FT, you are so utterly blind to the systemic risks intrusive bank regulations create.

Sir, with respect to the “US Treasury’s report on financial regulation reform” of June 14 you write: “The report does not propose doing away with any part of the regulatory regime wholesale. Capital and liquidity standards, stress testing, living wills, prudential regulation and the Volcker rule are all accepted in principle. In practice, though, the report urges that they be applied with less vigour, more discrimination and greater consultation with the industry”

Well that is bad! The report should take away most of it because “Capital and liquidity standards, stress testing, living wills, prudential regulation [and credit ratings]” is nothing but dangerous sources of systemic risks, introduced by regulators wanting to play bankers instead of acting like regulators.

For instance what do you think is gained by having all banks focusing on the same risk a la mode in a stress test, while ignoring if the real economy is getting the access to credit it needs in order to remain vibrant?

What would I propose instead of all that? Perhaps 3% capital requirements on all assets to cover for bankers’ ineptitude, and 7% capital requirements on all assets to cover for unexpected events, which comes up to the 10% proposed by the Financial Choice Act for smaller banks, but that I would love to see applied to all banks.

@PerKurowski

Martin Wolf, how statist must one be in order to find favoring public debt over private sector debt so much normal?

Sir, Martin Wolf, on the first 100 days of President Trump writes: “The good news is that, albeit chaotically, he is governing more as an orthodox post-Reagan Republican than most expected. The bad news is that he is governing more as an orthodox Republican than most expected. This now seems true in all the main policy areas, both domestic and international. It is clearly true in economic policy… deregulation is still an objective.” “America’s pluto-populism laid bare” May 3.

Sir, let us analyze how regulators have “deregulated”.

Bank regulators, for their risk weighted capital requirements for banks, assigned a risk weight of 0% to sovereign debts and one of 100% to citizens’ debts, which allows banks to earn higher risk adjusted returns on sovereign debt; which of course make banks hold more sovereign debt that they otherwise would do.

Bank regulators, for their liquidity requirements, are classifying sovereign debts as the most liquid ones; which of course make banks hold more sovereign debt that they otherwise would do.

Insurance regulators are copycatting bank regulators

To top it up the Fed, with its QEs, has mostly purchased sovereign debts… and will mostly maintain sovereign debt on its inflated balance sheet.

All that clearly favors the Sovereigns’ access to bank credit over that of the citizens.

Such statism must presume, de facto, that government bureaucrats know better what to do with credit than the private sector. That presumption must lead of course to disaster. 

Yet Sir, here is Martin Wolf worried about deregulation that perhaps might make away with all this. Like Jeb Hensarling's proposal of a straight 10% leverage ratio.

Wolf expresses serious concerns about the tax cuts proposed by President Trump, concerns that many of us share. But my worries has more to do with the deficit ad new debt that might result, while Wolf’s probably has much more to do with the wish he so many times has expressed, namely that governments should take advantage of the (artificially low subsidized by regulations) low interest rates in order to do more, like investing in infrastructure.

In a letter published by FT in 2004 I wrote: “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” Clearly that applied to developed countries too.

PS. Sir, dare to ask regulators the questions in this link. You talk about voodoo economics, what about voodoo regulations? 

@PerKurowski

Congresswoman Maxine Waters… stop rooting for bank regulations that puts inequality on steroids.

Sir, I refer to Ben McLannahan’s and Barney Jopson’s “Republican puts forward alternative to ‘nightmare’ Dodd-Frank” April 27.

Jeb Hensarling, the chairman of the House financial services committee’s Choice Act includes a provision of requiring banks to hold “at least 10 per cent of gross assets, if they want relief from some of the toughest standards on supervision and regulation”

“Congresswoman Maxine Waters, the top Democrat on the committee, told the hearing that the proposals — known as the Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs — would unleash more “risky and predatory” practices on Wall Street.”

Holding 10 percent, against all assets, would eliminate that odious discrimination against the access to the opportunities of bank credit of "the risky", which result from the current risk weighted capital requirements for banks.

John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote:

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Allowing banks to hold less capital against what is perceived as safe than against what is perceived as risky; allows banks to leverage more with what is perceived as safe than with what is perceived as risky; which allows banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived as risky; which means banks will lend more than usual to what is perceived as safe, at even lower rates, which could be very dangerous; and less than usual to what is perceived as risky, unless its done at much higher rates than usual… which unfortunately makes the risky even riskier.

So, as I see it this proposal by Chairman Hensarling should not be applied only to those who want “relief from some of the toughest standards on supervision and regulation” but to all banks.

Of course, I pray that 10% capital requirement applies also to loans to the public sector. As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course pure statism, totally false and absolutely unsustainable.

http://subprimeregulations.blogspot.com/2016/03/decreed-inequality.html

@PerKurowski

Martin Wolf. When the Basel Committee introduced irresponsible financial miss-de-regulation, why did you keep mum?

Sir, Martin Wolf writes of the risks… of “irresponsible financial deregulation... closely linked to the agenda of the Republicans” and argues: “The short-term effects of taking the brakes off an unstable financial system might also be positive. The longer-term ones might include a more devastating crisis even than the one of a decade ago.” “An upswing is not sustained growth” April 26.

Indeed! The short term effects of the Basel Committee favoring what was perceived as safe with much lower capital requirements for banks, had positive short term effects, but also caused the crisis a decade ago, by pushing too much investments in what was AAA rated and lending to sovereigns like Greece.

But I don’t remember reading Mr. Wolf warning about that miss-de-regulation.

The current (republican) proposals we now hear about, like the Financial Choice Act, that suggests a 10% leverage ratio instead of the Basel risk-based capital standards, seems to head in the right direction of eliminating the distortions in the allocation of bank credit to the real economy caused by Basel’s risk weighted capital requirements.

Of course, that is as long as exposures to sovereigns are not calculated differently from other exposures.

As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course totally false and absolutely unsustainable.

@PerKurowski