To stand a chance, UK must refrain from imprudent risk-aversion and embrace some prudent risk-taking.

Sir, I refer to Martin Wolf’s “The UK’s future depends on improving economic performance” FT, April 15 2023. 

Wolf at the end of it recommended the UK to “reform its pension system, in order to generate more risk-taking capital, create dynamic new businesses.” Why does Wolf not even mention the UK's banks?

From mid 1979 until mid 1980 I practiced at Kleinwort Benson, one of the truly old English Merchant Banks that has since then, as so many others, gone down, disappeared by globalized Basel Committee bank regulations. With the risk weighted bank capital (equity) requirements, knowledgeable and experienced loan officers were substituted by creative equity-minimizing / leverage-maximizing (dangerously creative) financial engineers.

October 2009, in his Economist Forum, Martin Wolf published my: “Please free us from imprudent risk-aversion and give us some prudent risk taking” It began it with “There is not one single reason to believe the world would be a better place because our financial regulators provide additional incentives to those who, perceived as having a lower risk of default, are already favored by lower interest rates, or punish further those who, perceived as more-risky, are already punished by higher interest rates. In fact, the opposite is most likely truer”

Sir, when comparing government debt and residential mortgages with loans to small businesses and entrepreneurs, in terms of how nutritive they could be for the economy, it is not that outlandish to describe it as demand-carbs vs supply-proteins.

In “Credit Suisse: the rise and fall of the bank that built modern Switzerland” FT, March 24, Owen Walker and Stephen Morris write the Schweizerische Kreditanstalt, later rebranded as Credit Suisse, was born out of Alfred Escher’s determination to develop a railway network across the Alpine nation that would link northern and southern Europe. 

Sir, would that Alpine railroad have been built, with a Basel Committee imposing risk weighted bank capital/equity requirements with decreed weights 0% government, 30% residential mortgages and 100% risky projects? 

Would the banks in the City of London have reached the stars with such regulations?

Sir, dare ask Martin Wolf to dare answer that.

@PerKurowski

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

And some say I am obsessive and monothematic about the risk-weighted capital requirements for banks. Hah!

Sir, Patrick Jenkins writes about “banks’ unhealthy obsession with ROE numbers — which can be a recipe for inefficient, potentially toxic short-termism. An obsessional focus on generating high ROE numbers in the boom times drove bank bosses to shrink equity to dangerously low levels, contributing to the severity of the financial crisis” “Regulator plays part in Credit Suisse chief ’s quiet revolution” October 27.

Why? What is unhealthy with trying to generate high ROE numbers in boom times if that is what your shareholders want? If you do not do that they will fire you or the bank will be consolidated into another bank.

And why only lay the blame on “bank bosses” shrinking “equity to dangerously low levels”, when it clearly was regulators who authorized European banks to leverages bordering on 50 to 1? That is if only banks leveraged with what was safe… with what caused the financial crisis.

And what can be more short-termism, than regulating banks without even defining their purpose, and so not caring one iota about if these allocate credit efficiently to the real economy.

And then some say I am obsessive and monothematic about the dangers of the risk-weighted capital requirements for banks. Hah! 

No wonder I have to keep hammering on against that much more generalized monothematic obsession of wanting to blame the banks for all bad that happened and happens… an obsession probably based solely on a deeply held dislike of bankers.

@PerKurowski ©

Caveat emptor, regulators regulating!

Sir, I refer to Shahien Nasiripour and Tom Braithwaite’s report “Credit Suisse faces NY lawsuit” November 20, in order to comment on the temptations that existed (and still exist) for someone doing wrong, when awarding and packaging mortgages to the subprime sector. 

The natural incentive: If you convinced risky Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Hans that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell the mortgage for $510.000 and pocket immediately a tidy profit of $210.000. 

The regulatory incentive: If banks invested in such AAA rated securities, or lent against it as collateral, then according to Basel II, they needed to hold only 1.6 percent of a very loosely defined capital, which amounted to allowing banks a mind-blowing 62.5 to 1 leverage of its very loosely defined capital. 

And the combination of these two incentives to create “The Infallible” proved too irresistible for many, like for Credit Suisse. Only Europe, over just a couple of years, invested over a trillion dollars in these securities. I am not clearing mortgage originators, mortgage packagers, security credit raters and investment banks of any of their responsibility, but are not those regulators who provided the irresistible temptations also at fault? 

The sad part of the story is that the possible cost of this sort of lawsuits will now have to be paid including by those who bear no blame for the disaster, like “The Risky”, like the small business and entrepreneurs, those with interest earning bank deposits, and taxpayers. 

From now on, besides notices on the door indicating a bank to be insured, we might also need to put up a sign stating “Caveat emptor, regulators regulating!”