Way too many have kept busier defeating Brexit than saving Britain, come what may.

Sir, Philip Stafford writes “City executives describe the EU’s no-deal plans as a ‘nakedly political’ grab for London’s business” “Tail risk” April 9.

Alex Barker in “Barnier vs the Brits” FT already in November 2011, wrote about the fears of Sir Mervin King held about that some Brussels reforms would reshape a vital British industry, banking, to the benefit of eurozone rivals. 

Specifically Barker mentioned: “Underlying the alarm in London is a more visceral fear: that Mr Barnier’s backers on the mainland are using this regulatory marathon to sap London’s strength as Europe’s pre-eminent financial centre.”

And that was when Michel Barnier was only the “European internal market commissioner – a perch giving him oversight of the continent’s financial industry. Arguably, no European Union job is of more consequence for the UK.”

Well yes, there was. Now Michel Barnier, since December 2016, is the European Chief Negotiator for the United Kingdom Exiting the European Union, a job with even more consequence for the UK.

Given the previous rough relationship between Britain and Monsieur Barnier, one could have made a very well argued case that his appointment served no one well. And I am sure many EU nations would have understood that.

As a friend of Britain, I have one way or other argued the previous on several occasions, but with no luck. I believe that is because way too many were kept too interested in just defeating Brexit and so, to try for a better Brexit, did not fit their plans.

https://teawithft.blogspot.com/2017/03/is-michel-barnier-really-sure-about.html

https://teawithft.blogspot.com/2017/07/european-citizens-must-solve-brexit.html

https://teawithft.blogspot.com/2017/07/should-not-mr-michel-barnier-negotiator.html

https://teawithft.blogspot.com/2018/04/what-kind-of-tariffs-is-protectionist.html

@PerKurowski

Brexit is sure a bad idea, but how can you be sure Remain is not even a worse one?

Sir, Alex Barker and Jim Brunsden quote Catherine Barnard, a professor of EU law at Cambridge university: “Never before has a treaty been constructed of this kind,” “The EU is a unique organization. What the Brexit process has revealed is just how deep the integration is in reality.” “Accord leaves Britain bound to Brussels” November 16.

On the first, indeed, to for instance adopt a Euro in order to push forward a union instead of letting a union produce a common currency, is a truly strange way to construct a union.

But, on the second “how deep the integration is in reality” I beg to differ. Having a member like Greece walk the plank, especially as EU authorities were most to blame for its problems, is not the doings of a real deep union.

Sir, let me refer to a speech delivered by Mario Draghi, President of the ECB, at the Frankfurt European Banking Congress, given today, “The outlook for the euro area economy”. 

It concluded with: “I want to emphasize how completing Economic and Monetary Union has become more urgent over time not less urgent – and not only for the economic reasoning that has always underpinned my remarks, but also to preserve our European construction.”

I agree, because as is, Italy will not walk the plank as Greece did, and that could bring on the end of the euro, as we now know it, which could bring an end to the European Union, as we know now it, or, clearer yet, as we perhaps really don’t know it.

Sir, whether Brexit or Remain supporters, does not Britain (and all other UE members) have the right to know what “completing Economic and Monetary Union” to “preserve EU our European construction”, which Draghi urges really entails?

Draghi also mentioned “as urgent as the first steps were in euro area crisis management seven years ago”, “The completion of the banking union in all its dimensions, including risk reduction, and the start of the capital markets union through implementing all ongoing initiatives by 2019”

Sir, does not Britain, a nation where banking means so much, have the right to know exactly what that entails so that it banks are not castrated in the process?It is not just me a foreigner asking. Let me remind you that seven years ago, Alex Barker in [Mr. Brexit Negotiator] “Barnier vs. the Brits” wrote about the fears of Sir Mervin King that Brussels reforms would reshape a vital British industry, banking, to the benefit of eurozone rivals.

Draghi also said: “Household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth.” 

That is an untrue statement. A much truer one would be: “Household net worth remains very fragile since it rides almost exclusively on rising house prices, as a consequence of the distortion produced by too much and too favorable financing being offered for the purchase of houses. A distortion that helped to anticipate much of the consumption we have seen, but that will come back and hurt house owners, whether by house prices falling, or hurt everyone, by inflation eroding our real consumption power.

Sir, when that happens, and the crisis needs to be managed so as to impede the destruction of all social cohesion, would you prefer to do that on a national level, instead of on the level of a union in which very few know how to sing its anthem?

Sir, I’m no one to give a recommendation but, should not the Brexit vs. Remain discussions refer more fundamentally to the future of Britain and of EU, instead of being turned into another profitable venture for some opportunistic polarization profiteers?

Should not FT inform its readers, in a much more balanced way, of all challenges that lay ahead, not only those of a Brexit but also those of a Remain?

A long time friend and admirer of Britain 

@PerKurowski

Why would some not participate in needed societal risk taking, but have right to unimpeachably safe liquid assets?

Martin Wolf writes: “The most important purpose of money is to serve as a safe source of purchasing power in an uncertain world.”, "Why banking remains far too undercapitalised for comfort" September 22. 

I am not sure that means to allocate bank credit efficiently to the real economy, but if it does then I agree.

But that purpose was absolutely absent from regulators’ minds when, because of an insane risk aversion, they decided to allow banks leverage much more the capital required by regulations when lending to “the safe”, than when lending to “the risky”.

The result was henceforth that banks would be able to earn higher risk adjusted returns on equity while lending to the safe than when lending to the risky. That, which allowed bankers to realize some wet dreams and big bonuses, completely hindered banks from fulfilling their purpose.

We read: banks “remain highly undercapitalised, relative to the risks they bear.” That is a misleading statement. Banks remain highly undercapitalized relative to the risks of the assets considered by regulators to be safe, is a more correct way to describe the reality.

Wolf holds: “This system is designed to fail” Of course it is. To allow banks to hold less capital against those assets that have always provoked major bank crises, namely those ex ante perceived as safe, cannot but result in making the failures even more dangerous.

The truth is that current bank regulators are too inept for comfort.

Wolf also refers to all “these proposals try to separate the risk-taking from the public’s holdings of unimpeachably safe liquid assets”

To me such proposals are the product of obnoxious social/financial engineering mindsets.

Unless we limit it to perhaps the value of one year’s median salary, why on earth should the public have the right to unimpeachably safe liquid assets… and why on earth should it not have the right, and the duty, to participate in the risk taking a society needs to move forward?

And just the expectation of “unimpeachably safe liquid assets” introduces a huge systemic error.

To follow that recipe, in an economy depressed by lack of risk taking, would have the remaining risk takers end up with all the negative interests earned by the risk avoiders… talk about putting inequality on steroids and feeding lines to populists.

No way Martin Wolf, that is not the way my western world got to where it is… that is not the road I want my world to take for my grandchildren.

Am I opposed to higher bank equity? Of course no, though I do not feel that much more than ten percent is needed… as long as it is ten percent for all… sovereigns, AAA rated and housing finance included.

To require 20%, a leverage of five to one, while leaving in place any kind of risk weighting adjustments, could just worsen current distortions.

PS. Wolf refers to Mervin Kings book “The end of alchemy” but that book had nothing to say about “the alchemy of risk-weighting” to which he now refers to, and about which I have written hundreds of letters to him over the years.

@PerKurowski 

The obsessed

Regulators, your risk management, need to start by asking: What risks can we not afford the banks not to take?

Sir, I refer to Martin Wolf’s “Central banks as pawnbrokers of last resort”, in which he discusses Mervyn King’s suggestions as expressed in the book “The End of Alchemy”.

Again, falling sparrow included, Wolf’s and King’s primary, almost only objective, is to make banks safe, referring to the back room what many of us would consider a banks primary social purpose, that of allocating credit efficiently to the real economy.

They might defend a “leverage ratio”, but that is solely out of bank safety concerns, and not out of any sort of concerns that the current risk weighted capital requirements for banks hugely distorts the allocation of credit.

Wolf writes: The new improved safer banks would hold “Reserves at the central bank plus the agreed collateral value of any other assets [that] should match institution’s liquid liabilities, defined as loans of a year’s maturity or less”.

Where would the Western world be if its banks had always been required to hold after haircut collateral against all its liquid liabilities?

Also since regulators would certainly assign to the governments the lowest haircuts, they would not dare doing elsewise, it would mean that all “liquid liabilities” will basically fund the government.

Don’t we already have had enough of that statism that is reflected in the risk weight for sovereigns being zero percent, while the risk weight of the citizens that give the sovereigns it strength is 100 percent?

And speaking about the haircutters, don’t we have had enough with regulators who assign to those prime rated AAA to AA a 20% risk weight, while those who are rated speculative and worse below BB-, and are therefore totally innocuous, are given a risk weight of 150%?

Sir, I don't think central bankers could survive as pawnbrokers. Its a too competitive business… I can see them being gamed and getting stuck with a lot of “valuable” possessions worth nothing.

Martin Wolf writes that King’s “ideas deserve open-minded consideration”. Of course they do! But can we please, for once, begin by discussing the need for all borrowers to have equal fair access to bank credit? That which has nothing to do with the riskier being charged higher interests and getting smaller loans, but with the loans to the “riskier” generating higher capital requirements for the banks or, in this case, receiving higher haircuts as collaterals.

The risk we can least afford our banks to take, is that of these not financing the riskier future but only refinancing the safer past; is that of only supplying carb credits to the real economy and not the protein rich loans to SMEs and entrepreneurs.

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

@PerKurowski ©

Mervyn King, for bank regulators to use the expected, as a direct proxy for the unexpected was, and is, radically dumb

Sir, John Plender, March 3, reviewed Mervyn King’s book “The End of Alchemy: Money, Banking and the Future of the Global Economy" And in doing so Plender writes that King argues that in a world of what economists now call “radical uncertainty”, it is not always possible to compute the expected utility of any action. There is simply no way of identifying the probabilities of all future events and no set of economist’s equations that describe people’s attempts to cope with that uncertainty.”

And according to Plender, King proposes a “central bankerly pawnbroking” facility to supply “liquidity, or emergency money, within a framework that eliminates the incentive for bank runs… That would displace what King regards as a flawed risk-weighted capital regime ill-suited to addressing radical uncertainty.”

And John Kay ends his discussion of King’s book with: “There is a world of difference between low-probability events drawn from the tail of a known statistical distribution and extreme events that happen but had not previously been imagined”, “The enduring certainty of radical uncertainty”, April 6.

Hold it there has all that really anything to do with the current risk weighted capital requirements for banks? Absolutely not!

What happened was that since the regulators did not know how to estimate the unexpected losses, those that bank capital is foremost to safeguard agains, they went out and used the expected credit risks. And since those risk were already cleared for by banks, with interest rates and the size of exposures, credit risks, when also used to set capital requirements, were given too much consideration.

And, for the umpteenth time: any risk, even if perfectly perceived leads to wrong actions if excessively considered.

And Plender also wrote about King arguing: “Banks satisfied investors’ desperate search for income by creating increasingly complex and risky financial products based chiefly on mortgage debt. Bank balance sheets grew explosively as property lending ballooned. At the same time, the capital of banks shrank as they took on more risk.

Again that is not really so! The increasingly complex and risky financial products chosen were entirely based on that these could be argued to be very safe, and therefore require banks to hold less capital. For instance mortgage debt would never ever have exploded as it did, if instead of receiving a 35 percent risk weight, it had the 100 percent risk weight assigned to “risky” SMEs and entrepreneurs.

And Plender also wrote about King arguing: “They were trapped by what game theorists call a prisoner’s dilemma. If they retreated from riskier lending and trading strategies while reducing their borrowings, a decline in short-term profits relative to their competitors would have caused staff to defect in pursuit of higher bonuses elsewhere and prompted calls for the chief executive’s head.”

Those “short tem profits” are not some absolute profits, but returns on equity, and so banks, searching for the highest profits, naturally favored those exposures that provided the highest expected risk adjusted returns on equity, in other words those that could be most leveraged.

Sir, I have no respect for a regulator like Mervyn King. He and all his colleagues decided to regulate banks without defining their purpose. Had they done so they would have known, that the most important social purpose of banks is to allocate credit efficiently to the real economy.

Now our banks do not finance the riskier future they just refinance the, for the short time being, safer past.

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

I can understand journalists covering the reputation of old friends… but is that really their role and duty? “Without fear and without favor”… Hah!

@PerKurowski ©

Dumb regulators are much more dangerous to the real economy than banks

Sir, let alone, without regulations, banks would take on assets based on which of these produces them the highest expected marginal risk and cost adjusted return on equity, as long as that return is over their marginal cost of capital… and that was how bank credit was allocated efficiently in the real economy.

Now they don’t. Now they take on assets based on which produces them the highest expected marginal risk and cost adjusted return on whatever equity they are required to hold for that specific asset, as long as it is over their marginal cost of capital...and that means that different assets are not treated equally by the market clearing mechanism… and that means that bank credit is not allocated efficiently in the real economy.

And that is why Chris Giles is wrong when writing “Britain’s banks are still a danger to the real economy” June 20, and leaving out the dangers of faulty regulations. Truth is that much more dangerous to the real economy than the banks, no matter a Sir Mervin King’s good intentions to “protect the economy from the banks rather than the banks from the economy” are the regulators who do not understand how their regulations distort.

PS. Sir, there are some very good regulators out there (I know of at least two, one in the US and one in the UK) and they are facing the horrendous difficulty of having to explain to their colleagues what is wrong, when the explanation on its own, implies that their colleagues have been lunatics.

Martin Wolf, what if Sir Mervyn King had been an engineer and a bridge he helped design had collapsed?

Sir, retiring bank regulator Sir Mervyn King explains: “I think what went wrong with regulation in the period running up to the crisis was that there weren’t any obvious problems with the banks in the sense that no one was coming to the central bank for money and none was failing. So it was very hard for anyone to argue that prudential supervision was at the heart of regulation”; and his lunch companion journalist Martin Wolf kindly comforts him with a: “I say that almost nobody thought that a failure of the British banking system on the scale we have experienced was possible”, Lunch with the FT Sir Mervyn King”, ‘I’m going to miss it enormously’, June 15.

Sir, if Sir Mervyn King had been one of the members of a group of engineers who designed a massive bridge system which had later collapsed, and caused the death of millions, would this journalistic endeavor really have been acceptable to you? 

Of course bridges and banks are not the same, but do you really think our world can afford this type of lack of accountability? No wonder the Basel Committee goes on as if nothing has happened and their bank regulation only needs some tweaking here and there.

I must say though that when Martin Wolf advances the idea so dear to him that “if people are happy to lend to the government, at negative real interest rates, the government should borrow and build something” it speaks very well of him that he clearly records Sir Mervyn King's resistance: “I’m always struck when I speak to not just ministers but people who work in the Treasury that it is actually quite difficult to produce the investment projects. It’s very easy to spend money but in a way that maybe doesn’t add to the real gross domestic product.”

For the health of our banks, much more important than more capital, is less capital distortion by the regulator

Sir, Tom Braithwaite writes that “Regulators will have to be watchful that banks do not dream up new risky products that evade high charges… but… safer businesses such as advisory work or retail brokerage are being preferred because they are ‘capital light’ and hence good for overall ROE”, “Quest for profit in high-capital world can make bank safer” February 19.

Is advisory work or retail brokerage what our banks should all be about now? What about their vital function of helping to allocate economic resources efficiently? Tom Braithwaite might have a job, for now, but what about those millions of unemployed counting on banks to finance those who could create jobs?

And Braithwaite ignores that dreaming up new risky functions to evade high charges and obtain high ROE has been made a competitive necessity, by the sheer fact that the regulators allow there to be some “capital light” pockets.

I have not read The Bankers New Clothes by Anat Admati and Martin Hellwig, yet, but if it holds that “Bank’s obsession with return on equity is at the root of the problem…this makes the whole system more fragile”, would that not precisely indicate the dangers of capital requirements which, quite arbitrarily, allow some bank bets to make a larger ROE than others? If a regulator I would for instance much prefer banks having diversified exposures to “The Risky” than having to trust the infallibility of some monumentally large exposures to “The Infallible”.

And, if that is not in the book, then I must say that Sir Mervyn King unfortunately still does not understand “what is wrong with banks and what needs to be done to make them safe”. Yes, more capital is needed, but that capital should primarily be required as a result of eliminating differences in capital requirements, and not feeding these.

“There is far more capital in the banking system than there was in 2007” it is written. That could indeed be true, I do not have the figures, but it could also be a very devious half-truth, if the increase in capital is just the result from banks exiting “capital heavy” in order to, quite dangerously, overpopulate some “capital light” pockets.

Defeatism you can really write home about

Sir, Chris Giles, in “Why Sir Mervyn has taken a walk on the supply side” January 24, considers going for more “supply side” economics and abandoning “demand side” stimulus as something “too defeatist. Frankly, he has no idea of what real defeatism is. 

Mark Twain said “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”. The capital requirements for banks based on perceived risk imposed by the Basel Committee's bank regulators only makes real sure that bankers will be ever so more anxious to lend you the umbrella when the sun is shining, and immensely faster to demand its return, as soon there is the slightest indication that it could possibly rain.

And that my friend, that is defeatism you really can write home about.

Basel keeps tightening the noose around the neck of “The Risky and Excluded”, and thereby killing the real economy.

Sir, Brooke Masters, FT’s chief regulation correspondent, reports on January 6 that “Banks win more flexible rules” with respect to the assets that might count towards the liquid coverage ratio LCR, and that “the results are largely good news for bank profits because institutions will be allowed to count more, higher-yielding assets in their liquidity buffers”. 

What no one seems to care one iota about is that the more you widen the definitions of “The Infallible and Included”, by allowing  banks to  lend to them against ultra low capital requirements, and including them in these liquidity requirements, the more you will tighten the rope around the necks of “The Risky and Excluded”, primarily all those small, medium sized business and entrepreneurs with no ratings or not so good ratings, but whose access to bank credit is still vital for the strength and sturdiness of our real economies. 

Indeed these bank regulators are as dangerous as they can be. For instance, Sir Mervyn King, called the agreement “a very significant achievement [and] a clear commitment to insure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort.”; as if the lack of liquid assets, and not the lack of good assets, was the fundamental problem. 

What was the primary cause of the current crisis? That all the investments in triple-A rated securities backed with lousily awarded mortgages to the subprime sector in the US, or the huge loans to sovereigns like Greece were not sufficiently liquid, or that they were outright bad? No doubt the later! 

And why did these assets become so bad? Simply because the bank regulators whetted too much the appetite of the banks for this type of assets.

When are we going to parade these Basel regulators down Fifth Avenue wearing their well earned cones of shame and as we must do?

Never forget that in the real economy, the existence of favorable conditions, like access to bank credit,  is much more important for “The Risky” than for “The Infallible”

Regulators bully banks, banks bully “The Risky”, and “The Infallible”, they just have a blast.

Sir, Brooke Masters, Claire Jones and Patrick Jenkins report “Big banks’ capital needs under microscope” November 30. 

"Regulators suspect banks have understated possible losses and need a 'material' amount of extra capital"

Of course I favor more capital in the banks, at least for their exposures to ‘The Infallible”, which are seriously under-capitalized as a result of overly generous capital requirements. 

But what regulators must remember is that while different capital requirements for different assets exists, their pressures on banks to increase their capital, will be mostly felt by those who generate the largest capital requirements, namely “The Risky”, like small business and entrepreneurs. 

Regulators bully banks, banks bully “The Risky”, the small businesses and entrepreneurs, and “The Infallible”, sovereigns and triple-A ,they just have a blast getting even more bank funds at even lower interest rates.

PS. Could these type of capital adjustments not trigger the conversion into zero clause of Barclays' recent $3bn contingent capital notes deal?   

The Martin Wolf Inconsistency

Sir, Martin Wolf ask for “Radical policies for rebalancing Britain’s economy” November 2. In it he again favors the government to be less austere, “the case for a reconsideration of fiscal policy remains strong” and the banking sector, even though loans have contracted immensely, to be more restricted, “the case for much lower leverage is far stronger than in normal times”. Why the inconsistency? The only explanation possible is that Wolf is a firm believer that government spending allocates the resources with more economic efficiency than what banks with their credits can do. 

And yes, in many ways Wolf is correct, because regulators, by means of their capital requirements for banks based on ex ante perceived risk, exerted so much influence favoring “The Infallible” and thereby discriminating against “The Risky”, that the banks have indeed not allocated their credits in an economic efficient way. But, the solution for that should be less government intervention, not more! 

“Rebalancing?” Yes! But, Sir Mervyn King, how about rebalancing first between “The Infallible” and “The Risky”?

In this respect, for the umpteenth time, Wolf would say “monotonously”, I hold that one of the most important challenges for the UK, Europe and America, is to work themselves out of that silly bank regulatory risk-aversion, which caused and causes the banks to dangerously overpopulate safe-havens and, equally dangerous, at least for the society and the economy, to under exploit the more risky but more productive bays, like small businesses and entrepreneurs. 

Martin Wolf, when he writes “Equity targets [for banks] should be set in pounds”, and although he probably loathes admitting it, shows that he finally begins to understand how the capital requirements for banks perceived on risk distorted the economy,. 

Unfortunately, to get rid of those distortions is not as easy as Wolf would like it to be, in order for that issue to go away fast. You simply cannot attract the so much needed new bank equity, by introducing prohibitions to pay dividends subjectively set by regulators. You need to design a credible transition plan so that any new bank investor knows what he can expect tomorrow. And, to do that, you need to put at work fresh regulatory minds not encumbered by past mistakes. 

And so, before messing with tools like depreciating a currency (buying foreign low-risk assets?), in a world were so many currencies wish for depreciation, I suggest that UK, America and Europe draw up a careful plan, acceptable to future bank investors, for how to allow the banks again to take a chance on “The Risky”, those that in truth made the UK, Europe and America what they are. 

To me that plan should pursue making banking more of a safer and lower rate of returns utility, and so able to attract more widows and orphans like funds. For the rest of the economy to prosper, we must make banks be a lower returns affair.

When accessing bank credit some players are allowed five strikes while others only one

Sir, Robin Harding writes about Ben Bernanke and Sir Mervyn King being great fanatics of baseball and cricket respectively “Central bankers are right to take up the bat and ball” October 27. 

I do not know about cricket but, the current capital requirements, based on ex-ante perceived risks, one or the pillar of current bank regulations, would, if translated to baseball, signify the following: 

A batter who is perceived by one of the few authorized batting rating agencies as an extremely good batter, a Babe Ruth, one of “The Infallible”, the AAA rated, sovereigns like Greece, would be allowed five strikes instead of the ordinary three before he is called out, and, lousy batters like me, and perhaps like you, “The Risky”, the small businesses and entrepreneurs, would be called out after just one single strike. 

And let me assure you that would not do baseball, or us, any good, just as that has not done our banking system, and "The Risky" any good. And so let us at least make certain that when Bernanke leaves his post, he does not go into regulating baseball.

When will FT be able to speak out on bank regulations and regulators “without fear and without favour”?

Sir, in your “Sobering lessons from the Old Lady” October 25, you refer to Sir Mervin King the governor of Bank of England mentioning that “The UK banking system still has too little capital effectively to channel the BoE’s stimulus to households and businesses? Sincerely, whose fault is that? 

I truly find it hard to understand how a paper that promotes itself as “Without fear and without favor” does not have it in itself the courage to call out the silliness of such a statement. Is it not so that those capital requirements for banks based on perceived risk, and of which Sir Mervin King must have been approving of, force, especially in times of scarce bank capital, the banks to lend to “The Infallible”, for which lending little capital is required, and to avoid, lending to “The Risky”, for which much more bank capital is required. 

Had Sir Mervin King understood what he and his regulator colleagues did, they would, long ago, have at least temporarily reduced the capital requirements for banks when lending to “The Risky”. 

You end by mentioning “there is no way around the structural shift from an economy powered by credit to one built on investment”. Do you not understand that requires a total different view about risk-taking? Like one of “Risk is good!”

FT, you´ve forgotten that unencumbered risk taking brought you the banks (and your Britain) to be proud of.

Sir, in “Reforming British banking after Libor” July 25, you, like seemingly Lord Turner and Sir Mervyn King too, show yourself unable to understand that you would never ever have had any British banks to be proud about, or even perhaps a Britain to be proud of either for that matter, if your banks had had to operate with regulatory bank capital requirements based on perceived risks, based on risk-adverseness. 

All banks that have grown to be important have always been allowed to manage their risks unencumbered, without some silly meddling nanny regulator assigning risk-weights for them.

There’s also a need for a profound change in the culture of regulations

Sir, Sir Mervyn King, the Bank of England Governor lashes out with “From excessive compensation to deceitful manipulation of one of the most important rates, we can see we need a change in the culture of the industry”. Sorry, as a regulator he is not really one to speak about the need for a culture change.

Only because of the capital requirements based on perceived risks, the regulators caused the banks to charge hundred and so basic points in higher interest to those perceived as “risky”, like small businesses and entrepreneurs, and hundred and so basic points in lower interest to those perceived as not risky, like infallible sovereigns. If that is not manipulation of the most important rates, I do not know what that is.

And besides, most of the excessive compensations to bankers arose from the fact that regulators freed the bankers from having to compensate shareholders by requiring so little bank equity. By the way, on that issue, it might be better for Sir Mervyn King to lie low, because there could be calls for claw-backs on all types of compensation.

Mr. Sir Mervyn King and Mr. George Osborne, here is a much better proposal!

Sir I refer to Martin Wolf’s “We should not pin our hopes on Britain’s plan A-plus” June 16. 

Why should not those not creditworthy who want to borrow not be allowed to compete for access to bank credit on the same regulatory terms than those who are creditworthy but do not want to borrow? That is a question that Martin Wolf should try one day to answer, as currently the banks are required to hold more capital when lending to the risky than when lending to the not risky. 

This issue of discriminatory bank capital requirements is ignored over and over again, by those who feebly believe, even after all current evidence against such nonsense, that the best thing to do is to make sure that already risk adverse bankers avoid taking any ex ante deemed high risks. It is truly sad to see what a brave society can reduce itself to, when it allows its nannies to reign supremely. 

Instead of a temporary banking funding scheme such as is proposed by Mervyn King and or George Osborne I propose that regulators urgently calculate any individual bank´s capital to total assets ratio, and ask for it to apply a capital requirement that increases ever so slightly on any new asset it acquires… until reaching some basic goal. That way they would be able to put the banks on a stronger footing to lend, with much less distortion.

I would be scared too by Michel Barnier…and by Sir Mervin King.

Sir, Alex Barker in “Barnier vs the Brits” November 9, writes about the fears of Sir Mervin King in that Brussels reforms will reshape a vital British industry, banking, to the benefit of eurozone rivals. Would that not be a case of plain vulgar under-the-table protectionism?

I do not know much about the competitive aspects of UK banks but, I would indeed be frightened if the banks of my country were to be even partially supervised by someone who when going to Washington D.C. presented in a brochure, as a success story of his office: “A French citizen complained about discriminatory entry fees for tourists to Romanian monasteries. The ticket price for non-Romanians was twice as high as that for Romanian citizens. As this policy was contrary to EU principles, the Romanian SOLVIT centre persuaded the church authorities to establish non-discriminatory entry fees for the monasteries. Solved within 9 weeks.” http://ec.europa.eu/solvit/problems-solved/discrimination/index_en.htm

And, if an owner of a small business or as an entrepreneur, classified as “risky” by the regulators, and in need or want of bank credit, I would also be scared witless by someone who even after the world has gotten itself into such enormous difficulties by the excessive bank exposures to what was ex-ante officially deemed as absolutely not-risky, during a conference in Washington, insisted on that his responsibility as a regulator is simply to avoid excessive risk-taking… but, come to think about it… so does also UK´s Sir Mervin King opine. Help!

To rebalance the flows we need to rebalance the regulations.

Sir, Martin Wolf in “Waiting for the great rebalancing”, April 6, writes about “an ‘uphill’ flow from poor to rich countries, predominantly into supposedly safe assets”. According to Wolf, Mervyn King, the governor of the Bank of England, explains the flow as resulting from “export promotions… a decision to accumulate foreign reserves… and the combination of low levels of financial development with inadequate social safety nets”.

May I suggest that Mr. King, perhaps because of some conflict of interest, left out the most important explanation, namely the incredible push the importance the credit ratings got, when the regulators based the capital requirements for banks on these. All over the world there was only one message going out loud and clear, which was that the credit rating agencies knew what they were doing, and that if you want lower risk you should better follow their triple-A ratings. That the AAA ratings are highly correlated with rich countries, well that is a quite different issue.

Let us hope now that whatever rebalancing must come will include the rebalancing of the regulations of banks, so as to get rid of that arbitrary discrimination in favor of those who are perceived as not-risky and who are already more than sufficiently favored by the markets.