At the end of the day, with these bank regulations, even Germans will suffer the same or worse tragedy than the Greeks

Sir, bank regulators, the Basel Committee and the Financial Stability Board, fully endorsed by ECB, allowed all European banks to hold much less equity when lending to the government of Greece or to the banks in Greece, than when lending to Greek small businesses or entrepreneurs. That led to the excessive indebtedness of Greece and Greek banks, and caused too little bank credit to be awarded to those who could best drive the real economic growth in Greece.

And because of that Greek and Cypriot citizens will now have to suffer deflation or inflation (same shit), having to pay higher taxes, and perhaps even be the subject to capital controls as those Hans-Werner Sinn proposes in “Impose capital controls in Greece or repeat the costly mistake of Cyprus” February 17.

If I was a Greek citizen I would of course lodge my “J’accuse the ECB of high treason or imbecility” … but I would also warn my fellow Europeans, that, with these lousy and discriminatory regulations, they are all no doubt heading the same way to a similar tragedy... including the Germans.

In fact Germany, which shares with the US the largest possibility of becoming the last safe haven in town, might end up with its sovereign safe haven as the one most dangerously overpopulated.

Tony Barber. No! Hercules would want to have nothing to do, with most of the “eurozone´s crisis-fighters”

Sir, Tony Barber holds that “Fixing the eurozone is a labour worthy of Hercules” October 10, and that, “If he were alive today, Hercules would have much sympathy with the eurozone´s crisis-fighters”. I very much doubt it!

First Hercules would now that fixing the eurozone will be the labour not of big time hero stars like him, but of millions of citizens, “The Risky” toiling away in medium and small businesses, and as risk-taking entrepreneurs.

Second, he would have little sympathy with the eurozone´s crisis fighters because in essence these include precisely those who believed themselves to be Hercules and decided they could, with risk-weighted capital requirements, manage the risks for all of the banks in the eurozone… and caused its crisis.

Mario Draghi, for example, as Chairman for many years of the Financial Stability Board, the only herculean lifting he helped doing, was lifting the bank leverages to the sky, for instance by finding it perfectly normal that banks from all over Europe, including little Cyprus, could lend to the Greek government holding only 1.6 percent in capital, in other words leveraging their bank equity 62.5 times to 1.

Instead Hercules would suggest allowing the capital requirements for banks, on exposures to “The Risky”, to be the same, or even slightly less, than on exposures to “The Infallible”.

And this because he would understand that regulators should not react to the same ex ante perceived risks that the banks have already reacted to, with interest rates, size of exposures and other terms.

And this because he would understand that, you cannot afford bank regulations which hinder the risk-taking necessary to win any war. Europe will not survive if European banks, for senseless regulatory reasons, end up holding only sovereign debts, even if all that is German debt.

And what do I mean with “Or even slightly less capital”? Yes because “The Risky” never ever poses any real systemic threat to banks, only the false members of “The Infallible” do that.

Europeans… go and pray in your churches, “God make us daring!” and then throw out those impostors who want you to believe them Hercules.

But, Luke Johnson, how do we get the Basel Committee to understand it has hit regulatory rock bottom?

Sir, the Basel Committee’s bank regulators, by allowing Cypriot and other banks to lend to Greece against only 1.6 percent in capital, which basically means allowing for a 62.5 to 1 debt to equity leverage, helped to cause both Cyprus and Greece to hit bottom.

But, in Luke Johnson’s “How to find some value in hitting rock bottom” September 18, we find no clue about how we could make sure that the Basel Committee understands and acknowledges it has hit regulatory rock bottom?

I mean these comfy regulators do not pay or suffer much direct impact from the damages they produce. In fact, after their Basel II flop they have even been authorized to follow up with a Basel III, using the same script of capital requirements based on ex-ante perceived risk. Hell, neither Hollywood nor Bollywod would allow something so dumb.

The Basel Committee’s capital controls, caused the capital controls in Cyprus

John Plender writes “Distortions caused by capital controls is price of stability” March 27. Absolutely, but by the same token let us remember that a dumb search for stability also caused the distortions which resulted in these capital controls.

And I refer of course to those insidious capital requirements for banks concocted by the Basel Committee, and the Financial Stability Board in order to bring more stability to the banking system, all by giving the banks extraordinary incentives to hold exposures to what was perceived as “absolutely safe” and to stay away from what was perceived as “risky”.

The Basel II regulations required for instance the Cyprus banks to hold 8 percent in capital when lending to small Cypriot businesses and entrepreneurs, a reasonable leverage of 12.5 to 1, but required holding only 1.6 percent in capital when lending to Greece, a mindboggling 62.5 to 1 authorized leverage.

We have now read reports which indicates that Bank of Cyprus' chairman Andreas Artemis handed in his resignation, along with four other directors, but the bank's board rejected the resignations. 

And this makes us ask: When are those bank regulators in the Basel Committee and the Financial Stability Board, like Mario Draghi, and who allowed banks from small Cyprus to lend to Greece as much as they did going to resign? I mean so that we too can reject their resignation and sack them.

FT, your statement on Cyprus is a disgrace and an insult to our intelligence

Sir, in your “Europe gets real – not before time”, March 26, you write that Cyprus “chose a high-risk strategy of living off a banking system far bigger than the state could support…. A metastasized bank sucked in more funds than it could usually deploy at home… and made a big bet on Greek sovereign bonds… with the complicity of leaders and the acquiescence of a population content to live beyond its means”.

Sir, set in the context of the Basel Committee of Banking Supervision having allowed, by means of Basel II, those Cyprus’ banks to hold Greek bonds against only 1.6 percent in capital, meaning authorizing a mindboggling leverage of 62.5 to 1, your statement is frankly a disgrace and an insult to our intelligence.

And let me remind you that in Cyprus, many of the accounts over €100.000 hold the salaries of those who do not have €10.000 and who of course had not the slightest idea about what lunacy some self-appointed bank regulators were up to… as neither did the sophisticated Financial Times... or did you?

Europe, ask your bank regulators to explain why they did it, and you will not get an answer. They never knew!

Sir, Martin Wolf ends “Big trouble from a small country” March 20, with “Banking is dangerous everywhere. But it still threatens the eurozone’s survival. This has to change – and very soon”.

Yes indeed, its bank regulations have to change. All which finds itself under the influence of a tiny committee, the Basel Committee for Banking Supervision, is threatened, by completely failed regulations. 

And these regulations have not been sufficiently questioned, this even more than five years after their failure should have become evident to all. Why is that? At this moment the only explanation I can advance, is that the ego of those behind it does not allow them to admit that, in fact... they never even understood it!

Banks, before the Basel era, cleared for perceived (ex-ante) risk, that which for instance was to be found in the credit ratings, by means of interest rate (risk-premiums), size of exposure and other term; let us call that “in the numerator”.

But Basel II, and now Basel III, instruct the banks also to clear, I would call it re-clear, for exactly the same perceived (ex-ante risk) risk, credit ratings, “in the denominator”, by means of different capital requirements, more risk more capital, less risk less capital.

And so ask the regulators, or your own Martin Wolf, to explain to you:

Why considering twice the perceived risk is something rational from a regulatory perspective. 

Why that does not introduce distortions.

Why that, which allows the banks to earn so much more risk-adjusted margins when lending to The Infallible than when lending to “The Risky”, does not doom the banks to overpopulate safe-havens. 

Why that will allow the banks to allocate economic resources efficiently, even to “The Risky”.

Why if all bank crises ever have resulted from excessive exposures to what was perceived as safe, but ex post turned out no to be, and never from excessive exposures to what was perceived as "risky". 

If you get an answer different from “more risk more capital and less risk less capital sounds logical” please, I beg you, resend it to me. If not, you will begin to understand what I am saying. Yes I know, it is hard to swallow.

I now remembered a speech I gave to some hundred regulators in 2003, pre-Basel-II days, at the World Bank. It is in my book Voice and Noise, 2006 and where I said: 

“Let me start by sincerely congratulating everyone for the quality of this seminar. It has been a very formative and stimulating exercise, and we can already begin to see how Basel II is forcing bank regulators to make a real professional quantum leap. As I see it, you will have a lot of homework in the next years, brushing up on your calculus—almost a career change.”

Little did I suspect then that what was really dangerous was that the complexity of what was being presented, stopped all of them from asking the questions which should have been asked.

Anat Admati and Martin Hellwig, have written “The Bankers’ New Clothes” 2013. It is in many ways an excellent book and I highly recommend it, although “The Regulators’ New Clothes” would have been a better title. But in one passage the authors write: “Whatever merits of stating equity requirements relative to risk-weighted assets may be in theory, in practice…”. My problem is that over many years I have not been able to find or hear anything that I feel could be included in the “Whatever merits”.

Martin Wolf also quotes from that book saying “Banks have so little loss-absorbing capacity that they stand permanently on the edge of disaster”. Not exactly. Banks have sufficient loss-absorbing capacity when lending to “The Risky”, it is when lending to “The Infallible” they don’t, and this the courtesy of the Basel Committee

PS. Sir, just to remind you again that I am not copying Martin Wolf more. He has told me not to send him anything more on “capital requirements”… he already knows it all, so he thinks. But, as I said, if he has an answer, I would appreciate hearing it.