The regulators should also care about their own internal governance standards.

Sir, Gary Dixon referring to Caroline Binham’s report “Record caseload for UK financial regulator” (August 13) writes, “FCA is now paying increased attention to the internal governance standards of regulated firms... all regulated firms should be taking steps now to improve their board standards as a matter of priority.” ,“Governance standards have become FCA’s focus” August 14

The regulators should also urgently take steps to improve their own government standards. I mean how could they have signed up to those risk weighted capital requirements for banks based on the nonsense that what’s perceived risky is more dangerous to bank systems than what’s perceived as safe? 

And those in EU, how could they have assigned a 0% risk weight to Greece and thereby doom it to suffer the tragedy of way excessive public debt?

@PerKurowski

Financial Conduct Authority dare go after the Great Financial Distorters, your hubristic bank regulating colleagues

Sir, Madison Marriage, Peter Smith and Caroline Binham, reporting on the Financial Conduct Authority’s FCA work on investment managers write that: “tougher measures come as regulators and policymakers are turning their attention from banks to other parts of the financial system that could pose future risks.” “UK financial regulator lifts bar to create one of the toughest investment regimes” June 29.

Yes, but the part of the financial system that poses the most important current and future risks, are the regulators who with their risk-weighted capital requirements for banks, horribly distort the vital allocation of bank credit to the real economy.

Come on FCA, don’t waste time on the small guys, dare go after the big ones, even if they are your colleagues.

PS. FCA, suppose ALL Investment Managers behaved exactly they are supposed to do: Would that create less inequality? Would that represent more or less of a systemic risk?

PS. FCA, how can you help us have the wealthy 1% fall into the hands of really lousy investment managers, so as to fight inequality? :-)

@PerKurowski

FCA, if bank regulators distort the allocation of credit to the real economy, is it good conduct or criminally stupid?

Sir, I refer to Caroline Binham’s interesting story on how FSA, later FCA, investigated at a cost of £14m, a case of insider trading that led to the conviction of five men, “Spectrum: Watching the ‘insiders’” May 21.

In it Binham quotes Mark Steward, the Australian who leads the enforcement team at the FCA with: “We need to look at the potential for our markets to be undermined by systemic and organized crime – people who organize themselves to commit this kind of crime. And we are doing exactly that.”

But what if technocrats that can only be accused of criminal stupidity, unwittingly undermine our markets?

If there is ever a FCA investigation that is really needed, urgently, that is the one about the validity of the risk weighted capital requirements for banks.

By allowing banks to leverage more with assets perceived as safe than with assets perceived as risky, banks were allowed to earn higher expected risk adjusted returns on equity on safe assets than on risky assets; and that obviously dangerously distorted the allocation of credit to the real economy.

And for no reason at all! Never are major bank crises caused by excessive exposures to something ex ante considered as risky. The regulators assigned a risk weight of 20% for the prime AAA rated, and one of 150% for what is highly speculative and worse below BB- rated. Is one as a regulator really allowed to know so little about banks and be so stupid? Not to me!

PS. Here is an aide mémoire that could be helpful for FCA in its investigations

@PerKurowski ©

Culture might not be a matter for bank regulators, but common sense should be.

Sir, you write “Banks are ultimately private institutions and not adjuncts of the state. It is the job of the FCA both to ensure that they treat their customers fairly and also to preserve the integrity of the UK’s financial markets. It is not the regulator’s function to determine how they go about the day-to-day management of their businesses. The soundness of the country’s financial system ultimately depends on having a sensible framework of well enforced rules as well as institutions that are capitalised sufficiently to withstand inevitable periodic shocks.” “Culture is a matter for banks not regulators” January 13.

Indeed but what have the regulators done? Nothing less than giving the banks the incentives that allow these to earn much higher risk adjusted returns on equity when lending to those ex ante perceived or deemed as safe, like the AAArisktocracy or Infallible Sovereigns, than when lending to those ex ante perceived as risky, like SMEs and entrepreneurs.

And that they did by means of credit risk weighted capital (equity) requirements, more risk more capital – less risk less capital; which means banks can leverage more with assets perceived as “safe” than with assets perceived as “risky”. 

Basel II prescribed 1.6 percent in capital for what was AAA rated, and 12 percent for what was rated below BB-. The meaning of that is “be very scared of the risks you see, what’s below BB-, and very daring with those you don’t see, the AAAs”

And with that regulators guaranteed that when really bad things happen, like when an AAA rated assets turned out ex post to be very risky, banks would stand there with especially little capital to cover themselves up with.

And with that they regulators also guaranteed the weakening of the real economy, that economy for which risk taking is the oxygen that helps it to move forward so as not to stall and fall.

Frankly, in their current incarnations, we would all be better off if the Basel Committee, the Financial Stability Board, the FCA, and other similar meddling schemers simply did not exist.

Sir, and you should be ashamed of helping to cover up those bad regulations that are taking our economies down.

It was the regulatory culture and not the banking culture that went wrong. The regulators need a real bashing.

Michael Skapinker writes about “the recent decision by the UK Financial Conduct Authority to drop its probe into the culture of banking is wrong, and why members of the Treasury parliamentary committee are right to call for hearings into why it did so.” “Bankers need a (metaphorical) bashing — as do the rest of us” January 7. He also opines that: “Lax regulation led to the 2008 banking crisis.”

Sir, what if FCA’s probe into the culture of banking would have come up with the following:

“The culture of bankers has not changed; as usual they do their best to provide their shareholders with the highest risk adjusted returns on equity possible.

This time though, the regulators, the Basel Committee, allowed banks to leverage their equity differently with assets, depending on the ex ante perceived risk of these. For instance with Basel II, they authorized a leverage of over 60 to 1 for any AAA to AA private asset but only 12 to 1 in the case of a loan to an unrated corporation.

That meant of course that the risk adjusted returns on equity for safe assets shot up in the sky. An expected 0.5 percent risk adjusted margin to something safe could produce a 30 percent on equity, while a loan to a risky SME or entrepreneur, with the same expected risk adjusted margin, would only yield about a 7 percent ROE.

And so banks, naturally, as should have been expected, went overboard in exposures to for instance AAA rated securities and loans to Greece. And assets perceived ex ante as safe but that ex post turn out to be risky, is precisely the stuff bank crisis are made off. In this particular case the crisis ended up so much worse by the fact that banks were holding very little capital when the ex post realities set in.

Another unfortunate consequence has of course been that banks have either completely abandoned the lending to the risky, or are charging them extra premiums in order to compensate for the regulatory distortions.

We have to make a note that the distortion that caused the crisis remains in effect with Basel III.

In order for regulators to introduce the necessary correction, we want to remind them of the following:

Bank capital is to cover for unexpected losses and so, to have these based on expected credit risk, a risk already cleared for by banks by means of interest rates and size of exposure makes absolutely no sense.

The safer and asset is perceived the greater its potential to deliver unexpected losses.

The regulators should not worry about the credit risk of bank assets but about how banks manage those risks, and a good place to start is by not introducing distortions that makes it more difficult for them.

In conclusion “lax regulations” had nothing to do with causing this crisis. It was all about seriously bad regulations. Of course we feel sad about it, but our bank regulation colleagues must be held accountable for what they did, otherwise the moral hazard becomes just too big to handle.

Yours truly”

Sir, could it not be that FCA has abandoned its probe into the culture of banks because its conclusions would reflect very badly on the culture of regulators?

Skapinker with respect to the malpractice that is allowed to go undetected, like because of the silence of the media before the 2008 crisis writes: “One part of society needs to step in when another does not. It is through their actions that the system is kept honest, more or less, or at least honest enough for it to keep functioning”

Absolutely, but why has FT not helped me to do so? How can you be so sure I am wrong… or is it something else?

@PerKurowski ©

FT, when have you lately heard a regulator state that allocating credit efficiently is a bank’s most important purpose?

Sir, Jonathan Ford writes “the banking lobby has been relentless in its opposition to reform, seeking to present it in terms of false choices — between growth and safer banks, or between regulation and a successful financial system.” “Relief for banks as Britain puts a leash on its financial watchdog” July 20.

Of course these are false choices… but the fact is that regulators pursuing safer banks are negatively affecting growth. Their credit risk weighted capital requirements for banks distort immensely the allocation of bank credit to the real economy.

And clearly, from what Ford describes, Martin Wheatley of the Financial Conduct Authority saw more his role as an bank inquisitor, and had no concern whatsoever about credit allocation.

Let us hope his successor is willing to include a hefty dose of regulatory mea culpa, and does not just follow in the political convenient track of only holding “bankers publicly accountable for their actions”.

@PerKurowski

Who’s going to fine bank regulators for manipulating credit markets?

Sir, Caroline Binham quotes Martin Wheatley, head of the Financial Conduct Authority with opining that fines are working in order to stop foreign exchange manipulations, “Bank fines credited for culture shift”, May 22.

We will see if that’s so, cross your fingers. But, much more important though, for all of us, is to stop bank regulators from manipulating the credit markets with their credit-risk-weighted capital (equity) requirements for banks.

With that they distort the allocation of bank credit to the real economy, for absolutely no reason… since major bank crises never result from excessive bank exposure to what is ex ante perceived as risky.

@PerKurowski

Abusive regulators used a cat o’ nine tails whip on banks, and FT insists on calling that ‘light touch’

Sir, once again you refer to “light touch” bank regulations, “In defence of eyebrows and cosy fireside chats” March 4.

No Sir, the portfolio invariant credit risk weighted equity requirements for banks functioned, as effectively as a cat o’ nine tails whip, to keep banks away from exploring risky but productive bays, and to force these to dangerously overpopulate supposedly safe havens.

That bankers absolutely loved to be able to earn much higher risk-adjusted returns on equity on what is perceived as safe than on what is perceived as risky, is an entirely different matter, which has more to do with a design flaw of this particular cat o’ nine tails whip.

You quote Mark Carney on that BoE has managed to cause “42 cases of potential market abuse being referred to the Financial Conduct Authority”. Great, but I just wonder when the regulatory abuse of these equity requirements, those that so distorts the allocation of bank credit to the real economy, is also going to be reported to FCA.

Sooner than later, FT is going to be questioned on its silence on this whole issue and, hopefully, also be held accountable, one way or another.

FCA, if there are “high interest rules” should there not be “low interest rate rules” too?

Sir, I refer to your “High interest rules”, October 4.

When reading about the laudable efforts of Financial Conduct Authority (FCA) of trying to reign in the excesses of payday lenders, one can also wonder about when the FCA would tackle the other side of the coin; namely the absurd low interest government pays on its debt and which might even be the reason for why many savers might end up having to reach out for moneylenders.

Let us not ignore that besides awful money lenders who could break your kneecaps, there are also awful money borrowers too, even though these use more subtle methods. Like for instance the borrowing public sector, who have the regulators allowing the banks to lend to it holding no capital, while simultaneously requiring the banks to hold about 8 percent in capital when lending to any ordinary citizen.

But also beware of the much greater risk derived from excessive lack of testosterone and dopamine

Sir, the fundamental problem with good articles like Sarah Gordon´s “Call in the nerds – finance is no place for extroverts”, April 25, is that they tend to analyze risks from the perspective of when risk-taking goes bad, without caring much for when risk-taking goes right.

The problem we are facing now is that bank regulators, with too little testosterone, and too little dopamine, and too little understanding of what they were doing, gave the banks extraordinary incentives to lend and invest in what was perceived as “safe” and to stay away from what was perceived as “risky”… and so the banks did… and loaded up on AAA rated securities, Greece, Spanish real estate and others safes.

Indeed if regulators had incorporated more behavioral analysis then they would not have based the capital requirements for the banks based on perceived risk, like that in credit ratings, but based to how bankers react to perceived risk. And then, instead of more-risk-more-capital less-risk-less capital, they might have applied a somewhat inverse capital requirements, since bank crisis have never ever resulted from excessive bank exposures to something perceived ex ante as “risky.

PS. As gold is mentioned, just as a curiosity let me remind you that in the Report on Global Financial Stability 2012, of April last year, the IMF listed 77.4 trillion dollars in safe assets and therein gold represented 11 percent.