Systemic distortion of bank credit allocation, is worse than risks with “global systemically important banks”

In November 1999 I concluded and Op-Ed with: “Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

And in May 2003, then as an Executive Director of the World Bank, addressing many regulators at a workshop, I argued: “Knowing that ‘the larger they are, the harder they fall’, if I were regulator, I would be thinking about a progressive tax on size.”

And so Sir, of course I agree with John Gapper in that “Regulators are right to cut the biggest banks down to size” January 8.

But that said, why is it that even though Gapper clearly understand the meaning (and cost) of higher capital requirements for banks, he seemingly cannot understand what different capital requirements for different bank borrowers mean.

The “risky”, because their borrowings generate higher capital requirements for banks than the “safe”, are being negated fair access to bank credit.

More important than increasing the capital requirements for those banks like JPMorgan that because of their size pose a “global” systemic risk, it is much more important to get rid of the risk–weighted capital requirements which constitute, not just a risk, but an existent systemic distortion that impedes the efficient allocation of bank credit.

FSB's rule is no deterrence for a bank wanting to become, globally, the most systemically important bank.

Sir, Tom Braithwaite reports “China’s ICBC joins banking risk list”, November 12. It should have been expected, as surely the Chinese government must have complained about not having one bank in the exclusive list of Global Systemically Important Banks.

Also in reference to JP Morgan Chase and HSBC, Braithwaite categorizes the 9.5 percent of capital based on risk-weighted assets as “punitive” and mentions the current empty10.5 percent capital bucket as “a deterrent to any banks that may think of getting bigger or engaging in riskier activities”. He is wrong.

First, as we all should now 9.5 percent or 10.5 percent of capital does not really mean anything if the risk-weights do not mean anything. And second… would a bank stop trying to be the globally most systemically important bank, just because of a risk-weighted capital requirement?

Forget it! If FSB really want to see some serious containment of the too big to fail they should require 9.5 percent of capital on all assets. Frankly the naiveté of FSB trying to frighten the banks with such a feeble bogeyman is just mindboggling.

PS. By the way the list just published is based on 2012 year end data. Does that sound speedy enough?

God help us, our bank regulators have really been taken for a ride!

Sir, Brooke Masters in “Regulators agree extra bank capital protection” June 27, reports that now the “global systemic important financial institutions”, G-SIFIs, have convinced the bank regulators that, for a mere 1 to 2.5 percent additional capital, to be paid in easy installments until 2019, and to be applied on risk-weighted assets, to formally award them the franchise of “Too big-to-fail”. What a sad day… for us and for all those other banks that at this moment have been deemed “global systemic irrelevant financial institutions”

And let us calculate. Since the risk weights for investments in private triple-A rated securities are still 20 percent that would dilute the maximum basic capital requirement of 9 percent to signify only a mere 1.8 percent and so the “too big to fail banks” could still leverage themselves 55 times to one, when doing that kind of business… and not to speak of what they could leverage when lending to some sovereigns with a zero risk weight. God help us, our bank regulators have really been taken for a ride!

And Jean-Claude Trichet, European Central Bank President, stepping down as chairman of the Basel overseers group is quoted saying “The agreement reached today will help address the negative externalities and moral hazard posed by global systemically important banks”, Sincerely from a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

Control the regulators, do not let them sell “Too big to fail” franchises for a meager 3 percent of additional bank equity.

John Authers writes that “Self-control is the key to an investors life” June 11. He is right but the self-control that we all need and should be able to expect is that of the regulators.

The regulator, even though one of the markets most dangerous sources of imperfection could be the banks trusting the credit rating too much, were not able to control themselves and intervened as risk managers making the capital requirements of the banks a function of the same credit ratings the banks were already looking at. And what disaster that resulted in.

And now, displaying again a total lack of self-control, they want to sell “too big to fail” franchises to (SIFIs/G-SIFIs) banks for a mere 3 percent in additional capital. Not only will 3 percent of additional bank capital end up being almost meaningless in the case of a systemic explosion or implosion of these huge banks, but it is also probable that precisely those too big to fail banks that we least should want to be too big to fail, will be those most likely to exploit the franchise for all it is worth, in order to compensate the additional equity required, in the ways we would least like to see these franchises exploited. 

Of course regulators will argue these franchises will be the subject of special supervision. Who are they fooling? Is it not hard enough for them to supervise these behemoths without labeling them as the most likely candidates for special support?