In finance the structurally discriminated are those perceived as “risky”, the SMEs and entrepreneurs

Sir, Gillian Tett refers to an almost all female conference on economic and finance to ask: “whether it is time to organize an all-black or all-Hispanic financial policy-making event of this sort?” “The power of role models” May 9.

And referencing Simon Kuper’s article “How to tackle structural racism” she reflects: “And, if that occurred, would it help to combat that structural discrimination”.

That is off target. In matters of banking, financial reforms and the future of global finance and economics, the truly structurally discriminated, the “all-black or all-Hispanics”, are those perceived as “risky”, like SMEs and entrepreneurs, while the structurally favored, the “all white males”, are “the safe”, like sovereigns and AAArisktocrats.

So we need more a conference with large representation of those perceives as risky. It would be so interesting if Senator Elizabeth Warren who has exposed “constant criticism of Wall Street and of America’s wealthy elite” were also present there. Can you imagine a small entrepreneur asking Senator Warren the following?

“From a credit point of view I am perceived as risky. I therefore face many difficulties to borrow that umbrella from bankers they only want to lend out when the sun shines. I accept that as a natural fact of life. But why must the regulators make it even harder for me to access bank credit, by allowing banks to have much less equity when lending to “the infallible” than when lending to me?

That results in that banks can leverage their equity, and the implicit or explicit support taxpayers give them, much more with the risk-adjusted net margin dollars paid by “the infallible” than when those same dollars are paid by me.

We the “risky” entrepreneurs and SMEs, we hear we are good for the economy, that we generate growth and jobs and, as far as I know, lending to us has never detonated a major bank crisis… so Senator Warren, can you explain to me why is there such an odious regulatory discrimination against us?

There exists an Equal Credit Opportunity Act (Regulation B) and so I must also ask: Senator Warren why does its benefits not extend to us?

@PerKurowski

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What if an Eric Schneiderman dared to stand up against those causing the greatest unfairness in the financial markets?

Sir, Kara Scannell, James Shotter, Daniel Schäfer and Alice Ross report on how New York attorney-general Eric Schneiderman is investigating unfairness in the financial markets, “Banks hit by dark pools probe” July 30.

But Sir, you know that those perceived as “absolutely safe” from a credit risk point of view, and who are therefore already the beneficiaries of lower interest rates, larger loans and on softer terms, get even lower interests, even larger loans and on even softer terms, because regulators allow banks to hold less capital against assets deemed as absolutely safe.

And you also know that those perceived as risky from a credit risk point of view, and who are therefore already paying higher interest rates, getting smaller loans and must accept harsher terms, are charged even higher interests, get even smaller loans and must accept even harsher terms, only because regulators require banks to hold more capital against assets deemed as risky.

And so I ask you Sir, does not the regulatory distortion produced by the risk-weighted capital requirements cause more unfairness in the capital markets than all the dark pools, and all the high frequency trading, and all the Libor manipulation and all the other misdeeds currently scrutinized put together? Of course it does!

What a shame there are no Attorney Generals willing to stand up to bank regulators discriminating based on perceived risk (in the Home of the Brave) … even when equipped with such formidable tools as the Equal Credit Opportunity Act – Regulation B. and all other non-discrimination and non-profiling rulings.

PS. Yesterday I was also censored in my homeland :-)

When fighting inequality, in a sustainable way, it is more important to distribute opportunities than to redistribute income.

Sir Jonathan Ostry, a deputy director of the research department of the IMF holds that some recent research indicates that “Redistribution is associated with higher and more durable growth” “We do not have to live with the scourge of inequality” March 4.

Indeed that might be so but, before redistributing income, making sure opportunities are equally distributed, is much more important when fighting inequality, at least in a sustainable way.

For instance there are some ludicrous risk based capital requirements for banks that by favoring the “infallible sovereigns” the housing sector and the AAAristocracy, discriminate against the access to bank credit of “the risky”, mostly the medium and small businesses, the entrepreneurs and start-ups.

Unfortunately, both the World Bank and the IMF have been totally silent on this inequality driver for much too long.

If Ostry really wants to help out, then he should recommend IMF’s research department to look into the reasons for all major bank crisis in history. That research would be extremely helpful, since it would certainly indicate that the Basel Committee for Banking Supervision is going after the wrong “risky”.

Capital requirements for banks based on perceived risk, is an equal opportunities killer

Sir, Tim Hartford writes “The uncomfortable truth is that market forces – that is, the result of freely agreed contracts – are probably behind much of the rise in equality. Globalization and technological change favor the highly skilled”, “This is what sticks in the throat about the rise of inequality: the knowledge that the more unequal societies become, the more we become prisoners of that inequality”, “The idea of a free, market-based society is that everyone can reach his or her potential. Somewhere, we lost our way”, “How the rich are making sure they stay on top”, August 16.

That is indeed powerful depressing stuff, and I can’t say that I have even a fraction of the suggestions needed to get the world out of this predicament. 

But, one thing I am absolutely sure of. Capital requirements for banks, based on perceived risks that are cleared for by other means, and that so shamefully favor bank lending to “The Infallible”, the haves, the old, the past, those already favored by banks and markets, and thereby discriminates against “The Risky”, the not haves, the young, the future, those already discriminated against by banks and markets, does not help. Those regulations have nothing to do with a free market. Those regulations only potentiate the inequalities and represent an act of financial terrorism that strikes at the heart of the needs of a nation to take the risks to allow it to move forward.

PS. The regulators are violating the Equal Credit Opportunity Act “Regulation B”.

Want more opportunities and less inequality? Then scrap capital requirements for banks based on perceived risks.

Sir, Lawrence Summers, proposes university to promote economic diversity in “How the land of opportunity can combatinequality” July 16. Let me proposes a more immediate way, scrapping capital requirements for banks based on perceived risk. These drive in a further inequality wedge between those perceived as risky, most often the have-nots, and those perceived as risky, most often the haves, at the same time it makes it more difficult and expensive for small businesses and entrepreneurs to get an opportunity. 

What good would it make for universities to introduce opportunity slots for the poor if then, when the poor graduates, his jobs will depend on legacy networks? 

“Ah but then our banks can become unsafe!” Don’t be silly, when have you ever heard about a bank crisis caused by too much lending to what was considered risky?

Ps. I have recently introduced a complaint before the Consumer Financial Protection Bureau arguing that these capital requirements go against the Equal Credit Opportunity Act (Regulation B)

The mother of all (official) interest rates manipulation.

Sir, capital requirements for banks are larger when these lend to something perceived as risky and lower when to something perceived as not risky. It is an utterly absurd proposition, because what is perceived as risky has never caused a major bank crisis. But, much worse, it also signifies that those perceived as risky must pay higher interest rates and those perceived as not risky lower interest rates, than would have been the case absent these regulations. And this amounts to an extraordinarily large official interest rate manipulation… and its effect is way more than some few basis points… and the widening of the spread between risky and not risky according to my calculations is way over hundred basis points. 

So let’s see what all those perceived as risky, usually correlated with the have-nots, who already pay higher interest rates, would have to say about regulations that made them pay one percent more in additional interest on all their bank loans, while those perceived as not-risky, usually correlated with the haves, who already pay lower rates, had to pay one percent less. 

I have now at least registered a general complaint at the Consumer Financial Protection Bureau CFPB, established in the Dodd-Frank Act, indicating that this odious discrimination against the “risky” does not seem to be allowed under the Equal Credit Opportunity Act (Regulation B).