Odiously inept bank regulators consider ex ante that the entrepreneurs are less worthy of credit than house buyers

Sir, Daniel Davies discussing the work-outs of small business failures seemingly based on what some bad apples did, writes that “unpleasant realities [are swept] into grubby corners so that the banking system can look clean and efficient” “The finance industry’s Achilles heel”, June 27.

Sincerely, as one who has been proudly involved as a consultant in many workouts of all types for more than two decades in Venezuela, before the failure of that nation, I must say that I do not identify much with what Davies writes. For instance what’s wrong with that when real estate loans are renegotiated there is often a “change of valuation basis”? It would surely be more of an Achilles heel for the finance industry, if its valuation of assets did not change with changing circumstances.

Davies wants us to “Consider what happens when an entrepreneur is classified as a “distressed borrower” rather than a “start-up founder”… at that point, the person has been put into a category in which their word is not as good as other people’s.” 

But classifying an entrepreneur ex post, quite naturally, as a distressed borrower, cannot be remotely as bad as when regulators, ex ante, by allowing banks to leverage more when financing “safe” houses than when financing “risky” entrepreneurs are, de facto, saying that the word of an entrepreneur is worth less than that of house buyers. 

If there has been any sweeping of unpleasant realities into grubby corners, that is the role the regulators, with their foolishly risk adverse risk weighted capital requirements, have played in putting bank crisis and economic stagnation on steroids. Had for instance any credit rating agency assigned a 0% risk to Greece and with that doomed that country to a tragic over indebtedness, it would probably be hauled in front of judge… but there are the regulators still regulating as if they had done nothing.

And Sir, you know I think FT has quite shamefully helped the regulators with much of that sweeping.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

Ordinary holders of bank shares had little idea that their investment was leveraged a speculative 50 to 1.

Sir, Daniel Davies, with respect to the lower returns on equity that result from higher capital requirements, holds that bank executives should tell investors: “You loved this business when it had equity-to-asset ratios of 2 per cent and a 16 per cent RoE. Why do you hate it now that it has 5 per cent equity to assets and a 9 per cent RoE?”, “Banks should not fixate on double-digit returns” January 13.

Let us be clear of that 2 percent equity to asset ratio signifies 50 to 1 equity leverage, and one of 5 percent, 20 to 1.

Does he really think shareholders loved the 16 percent RoE had they been truly aware that the bank management was leveraging his investment a mindboggling speculative 50 to 1… and taking home great bonuses because of that?

Does he really think shareholders would be satisfied with a 9 percent RoE if they really internalize the significance of banks now leveraging their investments 20 to 1, in times when any official assistance operations requires shareholders and creditors to first sustain important losses… in order for the management to keep taking home great bonuses?

Shareholders, like many other, were and are still misled by all those low leverages reported as a result of not using gross assets but using risk weighted assets instead.

Go back some years and you will, even in FT, find that the great majority of articles mention 10 to 1, or even lower leverages, quite often even ignoring to mention the risk weighing of assets, that which so much diminished the asset on which the leverages were calculated.

Would I be satisfied with a 9 percent RoE? Yes, perhaps for a bank leveraged 10 to 1… and with the bonuses to be paid to the managers decided by us, the shareholders. 

@PerKurowski ©