Our bank regulators, just like "Sulley" Sullivan and Mike Wazowski, fear the wrong thing.

Sir, Martin Wolf, discussing US-China relation ends with, “Our enemy is not China. Have confidence in our values of freedom and democracy. Understand that it is on the creation of new ideas that we depend, not the protection of old ones. That in turn depends on freedom of inquiry and openness to the best talent from around the world. If western countries lose these, they will lose the future. As the greatest US president of the 20th century declared: “The only thing we have to fear is fear itself.” “America must reset its rhetoric on China’s rise” October 31.

Absolutely! But why then it is so hard to get Mr. Wolf to understand that current risk weighted capital requirements for banks, which so dangerously distorts the allocation of credit to the real economy, is nothing but an expression of fear… and to top it up a completely unfounded one. 

Just as "Sulley" Sullivan and Mike Wazowski in Monsters Inc. thought that children were toxic to them, the regulators are convinced that what’s perceived as risky is what’s dangerous to our bank system. Of course it is what’s perceived as safe that poses the real dangers.

Wolf asks, “What has been the most important event of 2018 so far?” He answers “arguably, it was the speech on US-China relations by Mike Pence, US vice-president, on October 4.”

I would hold that the most disastrous important event during the last three decades was the introduction, in 1988, with the Basel Accord, of these so utterly silly and naïve risk adverse regulations. That year the Western world said no ti the risk-taking that has been the oxygen of its development.

Sir, again, let me remind you that just for a starter, had no banks been allowed to leverage with assets over 60 times only because these were AAA rated, or limitless with loans to sovereigns like Greece and Italy, we would all be in a much different and surely better world.

When is Martin Wolf going to stop protecting old senseless fears?

God make us daring!

It is in our best interest to keep Yellen, Draghi and other failed regulators out of tackling financial instability

Sir, I refer to Sam Fleming’s and Claire Jones “Yellen to tackle financial stability at Jackson Hole” August 24. Is the title a Freudian slip? Does “tackle” not refer to a problem, such as financial instability?

I argue that since Yellen, as part of that bank regulatory brotherhood that with risk weighted capital requirements for banks helped to cause financial instability, is simply not capable enough to help out achieving financial stability.

The idea of requiring banks to hold less capital (equity) against what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential houses, than against what is perceived as risky, like SMEs and entrepreneurs, is absolutely cuckoo.

That means that when banks try to maximize their risk adjusted return on equity they can multiply (leverage) many times more the perceived net risk adjusted margins received from “the safe” than those from “the risky”. As a result clearly, sooner or later, the safe are going to get too much bank credit (causing financial instability) and the risky have, immediately, less access to it (causing a weakening of the real economy). 

Anyone who can as regulators did in Basel II, assign a 20% risk weight to what is AAA rated and to which therefore dangerously excessive exposures could be created, and 150% to what is made so innocuous to our banking systems by being rated below BB-, always reminds me of those in Monsters, Inc. who run scared of the children. I wish they stopped finding energy in the screams of SMEs and start using instead the laughters of these.

The report also includes a picture of some activists holding a “We need a people’s Fed”. Yes, we sure do! Assigning 0% risk weight to the sovereign and 100% to any unrated citizen is pure statist ideology driven discrimination in favor of government bureaucrats and against the people. But perhaps the activists depicted are not into that kind of arguments. 

Draghi and Yellen might discuss problems associated to ECB’s and Fed’s large exposures to sovereign that their QEs have caused. If they were honest about the size of the problem, they should in the same breath include all sovereign debts and excess reserves held by banks only because of a 0% risk weight. Sir, if that’s not financial instability in the making what is?

PS. Those in Monsters Inc. all finally figured it out. Our bank regulators in the Basel Committee and the Financial Stability Board have yet to do so, even 10 years after that crisis produced mostly by AAA rated securities backed by mortgages to the US subprime sector. and loans to sovereigns like Greece 😩

 

@PerKurowski