Pray for a mea culpa by a bank regulator, or extract a confession from them by force (no waterboarding)

Sir, in “Europe must reset bank rules to restore faith”, February 14, Sony Kapoor writes “Five years into the crisis and it is still not clear where EU financial regulations are heading” and that “EU needs to reset its approach to financial reform” and suggesting “launching a high-powered public inquiry [to] help hold public officials and bankers to account so that public trust can restore”. 

Good luck with that! I have over a number of years, starting even before the crisis, in perhaps a hundred of venues, asked regulators some simple questions they refuse to answer. That they do because doing so would reveal the monstrous regulatory mistake they made when, thinking themselves able to be the risk managers of the world they created, especially in Basel II, their capital requirements for banks based on perceived risks, which is completely against common sense. 

The reform process is indeed paralyzed, especially when they now even begin to understand that their new concoction in Basel III, liquidity requirements also based on perceived risk, can only make things so much worse. 

What to do? Our best chance is finding a daring political leader that can pull out with force an answer from the regulators; the other possibility is that a courageous important regulator or ex-regulator, like for instance Mario Draghi steps forward with a strong mea culpa. Fat chance! 

As just one example of the unanswered question here is a link to a post in the IMF blog from August 2010.

And why are so distorting risk-averse risk-weights not even mentioned?

Sir, Patrick Jenkins gives his reasons for “Why the Liikanen bank regulatory reforms fall short” October 9. 

Of course those reforms fall short, but, what surprises me the most is that your bank editor does not even mention the fact that these reforms do not include eliminating the principal cause for the recent crisis, and the principle cause for why it is so hard to get our economies restarted. I refer of course to those risk-weights by which bank regulators (and bankers´ models) determine the effective capital requirements for banks, based on ex ante perceived risks. 

The Liikanen report writes a lot about these risk-weights needing to be more robust, but it does not mention the fact that these risk-weights, no matter how robust, distort the efficient resource allocation that banks are to carry out, by pushing the banks to lend excessively to the “not risky” and insufficiently to the “risky“. 

Could it be that Patrick Jenkins is unaware of these risk-weights or of how they work, or is he not allowed touching that issue that is seemingly so touchy to FT?

Poor small businesses and entrepreneurs of Europe who need access to bank credit in competitive terms

Sir, Martin Wolf writes that in Europe, bank assets in 2010 were 350 percent of GDP and holds that “Liikanen is at least a step forward for EU banks”, October 5. I totally disagree. 

When the banking sector is so important, it is even more important to make sure that there are no distortions in how it assigns its resources, and so, wasting precious time taking steps forward, without even mentioning the huge regulatory distortion which exists, less acting on it, is just as wrong as it can be. 

Wolf now agrees with “the skepticism on risk-weighting”, and now holds that “much higher un-weighted equity requirements are needed”. Though late, that is good. Unfortunately Wolf argues his support based on “given the experience of its limitations”, which means that had the crisis not erupted he would find no fault in a regulatory framework that is so fundamentally wrong.

Regulations with capital requirements which allow banks to leverage their equity 60 times and more with assets considered ex-ante as not risky, earning higher returns on equity, but only 12 times for normal banking assets like loans to small businesses and entrepreneurs because these are officially ex-ante considered “risky”, even though these assets have never ever caused a crisis, amounts to an unbelievable distortion of the economy. 

I read, in Wikipedia, that Martin Wolf was influenced by Friedrich Hayek’s “The road to serfdom”. Sadly it looks like he was not influenced enough so as to understand that allowing petty bank regulating bureaucrats, play risk managers for the world by assigning risk-weights, places us precisely on that road. 

In the foreword of “The road to serfdom” Hayek explains that he writes the book which will negatively affect his own personal life, “out of duty”, because the majority of economists have…been silenced by their official positions, and that in consequence public opinion on…problems is to an alarming extent guided by amateurs and cranks, by people who have an axe to grind or a pet panacea to sell. 

Well out of the same sense of duty, and of course also with personal sacrifices, I will endure in criticizing what I consider to be absolutely crazy bank regulations. Just to think how much more in interest rates to pay or lesser access to bank credit, the small European businesses and entrepreneurs will have to suffer, only because of these regulations, precisely when we most need them to create jobs, makes me cry. 

Please, for the time being, at least while European bank capital is rebuilt, half at least the capital requirements for banks when lending to the “risky”. That will never represent a risk superior than having the European banks lending excessively to what is officially perceived as “absolutely safe”.

FT, Liikanen, what is so great with avoiding the bank crisis of tomorrow, if our economies meanwhile have to die?

Making Europe´s banks safer, is a good but clearly insufficient objective, since you must also make them better in allocating efficiently resources. And in fact, the Liikanen Group, when established, included also the mandate to promote financial efficiency. 

But, on that, there is not a word in the Liikanen Report. And the truth is that you cannot achieve an efficient allocation of resources while some petty bank regulating bureaucrats persist in discriminating against what is perceived as “risky”. Sincerely, since those ex ante perceived as “risky” have never endangered banks, again I must wonder why the regulators seemingly hate them so much. 

And FT also eludes the issue of the need for efficient resource allocation completely, in “EU sets out vision for safer banking” October 4. 

What is so great with avoiding the banking crisis of tomorrow if the price for it is our economies crumbling? You also seem somehow to think that, as long as the taxpayers do not have to pay for the crisis, the crisis is ok and will not have serious consequences. FT, come on, take off the blinders!