Would adequate SIFIs’ designations have helped to avert the last crisis? Of course not!

Sir, I refer to Patrick Jenkin’s “MetLife ruling poses threat to drive towards global financial stability” April 5.

Jenkin sounds very much upset: “This is absurd. The FSOC — with its expert mandate and responsibility for “identifying risks and responding to emerging threats to financial stability” — is being torpedoed by an inexpert judge.”

Sir, you know I hold that the regulator, the Basel Committee and friends, was the real responsible for the crisis that errupted in 2007-08. Its risk weighted capital requirements for banks distorted the allocation of bank credit to the real economy, and allowed banks to leverage absurdly much on assets deemed, decreed or concocted as safe… and all this when history clearly shows that “safe” assets is precisely the stuff that big bank crises are made of.

Had the oversized exposures to AAA rated securities and sovereigns to Greece anything to do with what the regulators now tries to catch with their SIFI methodology? No is the simple answer.

In fact working on how to manage SIFI’s, keeps regulators from working on mending their own mistakes. And frankly I see no reason for Jenkins to deposit so much naïve faith in the expertise of FSOC or FSB or any other member of the regulatory logia.

He writes “The time may have come for the G20 to give the FSB proper statutory powers to ensure shortsighted political interests do not put the world on the road to financial ruin once more”

He should know that there is nothing as shortsighted as the risk weighted capital requirements. These have stopped the banks from financing the risky future and have them only refinancing the, for the very short term, safer past.

If anything Sir, I would wish for that “inexpert judge” to also look into whether the unauthorized discrimination against the access to bank credit of the “risky”, which is imbedded in that regulation, should really be allowed in the Home of the Brave.

It is high time the world starts to reflect on whether it really wants to allow an Ultra Important Regulator to introduce, as it wishes and thinks fit, dangerous systemic risks into the banking system.

The absolute minimum we must ask for is for the regulator to first give us its working definition of what is the purpose of our banks, so to see if we agree.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

Europe, the safety of your banks, though important, is only a subset of the safety of your real economy.

Sir, Wolfgang Münchau writes: “The wisest course of action is to appeal to those who are concerned about Europe’s declining influence, and who are open minded enough up to see the casual link between narrow-minded national economic dogmatism, poor economic performance, and declining geopolitical influence”, “Divisions behind a continent’s declining influence” September 15.

Indeed! But how hard it is for most to understand that possibly the narrow-minded national economic dogmatism that most causes poor economic performance, is the credit risk weighted capital requirements for banks

Not many decades ago, in Europe and elsewhere, banks decided what amount of credit to award to borrowers based on who offered to pay them the highest interest rates adjusted of course for perceived credit risk. And for the purposes of those decisions, the capital cost for the banks were the same for all borrowers. And that helped banks to allocate credit in the real economy to those who could produce the highest economic returns.

But then in July 1988 some besserwisser busybodies, in something know as the Basel Committee on Banking Supervision decided that banks needed to hold much less capital (equity) for some assets, because these were perceived as safe. 

And that meant of course that the banks would earn much higher credit risk adjusted returns on what was perceived as safe than on what was perceived as risky… and so the allocation of bank credit was not any longer based on who produced the highest return, but on who produced the highest return on capital (equity) adjusted for risk weights.

Simplified, initially safe assets were defined as: loans to (good) sovereigns, with a risk weight of 0 to 20%; “loans fully secured by mortgage on residential property that is or will be occupied by the borrower or that is rented” with a risk weight of 50%; and all other assets were given a risk weight of 100%.

In June 2004, with Basel II, all those other assets were awarded risk-weights between 20 and 150% depending on their credit ratings. And in Basel III the risk weighted capital requirements survive, though there is a minimum capital floor for the total of all assets, the leverage ratio.

And so, of course, banks are not longer allocating bank credit efficiently. In essence they are giving much too little credit to what is perceived as risky, which means financing too little future, while giving much too much credit to what is perceived as “absolutely safe” which in essence means mostly refinancing the past, and, under such circumstances it should be clear that Europe cannot go anywhere else but down.

Münchau correctly states: “It is only when you take a global view that you can spot what is wrong”. How sad then he is unable to take that global view which clearly indicates that the safety of banks, though important, is only a subset of the safety and sturdiness of the economy.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

By George I think FT’s got it: “A ship in harbor is safe, but that is not what ships are for” John A Shedd, 1850-1926.

Sir you write: “politicians… need banks to lend money and support economic growth (rather than inventing esoteric products to boost their bonuses). A bank that never takes any chances is not doing its job”, “Complicated banks face complex rules” August 8.

And so, are you finally waking up to the fact that banks have other purposes than not just going belly up and costing taxpayers some money? About time, why did it take you so long?

The regulators though still seem to be sleeping on it, as they insist with their risk-weighted capital requirements for banks… which are based exclusively on credit risks already cleared for by other means, and not having one iota to do with any lending money or economic growth purpose... much the contrary as these requirements profoundly distorts the allocation of bank credit.

As oaths come, a bank regulators´ is much more important than a bankers´.

Sir, Gary Silverman refers to the possibility of bankers, as masters of the universe, having to take an oath of office, “A cynic´s case for the bankers´ oath” August 1.

It could not hurt but, long before that it is more important that bank regulators take one… they are after all public servants… at least in concept.

What could be included in that oath? Perhaps the following could at least be a good start.

“I swear that regulating I will never forget banks have a purpose that goes way beyond guaranteeing their existence. In this respect I accept that helping banks to fail expeditiously, before they grow too large, is part of my responsibilities. I also swear that I will not believe myself to be a master of the universe, and for instance distort the allocation of bank credit through the use of credit risk weights that only very partially reflect the purpose of banks.

I also swear I will remember that all major bank crises have always resulted from excessive exposures to what was erroneously perceived as absolutely safe, so as to never confuse my own ex ante monsters with real ex post dangers”

121 words… too much? Then perhaps at this time, with lack of jobs menacing our children perhaps just having them quote John Augustus Shedd, 1850-1926, would do. “A ship in harbor is safe, but that is not what ships are for”

The collateral damage produced in the economy by faulty bank regulations, was mostly for the lack of a purpose.

Sir, Wolfgang Münchau writes “The west risks collateral damage by punishing Russia” July 28. That could be… but at least that would be the consequence of a purpose.

What is truly sad is to see that all collateral damage in the economy resulting from the distortions originated when favoring with ultra small capital requirements for banks assets perceived as absolutely safe, was more for the lack of a purpose.

John Augustus Shedd, 1850-1926 wrote “A ship in harbor is safe, but that is not what ships are for”

And though that clearly goes for banks too, that was something completely ignored by bank regulators.

Münchau writes “If you want to know how sanctions will affect the global economy, it is best to follow the money”. Indeed, and why does he not follow the money to understand where the global sanctions against the risky having access to bank credit took us? To lending too much to Greece? To investing too much in AAA-rated securities? To financing too much real estate in Spain? I believe so, but since he keeps so mum on it, what does he believe?

“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd, 1850-1926.

Sir, (and you other there) why is it so hard for FT and for regulators to understand that what applies to ships also applies to banks? 

The motto of the British Special Air service its “Who dares win”, and your own includes “Without fear”… and yet you find nothing wrong with regulators senselessly making banks avoid risks by allowing them dangerously immense leverages and therefore high risk-adjusted profits on what is ex ante perceived as “absolutely safe”… but which of course presents no absolute certainty about how it will turn out ex post.

The risk weighted capital requirements for banks has effectively destroyed the credit transmission mechanism to the real economy of the banks. Sir, why is that so hard to understand? 

FT, are you really proud of having your bank regulators turning your daring British banks into sissy banks?

PS. “Play the game for more than you can afford to lose… only then will you learn the game” so said also your very own Winston Churchill.