Little is as imprudent as the risk-adverse risk weighted capital requirements for banks.

Sir, Amar Bhidé writes: “Sweden’s Handelsbanken is an exemplar of prudence… The target loan loss ratio is zero; low loan losses, in turn, allow the bank to offer competitively priced loans and personalised service to creditworthy customers.” “Easy money is a dangerous cure for a debt hangover” August 17.

That is NOT exemplary prudence. “A target loan loss ratio of zero”… might allow “to offer competitively priced to creditworthy customers” but it will clearly not offer sufficient opportunities of credit to the not so creditworthy, which includes too many risky SMEs and entrepreneurs, those that could help provide the proteins the economy needs to move forward, in order not to stall and fall.

The truth is that in the medium and the long term, the creditworthy are more benefited by the banks taking more risks on the not creditworthy, than by just getting low priced loans.

However Bhidé also qualified it with: “prudent case-by-case lending also undermines the stimulative effect of the loose money unleashed by central bankers [because] Experienced financiers will not lend more to less worthy borrowers simply because of low or negative interest rate policies.”

Yes, indeed, but much more undermining of the stimulative effect of loose money is caused by the risk weighted capital requirements for banks… those which require Handelsbanken to hold more equity when lending to someone perceived risky, than when lending to someone perceived safe. Those that result in Handelsbanken earning higher expected risk adjusted returns on equity when lending to someone perceived, decreed or concocted as safe, than when lending to someone perceived as risky. Those that cause “small and medium-sized businesses have been left behind”.

Bhidé opines: “What the Fed and other central bankers can — and should — be held responsible for is prudent lending by banks”

Absolutely, I totally agree! But “prudent lending” means guaranteeing the economy sufficient risk taking by the banks; and knowing that, contrary to what current regulators believe, major bank crises are never caused by excessive exposures to something perceived risky, these are always caused by excessive exposures to something perceived as safe when placed on their balance sheets.

Sir, Handelsbanken is a Swedish bank, somehow it seems to have completely forgotten that in Swedish churches we all sang “God make us daring!”

PS. Bhidé writes that central bankers “base their assessment of risks, and of what would have happened without their intervention, on models whose mathematical sophistication hides a primitive representation of finance and the economy.” 

That is correct. In October 2004, as an Executive Director of the World Bank, I formally warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.” Sir, how many spoke out that clear at that time?

@PerKurowski ©

Pär Boman, at the end of the day, your children and grandchildren, and your nation, are your most important customers

Sir, Andrew Hill refers to that the chief executive of Handelsbanken told the “FT in 2013 that he had studied 5,000 years of credit risk, while the bank draws on minutes of board meetings from the past 140 years to inform its attitude to customer loans and business cycle”, “Creative forces”, “Boldness in business” March 20.

What a splendid occasion that would have been to ask Pär Boman whether in all that information, he had found any sort of evidence supporting that bank regulators should require banks to hold more equity against what is from a credit point of view perceived as risky from, than against what is perceived as absolutely safe.

That as you know Sir, has in my opinion introduced the most serious disruptive distortion in the allocation of bank credit to the real economy.

Unfortunately, in “Customers first”, Richard Milne later reports that Boman opines: “I don’t think it’s our role to have an opinion on whether the democratic system has taken the right or wrong decision. We see regulation more as a signal system from parliament on how we want banks to behave”.

That’s a shame. My opinion is that it is precisely persons like Pär Boman who owe their customers’ society, the duty to speak out if they feel signals provided by regulations could be taking banks down the wrong route.

Richard Milne quotes Boman in that the “main lesson [from] the 140 years of board minutes that lie in the basement… is that about every 17 years there is a financial crisis.”

That could be… but another lesson that should be extracted from that data is when did banks do the most for their nation between crisis and crisis… and I doubt the answer to that would be… “When we took no risks.”

On the web I find that Pär Boman has three kids… and one of this days he might have grandchildren too. He should never forget that, at the end of the day, they and his nation are his most important customers. And I am absolutely sure they do not need regulators like the Basel Committee and the Financial Stability Board to infuse their banks with dumb credit-risk aversion. That is no way how to finance their future. 

And Andrew Hill and Richard Milne, your duty, that is to press Pär Boman and others to speak out.

God make us daring!

@PerKurowski

Now is not the right time for European banks to make payouts to their shareholders.

Sir, Richard Milne reports “Shareholders press Swedish banks for payouts”, October 25.

According to recent indications from the Basel Committee, banks will have to publish their leverage ratios in January 2015, which means that their un-weighted assets to capital ratios will be seen.

If European bank shareholders only knew how important, for the competitive strength of their banks, it will be to then be able show up strong ratios, in the midst of that market panic that could result from unveiling the scary truths, they would not be asking for any payouts now.

Some questions on bankers’ doubts

Sir, I refer to Richard Milne’s interview of Pär Boman, the chief executive officer of Handelsbanken titled “The back-to-the-future banker” January 14.

In it Mr. Boman recounts that having been offered some triple-A rated mortgage backed securities by some US investments banks, Handelsbanken executives, led by him, visited the bankers in New York and asked to see the underlying documentation of the mortgages. And when that proved not to be possible, he went to the west coast and visited some of the houses used in the bonds, and from which he reached the conclusion of “it was very clearly nothing for us”.

Yes clearly that was a great job by Mr. Boman and he should be commended for having doubted. But that said it would be very interesting hearing his opinions on the following:

When presented with operations which involve triple-A ratings, at what size of potential exposure and to what extent of additional not recoverable research costs, is a banker supposed to doubt the validity of the credit ratings?

If it is possible to doubt the quality of the ratings what does that say about the quality of the regulators who with Basel II allowed banks to hold those same securities Boman so wisely rejected, against only 1.6 percent in capital, and thereby allowing bank equity to leverage 62.5 times to 1.

And if a bank discovers great reasons to doubt a credit rating, what is their responsibility in terms of communicating their doubts to the market and to the regulators?

And what is a bank to do if the doubting also extends to the supposedly infallible sovereigns... the paymasters of its regulator?

Ultra-loose monetary policy distorts but, in that category, the title goes to capital requirements based on perceived risks

Sir, John Plender is indeed bringing up an interesting point in that ultra-loose monetary policy carries with it the possibility of maintaining, alive and sort of kicking, zombie companies that should otherwise and best disappear; and this prevents an effective resource allocation “UK economic growth hobbled by overambitious banks” November 21, and “Japan counts ‘zombie’ cost of easy money” November 6.

That said, and in the category of financial distortions, the title clearly must go to the capital requirements for banks based on perceived risk.

Just as an appetizer consider that the better information banks have, such as those Plender mentions Andy Haldane points to, “a shared utility, storing client accounts details”, the more this information will be adequately cleared for by the banks, and so the lesser the need to have that risk information also reflected in the capital requirements.

By the way it was interesting reading about the way by which Handelsbanken was entering Britain, since a couple of months ago I described a bank that I would be interested investing in, in the following way:

“As an investor in a bank, the first thing I want from it is to dedicate itself exclusively to lending to what is officially considered as “risky”, like small business and entrepreneurs, and for which the bank is required to have capital... meaning that I, as a shareholder, count. 

And I abhor my bank to lend to anything that is officially considered as “absolutely safe” for the following reasons:

a.- It probably means the bank will be less careful.

b.-They can do so with much less bank capital and so therefore I, as a shareholder, become less important.

c.- It is only in what is considered as absolutely not-risky that the banks can build up exposures that can lead me to lose all my investment.

d.-If I want to invest in something perceived as “absolutely not risky”, I do not need a bank for that... anyone can read a credit rating (and save himself some banker’s bonuses)