the allocation of bank credit to the real economy.

Indeed, when history is written it is going to be about that regulatory aberration of setting a zero risk for sovereigns, while assigning a 100 percent risk weight to the private sector.

But when final history is written, it is also going to be about how expert papers like the Financial Times turned a blind eye to all of the above. And this even when someone like me sent it thousands of letters explaining the problems, and this even though they knew that in previous letters they had published, I had correctly alerted on many of the risks.

@PerKurowski ©

No Mr. Ralph Atkins. We know precisely that the next financial polar vortex is going to hit… where it always hits!

Sir, Ralph Atkins writes that “six years after the eruption of the financial crisis… we know remarkably little about where the next ice storm might break”, “Investors hunt for the financial polar vortex", January 10.

He is wrong. We know exactly that the next financial polar vortex is going to break out where these always do, namely in a haven that has been perceived as “absolutely safe”, but has become dangerously overpopulated.

And the damages will be worse than ever, because of the manmade fact that, when it hits, just like when the last 2007-08 hit, our banks will have little capital to cover up with, as a direct consequence of those nonsensical risk-weighted capital requirements the Basel Committee concocted.

There is a world of difference between “ultra-safe-AAA-rated junk” and “risky-junk”

Sir, Gillian Tett asks us to “Remember the lessons of the rush into “junk” in 2007”, March 15.

Does she mean that ultra-safe AAA rated junk, which banks were allowed to purchase or lend against holding only 1.6 percent in capital, meaning they could leverage 62.5 to 1 their equity, or does she refer to other junk?

She writes “many banks are reducing loans to risky corporate names because of new capital regulations” and that is not correct. Banks have been reducing loans for a long time to what is perceived as risky, and this because of "old" Basel II regulations, which allowed them to have very little capital for what was perceived as safe. And now, when some of those perceptions turned out to be very wrong, and they were left with little capital, they just have no choice but to run away even more from "risk-land" into "safe-land".

She also writes “So far the short-term money that has gone into the corporate debt world does not appear to be associated with too much leverage; this makes the picture notably different from the asset-backed commercial paper market or repo sector in 2007”.

Yes, indeed there is a difference, and that is explained by the difference between “ultra-safe-AAA-rated-junk” and “risky-junk”. It is always the former which is the most dangerous, though our current sad crop of bank regulators just forgot or preferred to ignore that.

Current bank regulations would have prevented no previous crises, much the contrary.

Sir, John Kay writes: “we devise rules that would have prevented the latest crisis from have happening if they had existed a decade earlier”, “Leveson should have learnt the lesson of the banking crisis”, January 5.

That might be applicable to many crisis, but not to the one that began in 2007-08. Had the regulators really looked at all the earlier crises when they designed Basel II in 2003-04, they would have ascertained that all the crises resulted from excessive exposures to assets that were ex-ante perceived as absolutely safe, but that ex-post turned out to be risky. And had they considered that they would never ever have designed capital requirements for banks which are much lower when the perceived risk is low than when it is higher, but could perhaps even have contemplated capital requirements that went 180° in the opposite direction.

John Kay is correct though when he writes: “Independence should mean regulators are free to take day to day decisions free of political interference, not that regulators are free to define policy directions for themselves.” But, the best way to ascertain all that, is for the purpose of the regulations, in this case the purpose of the banks, to be clearly defined between all parties concerned, including borrowers, and, about that there is for instance not a single word in the whole Basel framework.