There is already an unknown and hidden, odiously regressive, hugely distorting, levy on financial transactions

Sir, Gregory Meyer reports on levies on financial transactions that have been proposed in the US by Democratic politicians “US markets braced for trading tax grab” October 11.

One can easily understand the political appeal of such taxes, but also that all these could have unexpected consequences, many quite contrarian to the initial objectives.

That said, let me remind you of the financial sector’s “risk-weighted capital requirements for banks” tax; essentially based on assigning to the Sovereign a 0% risk weight and to We the People one of 100%.

That tax allows governments to collect revenues through the not so transparent channel of having more and cheaper access to bank credit. Unfortunately most of that tax is not paid by the rich and wealthy, but by the not wealthy SMEs and entrepreneurs, by means of lesser and more expensive access to bank credit.

Not only is it an immensely regressive tax, the AAArisktocracy is risk-weighted at only 20%, but, as an “unexpected that should have been expected consequence”, it also ends up causing stagnation that diminishes government ordinary tax revenues.

Even worse, that tax stimulates banks into creating excessive exposures to what has always been more dangerous to the stability of the sector, namely what has ex ante been perceived as very safe, but that ex post could turn out to be very risky.

Sir, compared to this tax, all other financial transactions taxes proposed, seems almost irrelevant.

@PerKurowski ©

Stop bank regulators from distorting bank credit allocation to the real economy, based on their anxiety de jour.

Sir, Barney Jopson and Gregory Meyer report, “The Fed wants to use capital charges to discourage banks from risky activities involving hazardous materials that could threaten their survival in the event of a catastrophe… like costly disasters such as tanker spills or gas pipeline explosions.” “Banks face capital call for commodity disaster costs”, November 4.

With their credit risk weighted capital requirements for banks regulators already discourage banks from lending to those perceived as risky, like SMEs and entrepreneurs, now they also want to discourage lending to what could produce a gas spill or a gas explosion. Where will all this risk aversion end?

When will they realize that something perceived risky like handling hazardous materials is by definition much less risky to the banking system than something that has an AAA credit rating?

Banks should of course hold capital against unexpected losses but regulators should of course also have the intellectual capacity to understand that the really dangerous unexpected, has much greater potential to appear among what is perceived as safe, than among what is perceived as risky.

Please let us have an 8 to 10 percent capital requirement on all bank assets based on that regulators simply do not know what they do, instead of having them to distort the allocation of bank credit based on their anxiety de jour.

@PerKurowski ©

Who in his right mind can believe credits rated BB- are more risky to the banking system than credits rated AAA to AA?

Sir, on October 22 Gregory Meyer and Joe Rennison reported on FT’s front page “US regulators signal first moves to rein risks of high speed trading”. Timothy Massad, chairman of the Commodity Futures Trading Commission was quoted saying “he wanted to safeguard financial markets against algorithms going haywire” That is great, but who is going to guard financial markets from regulatory algorithms going haywire?

Anyone who dares to really enter and analyze the pillar of current bank regulations, the credit risk weighted capital requirements for banks, comes out not believing what he has seen.

For instance, in Basel II, a credit to the private sector rated AAA to AA was assigned a risk weight of 20 percent while a similar credit to someone rated BB- or less was assigned a 150 percent credit risk weight... meaning a 7.5 times higher capital requirements.

And I just ask, who, in his right mind, can believe credits rated BB- are more risky to the banking system than credits rated AAA to AA? Honestly, what could attract more excessive financial exposures?

@PerKurowski ©

How many ounces of gold richer am I?

Sir when reading Gregory Meyer and Henny Sender report that “Paulson starts gold fund amid record prices” November 19, and all of the rest noises or sounds on gold, I cannot but help questioning how long it is going to take before we ask our private investment bankers inform us not only of the returns produced in dollar or euro terms, but also of the returns measured in ounces of gold.