On FT’s Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance

Sir, I refer to Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance this month”; as “decoded by a sceptic”, “Trump’s battle with red tape will hurt consumers and world” February 14.

1. “A swipe at the Consumer Financial Protection Bureau, the new body that has returned $12bn to more than 25m Americans ill-treated by financial groups.”

That comes to an average of $480 per person, which leaves open the questions of: At what cost? Should Americans because of CFPB’s feel safer and, if they do so, are they really safer? What has happened to good and useful old “Caveat emptor”?

2. “Mr Gary Cohn blamed regulatory capital requirements for a shortage of credit to the economy: “Banks do not lend money to companies . . . because they’re forced to hoard capital,” he said. Nonsense, given that equity capital is free to be used for lending.” What? Has Patrick Jenkins not yet understood how for instance requiring banks to hold more capital against “risky” SMEs than against the sovereign and the “safe” AAA-risktocracy, distorts the allocation of bank credit?

3. “There has in any case been pretty strong credit growth, about 6 per cent a year since 2012.”

Credit for what? Yes: for corporation repurchasing their shares; for more loans to “safe” sovereign; for increased automobile financing portfolios; for residential mortgages… but what about the financing of the riskier future our kids and grandchildren need to be financed?

4. “It may also be a pop at the Financial Stability Oversight Council, the only US federal body that assesses risk across banks and non-banks… disbanding FSOC, would… be dangerous”

No! All those involved with bank regulations that do not understand the fundamental reality that what is perceived as very safe, is much more dangerous to the bank system than what is perceived as very risky, should be disbanded… the faster the better.

5. “Enable American companies to be competitive with foreign groups in domestic and foreign markets. A natural adjunct of the president’s all-encompassing call for national greatness… is likely to translate into… deregulation.”

What? If banks have needed to hold the same amount of capital against loans to Greece or AAA rated securities that they needed to hold against loans to SMEs and entrepreneurs we might have had other type of crisis, but not the 2007/08 one, nor would we be suffering such lazy economic responses to all the huge stimuli doled out?

6. “be in no doubt: this president will deregulate”

If that means to take away what distorts the allocation of bank credit to the real economy then welcome, not a moment too soon. To just modify the regulations is not to deregulate, but only to neo-misregulate.

7. “Restore public accountability within Federal financial regulatory agencies”

That would be not a second too late. Not only the Federal financial regulatory agencies, but also most of the world’s bank regulators, refuse to answer some simple questions such as: Why do you assign a low 20% risk weight to the so dangerous for the banking system AAA rated, and a whopping 150% to the so innocuous below BB- rated?

@PerKurowski

Would adequate SIFIs’ designations have helped to avert the last crisis? Of course not!

Sir, I refer to Patrick Jenkin’s “MetLife ruling poses threat to drive towards global financial stability” April 5.

Jenkin sounds very much upset: “This is absurd. The FSOC — with its expert mandate and responsibility for “identifying risks and responding to emerging threats to financial stability” — is being torpedoed by an inexpert judge.”

Sir, you know I hold that the regulator, the Basel Committee and friends, was the real responsible for the crisis that errupted in 2007-08. Its risk weighted capital requirements for banks distorted the allocation of bank credit to the real economy, and allowed banks to leverage absurdly much on assets deemed, decreed or concocted as safe… and all this when history clearly shows that “safe” assets is precisely the stuff that big bank crises are made of.

Had the oversized exposures to AAA rated securities and sovereigns to Greece anything to do with what the regulators now tries to catch with their SIFI methodology? No is the simple answer.

In fact working on how to manage SIFI’s, keeps regulators from working on mending their own mistakes. And frankly I see no reason for Jenkins to deposit so much naïve faith in the expertise of FSOC or FSB or any other member of the regulatory logia.

He writes “The time may have come for the G20 to give the FSB proper statutory powers to ensure shortsighted political interests do not put the world on the road to financial ruin once more”

He should know that there is nothing as shortsighted as the risk weighted capital requirements. These have stopped the banks from financing the risky future and have them only refinancing the, for the very short term, safer past.

If anything Sir, I would wish for that “inexpert judge” to also look into whether the unauthorized discrimination against the access to bank credit of the “risky”, which is imbedded in that regulation, should really be allowed in the Home of the Brave.

It is high time the world starts to reflect on whether it really wants to allow an Ultra Important Regulator to introduce, as it wishes and thinks fit, dangerous systemic risks into the banking system.

The absolute minimum we must ask for is for the regulator to first give us its working definition of what is the purpose of our banks, so to see if we agree.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

God help our grandchildren if our insurance sector, like our banks also fall into the hands of a Sissy Brigade.

Sir, You hold that “Global insurers should be supervised at scale”, May 4. One reason for why you think that should be, is “the pivotal role of American International Group in the 2008 financial crisis. AIG… was belatedly found to have an insolvent derivatives trading unit, heavily intertwined with large banks and investment banks.”

That’s correct, but the real cause for that excessive intertwinement was that since AIG was AAA rated, if it assumed the risk of a bank asset, then according to Basel II, banks could leverage their equity with that exposure more than 60 to 1. What a temptation! So in fact it was the regulators’ own dumb risk-aversion that caused AIGs problems.

I find it amazing that the world has allowed itself to fall into hands of a shortsighted bank regulator who thinks that banks can remain safe by avoiding to take the risks needed to adequately take care of the real economies’ financing needs.

With its credit-risk weighted equity requirements, those which allow banks to earn higher risk adjusted returns on equity when financing what is perceived as safe, than when financing what is perceived as risky, the Basel Committee (and the Financial Stability Board) has completely distorted the allocation of bank credit to the real economy.

And now another risk-aversion centered Sissy Brigade, the EU with its Solvency II, is also in pursuit of the insurance sector, which will make sure its investments will be completely distorted too. And FT, tough not explicitly in this editorial, even seems to be egging them on. God help us. God especially help our children and our grandchildren, those most in need of banks taking risks, with reasoned audacity.

@PerKurowski

What we least need is a non-transparent “Financial Stability Oversight Council”.

Sir Sebastian Mallaby´s “How to fsoc it to the hedge funds” July 16, clearly indicates that with the Financial Stability Oversight Council, a brand new source of systemic risk has been introduced, much the same when regulators empowered the credit rating agencies with a very important role in setting the capital requirements for banks.

In order to increase our chances to escape from new major disasters, we must avoid the markets having to entertain additional useless speculation about what some holed up “systemic risk experts” might be thinking. In this respect I would suggest that the FSOC is required to open a blog; and place a first post saying “We have the following list of systemically risky institutions” and then allow for the public to comment on whatever they say.

Of course, some good whistleblower protection programs for employees of possible systemically risky institutions might also be useful.