Should central bankers answer my questions, or are they better off ignoring these?

Gillian Tett writes: “A century ago…central bankers barely talked to the public. Montagu Norman, the Bank of England governor from 1920 to 1944, is thought to have said: “Never explain. Never excuse.” That was partly because bank chiefs did not expect ordinary mortals to understand finance. But they also believed aloof detachment increased their authority.” “Should central bankers engage with the public?” July 28.

Sir, consider that I have with all means, even begging journalists to ask the questions, not been able to get an answer on something that should be very much within the general area of interest and responsibilities of a central banker, namely bank regulations.

My questions are simple and straightforward.

Why do you think that the regulators think that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe? Could it be because regulators look at the risk of the assets of a bank, like bankers do, and do not look at the risk those assets could pose to the bank system, as regulators should do?

Why do you think that allowing banks to leverage differently their capital (equity) with assets based on different capital requirements, could not very dangerously distort the allocation of bank credit to the economy?

When are those European central bankers/regulators who assigned a 0% risk weight to Greece, going to be named and shamed, for dooming that nation to the so tragic consequences of excessive public debt?

Sir, “If Montagu Norman saw [my questions] what would he make of it all?”

Perhaps: “Never explain. Never excuse”, most especially when you have no explanation and you have no excuse?

@PerKurowski

The UK needs its banks to get rid of equity minimizing financial engineers and call back savvy loan officers (perhaps some like George Banks)

Sir, Martin Wolf writes he now “rather suspect”, that “the BoE’s views on risk weights might be leading to an economically unproductive focus on property lending”. “Labour’s productivity policy is a work in progress” July 13.

Banks are allowed to leverage more with what’s perceived, decreed or concocted as safe, like with mortgages, loans to sovereigns and AAA rated securities, than with what’s perceived as risky, like with loans to small and medium enterprises and to entrepreneurs.

That means clearly that banks are allowed to earn higher expected risk-adjusted returns on equity with “the safe” than with “the risky”; without any consideration given to the purpose for which the financing is to be used. In essence, regulators have decreed that “the safe” are worthier borrowers than “the risky”.

And of course, since risk taking is the oxygen of any development that is doomed to negatively affect the productivity of the economy.

Sir, I’ve written hundreds of letters to Mr. Wolf about “imprudent risk-aversion” for over more than a decade, and so of course I am glad he has reached the stage of “rather suspecting” all this is true. 

Wolf here refers to a report prepared for the Labour party by Graham Turner of GFC Economics that as a solution mentions, “the establishment of a “Strategic Investment Board” to deliver the government’s industrial strategy, use of the Royal Bank of Scotland to deliver lending to small and medium businesses and creation of an “Applied Sciences Investment Board” to deliver public sector financing of research and development.”

How can I convince Wolf that long before any statist Hugo Chavez like ideas that he still considers “half-baked” are tried out, we need to get rid of the distortions produced by the risk-weighted capital requirements for banks.

As Martin Wolf mentions, it could start with someone “wondering why securing financial stability is the only official aim for bank lending”; perhaps adding for emphasis the why on earth, in all bank regulations, there is not a single word of the purpose for banks beyond that of being safe mattresses into which to stash away cash.

But we could also question for instance BoE’s Mark Carney and Andy Haldane, on why they believe that what is made innocous by being perceived as risky, is more dangerous to the bank system than what is perceived as safe.

PS. On “the City of London being a global entrepot with little interest in promoting productive investment in the UK” I can only remind you and Wolf that could precisely be one of the reasons for why George Banks decided to quit banking and go fly kites instead 

@PerKurowski

FT whoever replaces Mark Carney at BoE, pray he knows more about life on Main Street… and is a bit wiser.

Sir, you write: “Central bankers should not be above criticism. But the idea that a central bank governor should be vilified for warning about disruption that he then helped to prevent is absurd”, “Carney asserts his authority at the BoE” November 2.

Indeed, but when a central banker is also part of the regulatory technocracy, as Carney being the current chair of the Financial Stability Board is, then anyone should have the right to criticize him if it is clear he does not know what he’s up to.

I have denounced what I believe to be many serious mistakes/confusions with the current risk weighted capital requirements. Let me here just reference one.

Basel II set a capital requirement for banks of 12% when lending to anything below BB- rated, but only one of 1.6% for anything rated AAA to AA. That mean regulators allowed banks to only leverage about 8 times to 1 their equity when lending to the below BB- rated but 62 times to 1 with AAA to AA rated assets.

Sir, if you think that reflects the real risks of bank crises to occur, then I must hold that you have never walked on Main Street.

Also, there are so many, even in the Financial Times, who argue that governments should take advantage of the very low interests on public debt in order to finance for instance big investments in infrastructure. Sir, those low “real” rates might be the highest real rates ever. Basel regulations subsidizes infallible 0% risk weighted sovereigns, at the dangerously high cost of causing banks to finance less the riskier 100% risk weighted SMEs and entrepreneurs, those who could provide us with our future incomes, and governments with its future tax revenues.

Sir, pray you get central bankers that are not solely desk- or knowledge bound, but that have some Main-Street experience and some wisdom too.

PS. Of course the same applies to other too. Like Mario Draghi and Stefan Ingves.

@PerKurowski