Credit risk-weighted capital requirements make it impossible for banks to price risk

Sir, I refer to Howard Davies’ in FT’s A-List, “Dilemma of defining risk” September 10.

There Davies states: “Regulators accept that banking necessarily entails risk. Their view, however, is that banks should know what risk they are taking on, why they are doing so, and should ensure that risk is priced properly”.

Indeed, it should be so, but it is not! 

Regulators, by using credit risk weighted capital requirements for the banks, not only send the message that they do not believe banks know what risk they are taking on, and worse, much worse, they make it completely impossible for banks to price risk properly. As is, banks price risks adjusted for the capital required, and that distorts all.

Regulators have yet not understood that the risk they must be concerned with has nothing to do with the credit risk of a bank’s exposure and all to do with how a bank manages those credit risks. Today they act like a nannie helping a child to cross a street looking only at the traffic light and not looking at the kid.

What should regulators do? Fix some capital requirements in order to cushion for any unexpected losses. But for the unexpected, you cannot, as regulators, by their own admission have done and do, use the expected.

To me it is surrealistic to read Douglas Flint expressing how the main preoccupation of bankers is “to protect themselves and the firm from future censor” by regulators when it is the regulators who should hang (illustrative… I think) for their mistakes. 

As is Basel II and III risk weighted capital requirements for banks is a true regulatory nightmare.

By George I think FT’s got it: “A ship in harbor is safe, but that is not what ships are for” John A Shedd, 1850-1926.

Sir you write: “politicians… need banks to lend money and support economic growth (rather than inventing esoteric products to boost their bonuses). A bank that never takes any chances is not doing its job”, “Complicated banks face complex rules” August 8.

And so, are you finally waking up to the fact that banks have other purposes than not just going belly up and costing taxpayers some money? About time, why did it take you so long?

The regulators though still seem to be sleeping on it, as they insist with their risk-weighted capital requirements for banks… which are based exclusively on credit risks already cleared for by other means, and not having one iota to do with any lending money or economic growth purpose... much the contrary as these requirements profoundly distorts the allocation of bank credit.

How long have our economies got left with our banks having been injected with the venom of cowardice?

Sir, Martin Arnold and Tom Braithwaite report “HSBC’s warns of risk-aversion” August 5.

Of course you know very well that I hold that excessive risk aversion is what most threatens our economies but, to read of banker like HSBC’s Douglas Flint expressing concerns about “a growing danger of disproportionate risk aversion creeping into decision making of our business”, without mentioning the largest source of risk aversion for banks, the risk weighted capital requirements for banks, is maddening.

The disproportionate risk aversion of bank regulators, have banks now earning much higher expected risk adjusted returns on their equity on assets perceived as safe, which they can leverage much more, than on assets perceived as risky. And that has injected into our banks the venom of cowardice…

How long our economies can be sustained without medium and small businesses, entrepreneurs or start-ups having fair access to bank credit is hard to say, but one thing is really sure, if that risk aversion persists, our economies will go down down down.

Douglas Flint, as a banker might very well be doing his fair share of dressing up what is risky as more safe but, as a citizen, as a father, possibly even as a grandfather, and as someone who should understand the meaning of risk taking, he should be ashamed of himself. What is in it for our descendants if our generation refuses to take its proportionate and necessary share of risks required for moving the world forward?

And that, of course, goes also for many of you in FT too.

The awful truth is that risk weighted capital requirements for banks, are robbing our young of their horizons.

Bank regulators, rock stars? We wish, I bet you rock stars would not have messed it up this way!

Sir, Patrick Jenkins, in “Banks adapt to being kept in check” September 9, quotes “one top regulator who is close to Mark Carney, the new governor of the Bank of England” and the current chairman of the Financial Stability Board” saying “Regulators are the rock stars these days”. If so, what a sad class of rock stars we have.

Three of the problem circles in Jenkins’ “nucleus of the banking crisis” are directly related to bad regulations.

“Low capital”, indeed, how could it be otherwise when Basel II authorized banks to hold only 1.6 percent or even zero capital against so many of their assets.

“Bad investments/trading”, indeed, if you as a bank were allowed to leverage your equity 62.5 times to 1, only because something had an AAA rating provided by human fallible credit rating agencies, you were bound to get into trouble.

“Bad lending” indeed, I bet you that none of our real rock stars would have thought it a great idea for banks, like those of Cyprus, to lend to Greece against only 1.6 percent in capital.

And also when Jenkins quotes Douglas Flint, chairman of HSBC saying “It’s the system’s asset concentration – principally in government debt and in mortgage debt – that can be dangerous” he is directly spelling out what should have been the expected results of Basel I, of Basel II and, unfortunately it would seems, of Basel III too.

But the worst consequence of these faulty regulations, by which banks are allowed to earn much higher risk-adjusted returns on their equity when lending to “The Infallible”, than when lending to “The Risky”, does not even appear on the bank’s balance sheets. The worst consequence, in my opinion, is all those many loans to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups, which were denied by the banks, only because of these capital requirements. Those credits, if approved, could have delivered the next generation of sturdy jobs that our young ones so much need.

And so the bank regulators are now the rock stars? Forget it! Truth is that if any modest social sanction existed, and journalists did their jobs, instead of sucking up to the regulators, they would be paraded down the main avenues wearing dunce caps.