Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 

@PerKurowski

“Relax” or “tighten” has little to do with better regulation of US’s banks. Revise, correct and simplify, is what it should all be about.

Sir, I refer to Hal Scott’s and Lisa Donner’s discussion “Head to head: Should the US relax regulation on its big banks?” March 2.

Hal Scott writes: “There is empirical evidence that higher bank capital requirements cut lending and economic growth. A recent Fed paper concludes that a 1 percentage point rise in capital ratios could reduce the level of long-run gross domestic product growth by 7.4 basis points.”

And Lisa Donner writes: “Increased capital requirements lower the return on equity and, by extension, the bonuses linked to it. The desire of a small number of very wealthy people to become still richer should not drive public policy.”

They both, obviously each one from to the point of view of their respective agendas are correct in recognizing that capital requirements have clear effects. But then, as is unfortunately the current norm, they both ignore the problem of the distortions in the allocation of credit that different capital requirements produce.

And, if there is any problem in current bank regulations that needs to be tackled, that is getting rid of those distortions. If there is one analysis needed that is whether the bank’s balance sheets correspond with the best interests of our economies. The answer would be “NO!”

Scott asks: “Do we really want banks to hold enough capital to survive events that have no US historical precedent? If such an extreme economic event did occur, would any amount of capital be enough to withstand the panic it could trigger?”

Ok, agree, but then why should we want our banks to keep especially little capital when such events occur? Like when 20% risk weighted AAA rated securities exploded?

Scott, mentioning stress tests that depend on secret government financial models to predict bank losses argues: “avoid ‘model monoculture’ in which every bank adapts its holdings in order to pass the tests and they all end up holding assets the government model favors. A diversity of bank strategies is preferable given that risks are hard to predict.”

Absolutely and that is why, April 2003, as an Executive Director of the World Bank I held "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."

The stress tests, by focusing too much on the risk flavor of the day, as I have written to you before, are in themselves huge sources of systemic risk.

Scott informs “The living wills process requires banks with more than $50bn in assets to hold minimum amounts of “safe” assets; currently this stockpile totals more than $4tn in government debt”

Holy moly, $4tn is close to 20% of all US public debt. Is there really no interest for trying to figure out where real rates on US government debt would be if banks were not given the 0% risk-weight incentives for these debts, or, alternatively, be forced by statist regulators to hold lots of it?

Donner argues: “There is no fundamental trade-off between sound regulation of the financial system and shared prosperity. Quite the opposite. Even as tighter bank capital and liquidity requirements were phased in after the crisis, bank credit to the private sector has surged to new heights as a percentage of global output.”

But really, is that credit surge an efficient one? Are banks financing enough the “riskier” future, or are they mostly writing reverse mortgages on our “safer” present economy? 

Sir, what kind of crazy model could hold that economic growth is the result of banks being able to earn their highest risk adjusted return on equity on what is perceived, decreed or concocted as “safe”, and so avoid lending to “risky” entrepreneurs? 

@PerKurowski

Risk weighted capital requirements for banks, the mother of all wishful thinking, of all desirability bias?

I refer to Tim Harford’s discussion about desirability bias and wishful thinking. “Be careful what you wish for in politics” June 17

Basel Committee: “We know all of you want banks to be safe. For this purpose we have decided to impose risk weighted capital requirements on the banks”.

The world: “Risk-weighted? Hmm, sounds reasonable, that should do it. Good job guys!”

But that supposes, first that risks can be perceived adequately and second that the responses to these perceptions will be adequate. What are the chances of that? Nil!

That is why I nominate this the pillar of current bank regulations, to win the contest for the greatest wishful thinking during at least the last three decades.

So big was it that very few expressed some concerns about that it could dangerously distort the allocation of credit to the real economy.

So big was it that when with Basel I, 1988, it decreed a risk weight of 0% for the sovereign and 100% for the citizens, no one shouted, “You’re just a bloody bunch of statists/communists!”

So big was it that when 2004, with Basel II, no one found something wrong with a risk weight of 20% for AAA rated assets, that which bankers could love too much, and one of 150% for what is rated below BB-, that which bankers would not touch with a ten feet pole.

So big was it that when the 2007/08 crises broke out solely because of excessive bank exposures to assets that required banks to hold almost no capital, like AAA rated securities and sovereigns like Greece, the world screamed about the effects of “deregulation” and said not a word about “miss-regulation”.

So big was it that the Frank-Dodd Act, in its 848 pages, did not even mention the Basel Committee. And when that Act mentions risk weighing, no real concern is raised, but other risks that should also be included are pointed out.

So big was it that all type of efforts are being put in trying to make the credit ratings better, ignoring the clear danger present when there is even more trust put into these ratings.

So big was it that all those who had anything to do with it, like Mario Draghi, were promoted.

So big is it that basically every day we hear statements on banks being adequately capitalized, comparing current risk weighted oranges with former apple capital ratios that had no such thing.

@PerKurowski

Publishing what governments earn in natural resource income, is much more powerful than “publish what you pay” rules

Sir, David Pilling lashes out at the House of Representatives (at Trump) for voting to nullify a rule known informally as the “publish what you pay” rule, which obliges oil and mining companies to disclose payments they make to foreign states. “Trump, Tillerson and the African resource curse” February 23.

Pilling puts forward the case of Equatorial Guinea where, “Since oil was discovered, per capita income has rocketed to nearly $40,000 at purchasing power parity, the highest of any sub-Saharan African country. That comes as scant consolation to the three-quarters of the population who live in abject poverty on less than $2 a day.”

Does the population of Equatorial Guinea know that? Most probably they don’t have the slightest clue about it. Just like the poor in my homeland Venezuela do not have a clue that, from their beloved Chavez, they got less than 15% of what should have been their per capita share of the nations fabulous oil income. That is of course so because the redistribution profiteers, like everywhere else, do not want such information to be known.

If for instance a Voice of America (or any other media for that matter) would daily beam out to citizens in natural resource rich countries, how much their monthly per capita share of such income would be, that would produce more beneficial consequences than a hundred “publish what you pay” rules.

Why is it not a “publish what they earn” rule suggested? Probably because, among redistribution colleagues, that would not be considered comme-il-faut. Hey, someone could even begin reporting daily on how much were the overall monthly fiscal revenues on a per capita basis. Horror!

PS. David Pilling, many of your crocodiles are pussycats next to ours

PS. It is interesting to note that the “publish what you pay” rule was irrelevantly part of the Dodd-Frank Act; that which failed to even mention the Basel Committee for Banking Supervision. Here and here

PS. David Pilling thinks that since this rule applies to all, the playing field is now level. He should look into Venezuela and all the chinese natural resource investments. 

@PerKurowski

The 2007-08 crisis and the relative stagnation thereafter would not have happened without current bank regulations

Sir, Ed Crooks writes “Trump has threatened to “do a number” on Frank-Dodd banking regulations aimed at preventing another financial crisis.” “Populists push to roll back rules” February 22.

Well no! Except for the intent of eliminating overreliance on credit rating agencies, something that has yet to happen, the Dodd-Frank Act did not eliminate those populist bank regulations that caused the last financial crisis, or the relative economic stagnation thereafter.

Some real runaway populism, that happened when hubris filled technocrats thought they could, and at no cost, diminish the risks for the banking system with their risk weighted capital requirements for banks.

What did and does that regulation cause?

That the banks create dangerously large exposures to what is perceived, rated, decreed or concocted as safe, e.g. AAA rated securities and Greece. 

That the banks award too little credit to what can supply dynamism to the real economy, e.g. SMEs and entrepreneurs.

Crooks also writes: “In a 2012 OECD expert paper, David Parker of Cranfield University and Colin Kirkpatrick of the University of Manchester reviewed the state of academic knowledge and concluded that there were large gaps in our understanding of the effects of regulation policy”

I have not read that paper, but I am sure the conclusions must be absolutely correct. For instance, when regulators stress test banks, they do not even care to look at what should perhaps have been on their balance sheets, in order to satisfy the credit needs of the real economy.

It is amazing how the Financial Times insists on keeping all this hushed up.

Does that mean FT agrees with the regulatory statism reflected in assigning to the sovereign a risk weight of 0% while hitting us “We the People”, with 100%?

Does that mean FT finds nothing dumb in assigning a 20% risk weight to the so dangerous AAA rated, while hitting the innocuous below BB- rated with 150%?

Sir, here between you and me, what favours do you owe the bank regulators, or why are you so afraid of them?

PS. The Dodd-Frank Act is so surreal that in its 848 pages it does not even mention the Basel Committee

PS. I dare you to read an Op-Ed I wrote in 1999 about the dangers with regulations

PS. I dare you to read the remarks I gave to bank regulators in 2003 while being an Executive Director of the World Bank.

@PerKurowski

Risk weights of 20% for AAA rated and 150% for the below BB-, evidences the Basel Committee’s intellectual failure

Sir, Brooke Masters makes a lot of good points in her “Loss of a safety-first regulatory regime is no reason to party” February 4. Unfortunately, again, as is usual for almost all commenting on bank regulations, these are solely from the perspective of the safety of banks; so rarely from the perspective of the borrowers, most specially the “risky” borrowers, like the SMEs and entrepreneurs, and whose borrowings are taxed with the highest capital requirements for the banks.

When Masters’ writes that relative to some large institutions “Some smaller banks are struggling with high compliance requirements”, it is so in much because the natural borrowing clientele of smaller local banks belong to the “risky” group.

Masters ends by recommending: “just trim back the Dodd-Frank rules and stay in the Basel process but temper its safety drive… even try leaving the fiduciary rule in place”

I do not agree. The Basel Committee has produced regulations that make no sense to the real economy and, if you really want banks to have a chance to be sustainably safe, you must make sure the allocation of credit to the real economy is efficient and adequate. The Basel Committee with its risk weighted capital requirements dangerously distorts that allocation. And all based on the completely erroneous theory that what is ex ante perceived as risky is riskier ex post to the banks than what is perceived as safe.

That the AAA rated, so dangerous in that a perceived safety can easily cause very high exposures, have a risk weight of 20%, while the really so innocuous below BB-rated are assigned a risk weight of 150%, is about the best example of how confused current bank regulators are. To rebuild those regulations using the same builders and who are not even recognizing the mistakes cannot lead to anything good. Face it, banking after around 600 years of functioning, was in 1988, with Basel I, dramatically changed for the worse. 

The Dodd-Frank Act? What can I say: to me it is a monument to legislative surrealism. For instance in its 848 pages it does not even mention the Basel Committee for Banking Supervision.

Fiduciary role? Since no one can really guarantee that any fiduciary responsibility is complied with, it is better not to imply such thing with regulations. The best approach is just explaining to investors what its acceptance or not by the advisors, is “supposed” to mean. 

PS. It would be great if Brooke Masters used her influence to get some answers from any bank regulators to these questions.

PS. The sad truth is that our banks are in the hands of Chauncey Gardiner type regulators.

@PerKurowski

There are social leftwing reformers and statist leftwing reformers. In banking currently only the latter exist.

Sir, John Dizard, referring to Senator Bernie Sanders and Senator Elizabeth Warren writes “The US financial industry should listen to leftwing reformers” December 7.

Frankly, if by leftwing he refers to someone defending the small and poor, then I do not know of any real leftwing reformer. John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And current credit risk weighted capital requirements, to which I have heard none from the supposedly left raise objections, hinders precisely “the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

And, it is only going to get worse. That “Fed’s total loss-absorbing capacity… will require an estimated additional $120bn in equity and debt” Dizard refers to, that one is also based on credit risk weighted assets.

But of course, if it is leftwing reformer as in being statists, then they must be plentiful of them, as very few have raised objections to that in 1988, with the Basel Accord, the risk weight of sovereign (government) was set at zero percent, while the risk weight for the private sector was defined as 100 percent.

No Sir, whether leftwing or rightwing, I would not like to have anyone who fails to state in very clear terms what he believes to be the purpose of the banks, and I agree with that purpose, to have anything to do with regulating banks.

@PerKurowski ©

Risk weighted TLAC intensifies the irresponsible regulatory distortion of bank credit allocation to the real economy

Sir, I refer to Eric Platt’s and Ben McLannahan’s “S&P downgrades 8 US lenders on support fears” and to Lex’s “US banks: losing their safety harness”, December 4.

It is mentioned: “Since the financial crisis of 2008-09 regulators have launched a succession of measures designed to ensure that taxpayers will not be burdened again in the event of another Lehman-like crisis, forcing banks to hold more capital and liquid assets while limiting the amounts they can return to shareholders through buybacks and dividends” “Banks are expected to hold total loss absorbing capacity — TLAC — of at least 18 per cent of their risk-weighted assets.” “S&P on Wednesday pronounced the US Federal Reserve’s latest capital rules as up to the task”

So, on top of the distortions produced by the risk weighted capital requirements now regulators want to add this.

18 percent of risk weighted assets means that normal unrated creditors, and those rated between BBB+ to BB-, will generate the bank an 18 percent TLAC requirement, while for example private sector assets rated AAA to AA will only generate a 3.6 percent requirements TLAC. Those unlucky to have a rating below BB- they will generate a 27 percent TLAC requirement, which of course will not make their plight any easier to solve.

I am so amazed at how bank regulators seem to not care one iota about whether their regulations distort the allocation of bank credit to the real economy. Might it be that they have still not defined the purpose of those banks they are regulating? God, save us from this type of irresponsible regulators.

@PerKurowski ©

Titanic went down because an excessive trust in its safety blinded it to unexpected events. Same with banks.

Sir, Randall Kroszner writes: “After the 2008-2009 financial crisis, the Group of 20 leading nations, Financial Stability Board, the Basel Committee and other international regulatory bodies convened to provide a co-ordinated global response, promoting rules to reduce banks’ risk exposure and to increase macroprudential monitoring. “Beware of a Titanic response to Dodd-Frank” July 31.

Yes but “promoting rules to reduce banks’ risk exposure” is just a crazy double-down-on-the-same-mistake response, when considering that the crisis was precisely the result of rules intended to reduce bank’s risks.

With their credit risk weighted capital requirements, more risk more capital and less risk less capital, what the regulators achieved was to guarantee the excessive build up of bank exposures to what was perceived as safe, holding very little capital… precisely the stuff major crises are made of.

And precisely, like extra lifeboats could make ships riskier, just requiring banks to hold more capital, without eliminating the distortions produced by the risk-weighting, will make all so much worse. You can already see how the “safe” havens are becoming each day more dangerously overpopulated, while the risky but so much more productive bays, where SMEs and entrepreneurs reside, are becoming equally dangerously, less and less visited by bank credit. 

Why do those who most fight against government spending austerity, usually include those who most want to promote bank credit austerity? 

@PerKurowski

Why are regulators only concerned with banks not dying and not with banks living well?

Sir, Barney Jopson writes about Barney Frank discussing the impact of the Dodd-Frank Act and the future of regulation. “Architect of banking reforms says walls will not make the system safer”.

Frank, with respect of having joined the board of Signature Bank, and the resulting references to “the ‘revolving door’ between public office and the private sector” says:

“I reject this snarky premise that . . . I have somehow betrayed my principles by facilitating the operation of a bank that does what banks are supposed to do, which is financial intermediation”

Why is it only now Frank Dodd mentions: “what banks are supposed to do, which is financial intermediation”… in the Dodd-Frank Act there is not a word about that.

The stated purpose of the Dodd-Frank Act is: “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”

Had that Act started out by making clear that the number one priority of a bank is to allocate bank credit efficiently to the real economy, and that this is best achieved by minimizing regulatory distortions, we would most certainly have a much better Dodd-Frank Act.

By the way, “Elizabeth Warren and her band of progressive Democrats” have shown no interest in that either. The fact that banks need to hold much more capital when lending to American unrated SMEs and entrepreneurs, than for instance when lending to some AAA rated sovereigns, has been of no concern to them… or to most other involved with regulations.

What would the Founding Fathers say about these regulations with risk weights: 0% Federal Government and 100% We the People

@PerKurowski

A bank’s expected failure going from once in 1000, to once in 200 years, does not sound like an impressive improvement :-)

Sir, Gina Chon refers to Steve Strongin, head of Goldman’s investment research division stating: “In the past the mean time for the failure of a well-capitalized bank was 41 years… Now, with increased capital standards and stress tests scrutinizing how banks would withstand a crisis, it is estimated to be about 200 years”, “Dodd-Frank rules blamed for curbing growth” July 23.

To help you understand what an unbelievable scenario for bullshit that represents, let me mention that in the Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, the confidence level is described as “fixed at 99.9%, i.e. an institution is expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years. This confidence level might seem rather high. However, Tier 2 does not have the loss absorbing capacity of Tier 1. The high confidence level was also chosen to protect against estimation errors that might inevitably occur from banks’ internal Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) estimation, as well as other model uncertainties.”

Chon mentions “A senior Obama administration official said banks had overreacted and argued that a person with a high credit score should be able to obtain a mortgage on decent terms, which was not happening at many banks”. That official should ask regulators to explain that the system in place is first the banks reacting to perceived credit risks with interest rates, size of exposures and other terms… and then having the regulators, for good measure, to also react to the same perceived credit risks by means of setting the capital the bank needs to hold against assets… and, of course, reacting twice to the same risk, must cause an overreaction.

In this respect the Dodd-Frank Act cannot be much blamed for curbing growth that is unless you feel, like I do, that in the home of the brave, that Act should have prohibited the odious system of risk weighing the capital requirements of banks, something which negates the fair access to bank credit to for instance all SMEs.

Where could Iraq have been today if each one of its citizens was receiving his monthly oil dividend check?

Sir, I refer to your “The nightmare emerging from Iraq” June 12.

When you write “If Iraq is in the throes of sectarian break-up it is because the country has lost any sense of a national narrative, a shared story”, and I think of that “The Iraq Study Group” report of May 2006, prepared by the US Congress stated: “There are proposals to redistribute a portion of oil revenues directly to the population on a per capita basis. These proposals have the potential to give all Iraqi citizens a stake in the nation’s chief natural resource” I feel like crying.

Can you imagine what different scenario we might be confronting in Iraq were each Iraqi citizen monthly receiving a check as an oil dividend? Can you imagine what kind of example that would have given citizens of other oil-cursed nations, like Venezuela where the government gets directly over 97 percent or all the nation’s exports?

Yes the Iraq Study Group also said about that possibility “but it would take time to develop a fair distribution system.... There is no institution in Iraq at present that could properly implement such a distribution system. It would take substantial time to establish, and would have to be based on a well-developed state census and income tax system, which Iraq currently lacks.” But when compared to all other pains and resources wasted, that seems ex post honestly like the mother of all bland excuses.

And then today I received a copy of a letter signed by 58 Democrats calling for the US to sign up on the Extractive Industries Transparency Initiative, which is a global effort designed to increase accountability and openness in extractive industries… as if that could really move our curse needle in any fundamental way.

By pure coincidence this is part of an Op-Ed I published today in Caracas in El Universal

“During the week I went to one of those conferences where the well-intentioned try to solve your problems with the "resource curse." And that conference versed primarily over how the United States, by means of the Dodd-Frank Act, and the European Community, through laws on corporate transparency, seek to impose on their oil and mining companies strong information requirements regarding their relationship with governments.

My position was, as always: "That sounds very nice but truth be told that for someone who lives under the guise of a giant oil-curse like Venezuela’s, being able to know more about what happens in each specific contract, may be interesting, but could divert the attention from what is happening in general. "

If you really want to help, better published monthly, in a newspaper of global circulation, your best estimates as to the value of non-renewable natural resources extracted, per citizen, per month, represents in each of the various governments around the world. And then let the citizens ask.

I beg of you, do not cause our citizens to believe that you are making their work for them.

With respect to the war against this curse, it is useless for you to strive to make your companies behave with dignity, if we cannot make our governments behave with dignity"

PS. “Oil revenue sharing for Iraq”

PS. A YouTube “Please, while you leave Iraq”

http://theoilcurse.blogspot.com/

http://petropolitan.blogspot.com/

High noon to end Basel Committee's populist risk-weighted capital requirements for banks.

Sir, John Dizard quotes Christopher Whalen, senior managing director at Kroll Bond Rating Agency saying:“FSOC is the leading boring example of boring but cumulative changes in the regulatory system that are forcing us into deflation. Nobody seems to be paying any attention, but this is having a chilling effect on credit.”, "High noon for Dodd-Frank reform", May 26.

But also, because of the risk-weighted capital requirements, with respect to bank credit to "the risky", like to medium and small businesses, entrepreneurs and start ups, it has been more than chilly, for much too long; resulting in that bank credit to "the safe" sovereigns, AAAristocracy or the housing sector, has been too hot. And in consequence, with respect to the whole Basel regulatory paradigm, it is way high-noon for a reform.

On FT's first page we find an article that proclaims "France's FN leads surge of populists" which implicitly assumes somebody knows what is not populism nowadays. We would like to know that. I say this because as I see it the whole concept of risk-weighting, as if trusting you could order some risk-weighing that leads to more safety an greater stability, is as populist as populist comes.

You want your kids to be safe? Order them to stay in bed, all the time...and then see what really great dangers that entails!

If banks do well but the real economy falls, we will all fall… at the end including the banks. It is as easy as that!

Sir, it is hard for me to get a grip on what John Authers really means with heavily regulated when writing “Banking is complex, and must be heavily regulated”, “Volcker rule is doing its job despite Kafkaesque turns” December 16.

I say this because one single line of regulations, “capital requirements must be 10% of all assets”, would in my opinion be a more comprehensive regulation than the ten thousands of lines that will be derived from Basel III, Dodd-Frank Act and the Volcker rules.

Also, again, as I observed at a 2003 workshop on Basel II at the World Bank, there is still not a word about the purpose of the banks.

If the real economy does well, we will survive any bank crisis. If banks do well but the real economy goes down the drain, we will all fall… at the end, including the banks. It is as easy as that!

And in that respect I can also guarantee that my single regulatory line will distort the allocation of bank credit to the real economy, a thousand times less than the other referenced regulatory concoctions.

PS. The latest version of Basel III, December 2017, in 158 pages still contains no other stated purpose, like e.g., that of allocating credit efficiently to the real economy.

Listen graduates, “plastics” is long passé… now it is “bank regulations”

Sir reading Christopher Caldwell’s “The Volcker rule is a gift to banks and excludes the rest” December 14, it is easy to see whey instead of recommending “plastics” as a future to a graduate, any person with good intentions would now easily tell him “bank regulations”.

And if we already gasp at the 828 pages of the Dodd-Frank Act, we should not forget that this is without making one single reference to the Basel Committee for Banking Supervision, and to the Basel Accord to which the US is a signatory.

If this regulatory frenzy is not digging us deeper in the hole we’re in, I do not know what is.

Risk-weighting for risks already weighted for, well that is regulatory zealotry you can write home about

Sir, you write that “the Fed’s monetary policy [is] much more efficient than in those economies where the transmission of central bank money-printing to real economy remains broken” “If the Fed ain’t broke, don’t fix it” May 1.

Indeed but the reason of that is that the US never adopted as fully as Europe did those Basel dictated capital requirements based on perceived risk, that so completely have clogged up the channels whereby bank lending can flow to the real economy.

And when you refer to that US Senators Sherrod Brown and David Vitter want banks to hold more capital you are ignoring that their bill contains the much more important provision of limiting [and hopefully making away altogether] with the obnoxiously dumb risk-weighting, something that is not explicitly mentioned in the Dodd-Frank law.

Sir, you mention the dangers of “zealotry”. Let me inform you that the worst example of regulatory zealotry is precisely the setting of capital requirements based on perceived risks that have already been cleared for.

Sir, as I wrote in a letter published today by the Washington Post, “Europe would also do better with a Brown-Vitter proposal”

Mr. Barney Frank, when will you help stop that odious and stupid regulatory discrimination against “The Risky”?

Sir, Barney Frank the former chair of the House financial services committee, with relation to the Dodd-Frank Act and its implementation writes “Don´t panic financial reform is coming to America” April 4.

Mr. Barney Frank, lending your support to the pillar of current bank regulations, capital requirements for banks which are much lower for assets perceived as “safe” than for assets perceived as “risky”, this even though those perceptions are cleared for by other means, you are allowing banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible” than when lending to “The Risky”.

And, as a direct result, “The Risky” need pay the banks much more than usual in order to make up for this regulatory competitive disadvantage.

And, as a direct result you are guilty of helping to increase the gap between the haves, the old, the history, “The Infallible” and the have-nots, the young, the future, “The Risky”.

And all for nothing as major bank crises never ever occur as a result of excessive exposures to what is perceived as “risky”.

And so if the Congress, in the Home of the Brave, with the assistance of bank regulators, in over 124 pages of assorted regulations, cannot understand and put a stop to this favoring of the access to bank credit of those already favored, “The Infallible”, and which thereby discriminates against the access to bank credit of those perceived as “The Risky”, and who even without these regulations already have to pay more because of those perceptions, then I do indeed believe it could be time to panic.

And I say this because it is precisely in troubled times like this, with growing unemployment, that it is so important that regulators help "The Risky", like small businesses and entrepreneurs, to have access to bank credit in the best possible terms, and not to fight against that!

Bailouts and the socialization of losses is not the responsibility of banks but of governments, and what banks really must do, is to relearn the ancient art of lending to “The Risky”

Sir, James Grant writes “Banks need to rediscover the ancient art of caution” December 14, and mixes up any ex-ante behavior of banks, which is their responsibility, with the ex-post socialization of their losses, which is entirely the responsibility of governments. 

Also, were not our current predicaments so sad, it would almost be funny when Grant preaches “A good banker lent against the collateral of short-dated commercial bills, not heaven forfend-property”, and as if implying that the banks had been out on a very risky bungee-jumping tour. 

Does Grant really believe that holding triple AAA rated securities backed with mortgages, and to which the banks were authorized by their regulator to leverage their equity 62.5 to 1, so safe were these, and for which there was an immediate mechanism to obtain liquidity by selling these in a market that very much demanded these securities… evidenced a lack of caution? Is it not an excessive regulatory risk-adverseness against all perceived as “The Risky” and which drove the banks excessively into the arms of “The Infallible”, precisely the spot where all bank crises have always originated. 

No, the problem is that bank regulators, with their capital requirements based on perceived risk, gave the honest bankers an additional motif to behave just like Mark Twain describes them, namely those who lend you the umbrella when the sun shines and want it back when it looks like it is going to rain. And as a consequence banks got caught with excessive exposures to “The Infallible” with no capital at all. 

On the contrary, what bankers must now with urgency relearn, is the art of lending to “The Risky”, like unrated small businesses and entrepreneurs but, for that to happen, we first need to rid ourselves of nervous regulatory nannies who want banks to deal exclusively with “The Infallible”, triple-A rated and sovereigns (like Greece).

God make us daring!

Forget Basel III and go directly to Basel IV, but first make the Basel Committee accountable to someone.

Sir, as you can imagine after the over 900 letters I have written to you about the not really discussed  fundamental mistakes of Basel II, Thomas Hoenig’s “Get Basel III right and there will be no need for Basel IV” December 13, is an extremely welcomed analysis. And it is on the dot when it comes to analyzing bank capital in terms of the risk of bank failures and its consequences. 

But different capital requirements for different perceived risks, also translates into allowing different leveraging of the net after risk and transaction cost margins, something which distorts the markets immensely. It favors what is ordinarily already favored “The Infallible”, and thereby discriminates against what is already being discriminated against, “The Risky”, like the unrated small businesses and entrepreneurs. And in this respect it completely stops the banks from performing efficiently their vital economic resource allocation function. 

So add up these two main lines of criticism, that it does not work for making banks safe and that it does not work for making the economy grow sturdier, and it is easy to understand why Basel II and the current pre-Basel III need, for the sake of our banks and our economies, to be thrown out lock stock and barrel. 

Clearly going from a Basel II to a more correct Basel IV with 8-10 percent tangible equity on all assets, requires some deft navigation skills if we want to avoid hurting the current economy more needlessly. But it can be done! 

That said before allowing bank regulatory schemers scheme and tweak our banks more we must make the Basel Committee for Banking Supervision publicly accountable to someone in a transparent way… and of course start by asking them… what is the purpose of our banks?... so as to see if we agree. 

But, knowing us, even if we correct all that needs to be corrected now, I can assure you that there, sooner or later, will still be need for a Basel IV, IV.2, V and so on… and Thomas Hoenig is clearly well aware of that too.

God make us daring!

Professor Hubbard, bad news, the waters you fondly remember, have been contaminated by bank regulators

Sir, Professor Glenn Hubbard wants the US to walk down a narrow path, carefully avoiding the fiscal cliff, so as to reach the “pleasant waters [with] less uncertainty and stronger growth, “How the US should avoid falling off the fiscal cliff”, November 13. And, in doing so, he suggests that the US avoids increasing marginal taxes, which “distort behavior and reduce activity” and go for scaling back tax deductions instead. 

I completely agree with Professor Hubbard, but I have some very bad news for him. Those waters that he so fondly remembers from his youth are not the same waters anymore, they have been contaminated. 

When bank regulators decided to allow banks to hold much less capital against exposures to “The Infallible” than against exposures to “The Risky”, and thereby allowed “The Infallible” to provide the banks with a much higher risk-adjusted rate of return on equity than what “The Risky” could do, they effectively made the banks much more risk-adverse than what they already were. 

And banks, as a consequence, abandoned taking on the traditionally manageable risks we need them to take on, like lending to small businesses and entrepreneurs, “The Risky”, and entered a suicidal path of taking unmanageable exposures to “The Infallible”, and precisely the kind of exposures that have always resulted in a lot of tears. 

And so Professor Hubbard, if you do not want to be unpleasantly surprised when reaching the waters, ask your bank regulators to immediately stop discriminating in favor of those already favored by markets and banks, and against those already discriminated against. 

It is none of a bank regulators’ business to distort the economic resource allocation function of our banks, only because full of hubris they want to fool around playing risk managers for the world. In fact, and as I have said it before, if these bank regulators had done what they did knowingly on purpose, that would represent an act of high treason against our economies, and for which they should be shot.