Where would the City of London be if in the 19th Century it had been placed under the thumb of a Basel Committee?

Sir, I refer to your “The City must not be forgotten in Brexit talks” September 29. In view of the City’s real existential problem, I find it a bit irrelevant 

Creative financial engineers tricked or ably lobbied bank regulators into accommodating their wishes for leverage maximization/equity minimization, by introducing risk weighted bank capital requirements nonsensically based on that what’s perceived as risky is more dangerous to bank system than what’s perceived as safe.

That caused loan officers to allocate credit not as it used to by means risk adjusted interest rates but to allocate it by means of risk adjusted returns on equity. If the City of London is to survive as one of the prime banking centers of the world it needs to get rid of that distortion.

FT, without fear and without favor dare to think what would have been of the City of London if in the 19th Century it had to operate under the thumb of Basel Committee inspired risk adverse regulations?

PS. And if in 1910 that savvy loan officer George Banks had been asked about risk-weights, Tier 1 capital and CoCos, I am sure he would have gone to fly a kite.

Many or perhaps most of our bankers would be much better off, at least happier, if they heeded George Bank’s “Let’s go fly a kite!”

Sir, John Gapper refers to “Two academics who studied investment bankers in London were surprised by their degree of cynicism and noted the absence of ‘meaningfulness, emotions and personal investment in work values’. “Bankers have been alienated from their jobs” July 11.

Call me a romantic if you want but, I know that when bankers who felt proud of being savvy loan officers were, with the introduction of the risk weighted bank capital requirements, pushed aside by equity minimizing and leverage maximizing financial engineers, there had to be a lot of frustrations.

Imagine if you as a loan officer had analyzed in depth the plan an entrepreneur presented in his credit application; and you had gotten to know him well; and you had agreed on a risk adjusted interest rate that made sense for both of you, and then your superiors told you: “No we can only leverage our equity 12.5 times with this loan so you either get him to accept a much higher interest rate, or we’re not interested”… and you knew that higher interest rate doomed the viability of the project? Would you not then feel like our beloved George Banks, that you’d better go and fly a kite?

Sir, most of those who became bankers during the last three decades must have a very hard time understanding what “It's a Wonderful World" is all about.

@PerKurowski

European banks that leveraged more than 40 (25) times were (are) not banks; only scary betting propositions.

Sir, Stephen Morris, summarizing the state of European banks writes, “Poor profitability, outdated business models, negative rates and little cause for optimism have driven investors away”“Europe’s banks languish in a climate of gloom”, December 28.

As I see it, something leveraged way over 40 times, as many European banks were before the 2008 crisis, should hardly be called bank. When regulators went along with some bankers’ plea to reduce the capital the banks needed to hold, perhaps for bankers to be able to pay themselves larger bonuses, they simply destroyed the bank system that was. 

If I was a regulator, and wanted my banks to grow stronger than their competitors, the last thing I would do, is to allow them to hold little capital.

The regulators, with Basel II in 2004, showed they believe banks could leverage 62.5 times with assets that have obtained an AAA to AA rating. The market initially believed their risk-weighing capacity and valued banks accordingly. The markets, after 2008, no longer believe such nonsense; “There is better risk-reward elsewhere,” one fund manager is here quoted to have said.

The European Commission assigned a sovereign debt privilege of a 0% risk weighting, meaning no bank capital requirement, to all those sovereigns within the Eurozone that take on debt denominated in a currency that de facto is not their domestic (printable) one. The market had blamed Greece for its excessive public debt and is only now beginning to wake up to that statist horror.

Morris writes: “One activist is trying to force it to exit large swaths of the business, arguing it absorbs too much capital for too little return”. That does not mean capital is unavailable for banks.

Do you want bank investors to return? Then offer them to invest in well-capitalized banks with well-diversified portfolios. To invest in banks that values the highest first class loan officers, not some bright equity minimizing financial engineers.

PS. Seeing “Mary Poppins return” reminded me of why good old George Banks went to fly a kite.

@PerKurowski

The UK needs its banks to get rid of equity minimizing financial engineers and call back savvy loan officers (perhaps some like George Banks)

Sir, Martin Wolf writes he now “rather suspect”, that “the BoE’s views on risk weights might be leading to an economically unproductive focus on property lending”. “Labour’s productivity policy is a work in progress” July 13.

Banks are allowed to leverage more with what’s perceived, decreed or concocted as safe, like with mortgages, loans to sovereigns and AAA rated securities, than with what’s perceived as risky, like with loans to small and medium enterprises and to entrepreneurs.

That means clearly that banks are allowed to earn higher expected risk-adjusted returns on equity with “the safe” than with “the risky”; without any consideration given to the purpose for which the financing is to be used. In essence, regulators have decreed that “the safe” are worthier borrowers than “the risky”.

And of course, since risk taking is the oxygen of any development that is doomed to negatively affect the productivity of the economy.

Sir, I’ve written hundreds of letters to Mr. Wolf about “imprudent risk-aversion” for over more than a decade, and so of course I am glad he has reached the stage of “rather suspecting” all this is true. 

Wolf here refers to a report prepared for the Labour party by Graham Turner of GFC Economics that as a solution mentions, “the establishment of a “Strategic Investment Board” to deliver the government’s industrial strategy, use of the Royal Bank of Scotland to deliver lending to small and medium businesses and creation of an “Applied Sciences Investment Board” to deliver public sector financing of research and development.”

How can I convince Wolf that long before any statist Hugo Chavez like ideas that he still considers “half-baked” are tried out, we need to get rid of the distortions produced by the risk-weighted capital requirements for banks.

As Martin Wolf mentions, it could start with someone “wondering why securing financial stability is the only official aim for bank lending”; perhaps adding for emphasis the why on earth, in all bank regulations, there is not a single word of the purpose for banks beyond that of being safe mattresses into which to stash away cash.

But we could also question for instance BoE’s Mark Carney and Andy Haldane, on why they believe that what is made innocous by being perceived as risky, is more dangerous to the bank system than what is perceived as safe.

PS. On “the City of London being a global entrepot with little interest in promoting productive investment in the UK” I can only remind you and Wolf that could precisely be one of the reasons for why George Banks decided to quit banking and go fly kites instead 

@PerKurowski

Our dear George Banks, having anteceded the Basel Committee, would never have dreamt about current bank bonuses

Sir, Jonathan Ford writes: “As Andy Haldane of the Bank of England points out, there are few ways for banks to bolster their returns to shareholders. One is to loosen underwriting standards and so increase the riskiness of assets they invest in. The other is to squeeze the amount of regulatory capital they set against the investments they make.” “Banking bonuses ought to be dead and buried by now” August 14.

Haldane is wrong about the increase of riskiness of assets, to improve the return on equity that is of little and doubtful sustainable value (bankers have even been fired for that); but he is absolutely correct about the regulatory capital.

When current bank regulators were taken for a ride by bankers and convinced, like for instance with Basel II of 2004, to set the capital requirements against something rated AAA to AA at only 1.6%, meaning an authorized leverage of equity of 62.5, they allowed bankers to earn returns on equity beyond their shareholders’ wildest dreams, and this even after keeping for themselves huge eye-watering bonuses.

Place a 10% capital requirement on all bank assets and those bonuses would immediately begin to vanish in the air as a result of shareholders becoming again important to banks.

As a huge bonus for the rest of the economy, that would also eliminate the current odious distortion of bank credit in favor of “the safe”, sovereigns, AAArisktocracy and houses, and against the risky, SMEs and entrepreneurs.

PS. Here is a letter from George Banks III, after having been called a bankster.

George Banks (the first)

@PerKurowski

The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.

Sir, I refer to Christopher Thompson´s “CoCo sell-off uncovers high yield bargains” August 15, and which title surprises a bit as I did not know FT provided specific investment recommendations.

But that said, whenever we read about “underlining investor willingness to shoulder more risk in their hunt for higher-yielding bank assets” you can be absolutely sure that all risks have not been disclosed by the seller of that asset… so what the investor is really willing to shoulder is a little bit more of uncertainty or looked at it from the other angle, or just willing to trust his advisor a little bit more.

What has happened to CoCos is clear. Investors had priced in the risk that deteriorating market conditions could force the conversion of CoCos into bank capital… what they had not priced was the fact that conversions could happen as a result of bankers´ and regulators´ whim playing around with the current capital requirements for banks. In fact, regulators had not thought of this, and also just recently woke up to that fact.

PS. In case you do not remember I hereby send you the link to what George Banks had to say about CoCos.

http://subprimeregulations.blogspot.com/2014/07/mr-george-banks-asked-about-cocos.html

Mark Carney, FSB, to begin, stop giving the Too-Big-To-Fail banks growth hormones.

Sir I refer to Sam Fleming, Ben McLannahan and Gina Chon reporting “BoE chief leads push to break ‘too big to fail’ impasse at G20”, July 21.

There they report on the efforts of Mark Carney as the current chairman of the Financial Stability Board to try to clinch a deal on bailing in creditors of globally significant, cross border banks that get into trouble”.

Mark Carney, to begin with should start by stopping giving the growth hormones that minimalist capital requirements for what is officially perceived as absolutely safe, represents for the Too-Big-to-Fail banks.

And then I would also suggest they think a little bit more about the implications of the Contingent Convertibles. The CoCos, hard to manage even in the presence of solely a leverage ratio rule, are mindboggling difficult when the capital requirements for banks are risk-weighted.

Perhaps Mr. Carney should read what George Banks had to say about CoCos when asked by his Board of Directors at theDawes Tomes Mousley Grubbs Fidelity Fiduciary Bank