Citizens should question the purpose of banks, but FT should also have a duty to forward those questions.

Sir, Saker Nusseibeh writes that citizens should question the purpose of the financial system “Systemic moral hazard is embedded in current economic view”, FTfm August 2.

Indeed, but that is mostly because the regulators never found it necessary to define the purpose of our banks, before regulating these.

With technocratic arrogance they decided that when banks lend to “safe” governments and to members of the AAArisktocracy, these should be allowed to hold much less capital (equity) than when lending to the “risky”, like to the SMEs and entrepreneurs.

That meant that banks would then in relative terms lend more and at lower rates to “safe” governments and members of the AAArisktocracy, than they would in the absence of these regulations.

And that means, almost explicitly, that regulators believe “safe” governments and members of the AAArisktocracy can use bank credit more efficiently than what SMEs and entrepreneurs can do. And that is of course pure and unabridged lunacy.

I have been questioning those capital requirements, for more than a decade, in soon 2.000 letters to the Financial Times. Long time ago I was told these were ignored because I was becoming tiresome and monotonous… as if that has anything to do with the fundaments or importance of my questions.

Again, FT why do all of you believe capital requirements for banks, those which are to cover for unexpected losses, should be higher for the risky than for the safe, only because the former present higher expected losses? I dare you to give me one single reason for it and then be willing to debate it publicly.

@PerKurowski

PS. From a 2003 World Bank workshop on bank regulations: “I have been sitting here for most of these five days without being able to detect a single formula or word indicating that growth and credits are also a function of bank regulations.”

And now, in the age of transparency, the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!

Sir, I refer to Steve Johnson’s “Money market ratings ‘outlawed’” of September 9 in your FTfm.

There Johnson writes of a proposal by the European Commission to ban money market funds from soliciting or financing a rating from a credit rating agency” so as “to end the risk of sudden massive redemptions” from a fund in the wake of a rating downgrade, [thereby[] strengthening the financial stability”.

What can we say? Now the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!

Why do they not just impose a little note after each credit rating stating who paid for it? And let the market take it from there?

More than simple rules we need rules that do not distort.

Sir, in your weekly review of the fund management industry, FTfm, Jonathan Davis writes that “There is an inevitable irony in the fact that the two main epicenters of the debt crisis, subprime mortgage lending and more recently sovereign debt, were both assigned minimal capital at risk ratings under the Basel II regime”, “Simple rules should trump regulatory overkill” November 5. 

“Irony”? No way José! The Basel II capital requirements for securities rated AAA, like those backed with mortgages to the subprime sector, and to sovereigns rated like Greece was for some years, were only a meager 1.6 percent of some very generously defined capital. If you allow banks to leverage the risk-adjusted return when lending to “The Infallibles” 62.5 times to 1, but only 12.5 times to 1 when lending to “The Risky”, that is simply dooming the banking system to a disaster. 

Of course, for all those reasons recently exposed by Andrew Haldane, we need simpler rules, but, what we most need is for the bank regulators to stop acting as if they were the master risk-managers of the world, and distorting the financial markets and impeding the banks from performing efficiently their vital function of allocating economic resources.