The direction into which banks go remains the same as the one before the crisis.

Martin Arnold, discussing the weakening of European banks when compared to the American quotes John Vickers, the former Chair of the UK's Independent Commission on Banking (ICB)with, “You had in effect a huge taxpayer-backed subsidy for risk-taking and that ended in tears. So pulling back from that is directionally a good thing” "How US banks took over the financial world", September 16.

Sir, do you see how little the world has learnt? The huge taxpayer-backed subsidy was not at all for risk-taking but for the excessive build up of exposures to what was perceived as safe, and against which regulators therefore allowed them to hold especially little capital.

“So pulling back from that is directionally a good thing” No! There has unfortunately not been any change in directions. By keeping the risk weighted capital requirements, the banks are still pushed towards what is perceived, decreed or can be concocted as safe, and away from what is perceived as risky.

The reason for it? The fact that the real causes of the bank crisis have been classified by those responsible for these, as something that shall not be named. And Sir, FT, sadly, is complicit in such cover up. In doing so FT, sadly, is absolutely not living up to its motto.

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

If regulators keep on regulating as bad as now, will it really help much to ringfence the banks?

Sir, you write: “By the start of 2019, Britain’s largest lenders will need to put their retail banking units inside a heavily capitalised subsidiary, protecting them in case the group fails.”, “Ringfencing will help in the next banking crisis”, January 10.

Do you really think that as long as government/tax-payers are not exposed to having to pay for a bank crisis, then its effects are smaller? If so, why did you not say so before lending support to governments and central banks, on behalf of unwilling or at least un-consulted taxpayers, with Tarp and QEs and similar paying out so much to alleviate the last crisis?

You refer to the Vickers Commission with admiration I do not share. In June 2015, in one of my thousands of ignored letters to you, when commenting on one of Martin Wolf articles I wrote: “The number one priority for any bank regulator, long before thinking about ring-fencing and similar “safety” devices, is to make sure the allocation of bank credit to the real economy is not distorted. To look for banks to be able to survive in shining armor in the midst of the rubbles of a destroyed economy is just insane.”

Sir, I’ve seen very little rectification coming out from bank regulators. Worse yet, the few correct movements they have done in moving towards simpler leverage ratios, because they kept in place some risk-weighting element, have in fact, on the margin, only increased the distortions in the allocation of bank credit to the real economy.

FT, in this matter of Basel’s bank regulations, you are so behind the curve. As is, I am almost tempted to say: “No ringfencing, let the banks run loose, with no supervision!”

@PerKurowski

The blindness of Financial Times (FT) to the most dangerous bank regulation blunder of all times is mindboggling

Sir I refer to your “Simplicity is the key to a resilient banking regime” February 17.

Therein you write about the need to “ensure that lenders have clear capacity, primarily in the form of equity capital, to absorb large losses if a crisis hits. Of course, this is a balancing act: regulators must weigh the benefits of more resilient banks against the higher costs of equity funding, which are likely to result in slightly higher borrowing costs in the real economy, constraining household and business borrowing.”

There it is, right in front of you. You accept that the level of bank equity carries costs, but yet you refuse to acknowledge that different levels of required equity for different borrowers, those which result from the risk weighted capital requirements, distorts the allocation of bank credit to the real economy. Why?

Also when you specifically mention that more bank capital would constrain “household and business borrowing.” you are ignoring that these “risky” borrowers are already much more constrained by the regulatory advantages awarded to other “safe” borrowers like sovereigns, the AAArisktocracy and housing finance.

You are absolutely correct in that “Setting the level of equity banks should hold is a judgment call” but, setting different levels of equity based on perceived risks already cleared for by banks, is a call that just shows a total lack of judgment.

And, to top it up, the current risk weighted capital requirements for banks only guarantee that when what ex ante has been perceived as very safe ex post turns out to be very risky, that banks will stand there very naked because of having especially little to cover themselves up with.

PS. Sir I don’t refer here to the discussion between John Vickers and Bank of England (Mark Carney), since for all practical purposes they are just as blind as you Sir.

@PerKurowski ©

What bank regulators do not yet understand and do not yet discuss, is truly scary stuff

Sir, John Vickers who chaired the Independent Commission on Banking (ICB) writes: “A central lesson of the crisis of 2008 was that banks had woefully inadequate equity capital” “The Bank of England must think again on systemic risk” February 15.

That is dangerously imprecise! The central lesson of the crisis was that banks had woefully little capital against assets that had ex ante been perceived or deemed very safe as a result of woefully wrong regulations.

The regulators allowed banks to hold much less equity against safe assets; which allowed banks to leverage much more their equity with safe assets; and which allowed banks to earn higher risk adjusted returns on equity on safe assets than on risky assets.

And the fact that regulators are still not able to comprehend that it is not their role to regulate based on what assets a bank has, but based on how banks manage those assets, is just scary.

And the fact that regulators are still not able to digest the truth that the assets that are really dangerous to the stability of the banking system are not the risky but those perceived as safe, is just scary.

And the fact that the distortions in the allocation of bank credit to the real economy that risk weighted capital requirements produces are not yet even discussed, is just scary.

@PerKurowski ©

You cannot ring-fence banks to live safe, in a vacuum, independent of the real economy.

Sir, Michael Barr and John Vickers argue that “Banks need far more structural reform to be safe” July 22, but as most navel gazing regulators, they seem to think banks could remain safe, as in a vacuum, effectively ring-fenced, independently of how the real economy is doing. Banks are more than some beautiful fishes to be looked at in an aquarium.

And in that respect, as long as ex-ante perceived risk of assets will allow for different capital requirements for the banks holding different assets, these will earn much different expected risk-adjusted earnings on their equity on different assets; which results in than the banks stand no chance of being able to efficiently allocate resources in the real economy; which results in that the real economy will falter; which will results in that banks, at the end of the day, are made unsafe, in a terminal way.

How on earth did we end up discussing bank lending ratios of 25 or 33 to 1?

Sir, Alistair Darling, the former UK chancellor of the exchequer, refers to the Vickers proposal of bank capital of 4 percent, a lending ratio of 25 to 1 and to George Osborne’s proposal o 3 percent, a lending ratio of 33 to 1. He also rightly “suspects” that a requirement to hold more capital is a far greater buffer against calamities than a ringfence. “In a crisis, it will take a firewall not a ringfence” February 5.

And I must ask, how on earth have we ended up discussing bank lending ratios of 25 or 33 to 1? Don’t we all realize these lending ratios are sheer lunacy? Even if a bank loans are solely to “the absolutely infallible”? What funny thing happened on the way here?

No! Banks need to hold more capital, I would say between 8 or 10 percent, and, if they don’t have that capital, then help them get it for Pete’s sake, by for instance introducing special tax-exemptions on dividends produced by any banks willing to hold a basic 8 or ten percent in capital against all its assets.

That would not only help to make our banks safer, it would also reduce the distortions produced by different capital requirements based on the perceived risk of the bank asset, and it could also lead to attract a new set of shareholders, like some widows and orphans, who would be willing to accept lower bank returns in exchange for a much lower risk.

Sir, the simple truth is that the real economy cannot afford paying off those speculative shareholders who could be attracted to banks allowed to leverage 25 to 1. It is as easy as that!

Mr. Martin Wolf think he´s understood the problem with risk-weighted bank capital. He has not!

Sir, Martin Wolf in “Two cheers for Britain´s banking reform plans” June 15, states that rejecting a general rise in bank equity “makes almost everything depend on risk-weighted capital: a fallible, even intellectually fraudulent, concept, as the Independent Commission on Banking´s final report”. And so one could think Mr. Wolf has now finally understood the problem with risk-weighted bank capital. Unfortunately, not yet! 

The ICB report states: “Risk-weighting has merit in principle but inevitable imperfections in practice. For example, the low risk weights attributed to some sovereign bonds have clearly been inconsistent with the market’s view of the likelihood of their default. So there is a strong case for capping total (un-weighted) leverage too, as a backstop.” And this basically means that ICB thinks the problem with the risk-weights is that these could be wrong. But that´s not it, it is much more intellectually fraudulent than that! 

The use of the risk-weights based on perceived risk is wrong even if the weights are perfect, even if they are consistent with the market views, because these perceived risks have already been cleared for by the banks (by means of the interest rate, amount exposed and other terms) and so forcing that risk perception to also affect the capital of a bank, dooms the banks to overdose on perceived risks. 

If you really want to have correct risk-weights for bank capital then these would have to be calculated based on how bankers react to perceived risks. And then, at least according to Mark Twain´s “a banker lends you the umbrella when sun shines and wants it back when it rains”, you might find instead a need for higher capital requirements for banks when the perceived risk of default of the borrower is low than for when the perceived risk is high.

The Vickers Report, like the Basel regulations, would benefit from defining the purpose of banks.

The current crisis was caused, almost entirely, by regulators arbitrarily setting risk-weights which allowed banks to lend or invest in sovereigns and what was triple-A rated with truly minuscule capital, 1.6 percent or less. As the Vickers Report keeps the notion of capital requirements based on risk-weighted assets, it does not protect against what it needs to protect.

Here is a question that I dare John Vickers and his colleagues to answer. Why should banks be allowed to leverage their capital more when earning their risk-adjusted-interest-rates from what ex-ante is perceived as the “not-risky”, than when earning these from the “risky”? Does that not mean that the “risky”, like the job creating small business or entrepreneurs, will then need to pay the banks higher interest rates than would otherwise have been the case without regulatory intervention? Or vice-versa that the “not-risky” will benefit from lower interest rates than the market rates? 

It is high time to stop thinking in terms of “buttressing the banks” and start thinking in terms of “buttressing the role of banks in the economy” For instance, is not the risk of an economy without jobs for our youth much riskier than having some banks failing?

Let banks capitalize on Darwinians benefits too

Sir, John Kay in “The nightmare of taking on “too big to fail” April 13, mentions that Britain’s Independent Banking Commission “has also recognized that the objective of regulation is not to prevent failure” Below how I phrased that in May 2003, when addressing some hundred regulators at a risk-management workshop at the World Bank.

“If the path to development is littered with bankruptcies, losses, tears, and tragedies, all framed within the human seesaw of one little step forward, and 0.99 steps back, why do we insist so much on excluding banking systems from capitalizing on the Darwinian benefits to be expected?

There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

Extracted from Voice and Noise 2006

Current banking regulations is a venomous potion for smal businesses

Sir, Vince Cable the UK Secretary of state for business, in “Private recovery is the only potion for growth” February 18, worries about “growth being undermined by costly, limited bank finance for smaller business”

Excuse me! Does the UK Secretary of state for business not know that limiting and making more expensive the finance for smaller businesses is a direct consequence of the subprime banking regulations that so odiously and regressively discriminates against perceived risks?

Does the UK Secretary of state for business not know that while banks are required to hold important levels of capital against lending to the small businesses, it needs to hold basically no capital at all when lending to the government?

What the UK Secretary of state for business should be doing is to protest the venomous regulatory potion that attempts against real private recovery… and not leave that to Sir John Vickers’ banking commission, which does probably not care one iota about small businesses.