Why do John Kay and his colleagues cover up bank regulators’ prominent role in creating the Greek tragedy?

Sir, John Kay writes: “For every foolish borrower there is usually a foolish lender. The Greek crisis is not simply the result of Athens’ inept public administration but also of an extensive carry trade on eurozone convergence by northern European banks, notably in France and Germany, which obtained short-term profits by matching northern eurozone liabilities with southern eurozone assets.” “What St Luke would say to Schäuble” July 29.

But however foolish bank lender can be, they can be made even more foolish by their regulators. For instance, between June 2004 and November 2009, because of Basel II and Greece’s credit ratings, banks were allowed to leverage their equity, and the support they received by means of deposit guarantees and similar, 62.5 times to 1 when lending to the government of Greece, while being limited to a 12.5 times to 1 when lending to German, French or Greek SMEs or entrepreneurs. 

And John Kay knows that without those regulatory incentives, based on some foolish aversion of credit risk, banks would never ever have lent to Greece as much as they did. And so the question is why does John Kay cover up for the regulators by hushing this up?

And speaking about crazy risk aversion, besides St Luke, John Kay could do well reading St Mathew, 25:14-30.

14 “It will be like a man going on a journey, who called his servants and entrusted his wealth to them. 15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 “Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 “His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest. 28 “‘So take the bag of gold from him and give it to the one who has ten bags. 29 For whoever has will be given more, and they will have abundance. Whoever does not have, even what they have will be taken from them. 30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’

The incentives provided by the Basel Committee, more perceived risk more capital – less perceived risk less capital, clearly instructed the bank servants not to behave according to the Parable of the Talents.

PS. It is clear that the ability to which Mathew 25:15 refers to has nothing to do with the ability of repaying the funds but with growing the funds by putting it to good use. In other words: the efficient allocation of bank credit.

PS. And, from what we read, perhaps Pope Francis would also do well pondering a bit more about that parable.

PS. By the way, should the servant St Matthew refers to, refuse to lend at negative rates?

PS. When John Kay mentions ordoliberalism, I must say that I cannot understand how anyone remotely connected to that economic thinking, could accept the distortions in the allocation of bank credit created by current bank regulations.

@PerKurowski

Jesus, though opposing the idle rich, clearly supported entrepreneurship, the heart and soul of good capitalism.

Sir, John Plender, when discussing the pro and cons of capitalism writes “Jesus… had no time for the rich”, “Morality and the money motive” July 18.

That is true but only with respect to the idle rich, and who in reality have also very little to do with capitalism. When it comes to entrepreneurs, as can be read in ‘The Parable of the Talents’, Jesus lends them his full support.

From Matthew 25:14-30 we extract the following: 

14 It will be like a man going on a journey, who called his servants and entrusted his wealth to them.

15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed.

25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed?

27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.

28 “‘So take the bag of gold from him and give it to the one who has ten bags.

29 For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.

30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’

Unfortunately the members of Basel Committee for Banking Supervision have clearly not understood the meaning of that parable. The risk aversion implied by their credit-risk-weighted capital requirements for banks, more-risk-more-capital and less-risk-less-capital, only promotes the immoral idleness of richness.

Plender also writes: “boom and bust, together with severe financial crises, are permanent features of the system”. Indeed, but Plender should never forget that busts, can be horrible or manageable, productive or useless, in much depending on whether it was risk-taking or risk aversion that ruled during the boom.

When true risk taking prevails, dangerous but possibly enormously productive bays will be explored. If instead risk aversion leads the way partner, then the safe havens will become dangerously populated… and, as Plender should know, the financial crisis of 2004 was a direct consequence of the latter.

Sir, the saddest part is that we ignore and still allow our bank regulators to apply unchristian immoral risk adverse principles. We should indeed throw out our worthless current bank regulating servants “outside, into the darkness, where there will be weeping and gnashing of teeth”

PS. Odious regulatory credit risk discrimination denies those perceived as risky fair access to bank credit, and is therefore also a great driver of inequality. 

@PerKurowski

Here is what the Primary Bank’s game changing Manifesto could state.

Sir, I read with much interest Ben McLannahan’s “Rare US bank launch targets ‘It’s a Wonderful Life’ values” May12.

And it came to me that the following could be The Primary Bank’s vey important and game changing Manifesto.

We, in the Home of the Brave, we refuse to hold less equity against those perceived as safe than against those perceived as risky. That discriminates against the fair access to bank credit of those SMEs and start-ups that build the foundations of our economy.

If we are required to hold 8 percent against a loan to a citizen, that is what we will hold if lending to the government, because we, in the Land of the Free, refuse to think of the American citizens as more risky than their government.

That means we will hold more equity than we are required to, and so risk-adjusted returns on equity will be somewhat lower than what other banks can generate.

But, our shareholders, and us the management, we are certain our way will, sooner or later, lead to much higher returns for all.

Reasoned audacity and pure crazy risk-taking is what brought us here and so, no matter how much regulators wants us to become risk-adverse, we refuse to deny our children and grandchildren the risk-taking that is necessary for them to have a good future with plenty of jobs.

God make us daring!

PS. We remit to “The Parable of the Talents” Matthew 25:14-30

@PerKurowski

Do liberal values include risk-aversion? If so, bye-bye Europe

Sir, Richard Vinen in his “The Pope is wrong – old Europe is a new world” of November 29 extols Europe’s liberal values. And I have a question for him, and for you.

During the last decades regulators have imposed on the European banks credit risk weighted equity requirements. With these they allow banks to earn much higher risk adjusted returns on equity when lending to what is perceived as “absolutely safe” than when lending to what is perceived as “risky”. And so of course return on equity maximizing banks, respond to these incentives and do not lend more to the “risky”, like to small businesses and entrepreneurs. And, given that risk taking is the oxygen of any economy moving forward, Europe is now stalling and falling.

And so my question is: do liberal values include such risk-aversion?

And I ask that because in my opinion little has turned Europe in that old granny Pope Francis refers to, that these risk-adverse regulations.

Risk-taking is for the young, for the optimists, for the believers in a bright future. Risk aversion is for the old, the pessimists, for the ones who do not dare to bet what they have today in order to get a better future.

What a pity Pope Francis did not in his speech to the European Parliament remind Europe of The Parable of the Talents.

The Parable of the Talents and the self inflicted curse of excessive regulatory risk aversion.

Sir, we live in a world where those who are perceived as “risky” from a credit point of view; those who always include small businesses and entrepreneurs; those who with their dynamism help to seed the future of an economy, are negated fair access to bank credit. And that is done by means of regressive and distorting bank regulations that allow banks to hold much less capital, meaning equity, against assets perceived as absolutely safe.

And tragically, that is not deemed to be a problem, like we can for instance see when reading Martin Wolf’s “The curse of weak global demand” of November 18. In it, as usual, this central problem is not even mentioned

Of course the world has many problems but since risk-taking is the oxygen of any development, one of the most serious one is the self-inflicted curse of excessive regulatory risk aversion.

I was recently reminded of “The Parable of the Talents”, Matthew 25:14-30 and we would all be well served if regulators read it and understood it. We the taxpayers are underwriting many of the risks in banking, “the Talents”, which we hand over to regulators to manage, and we do not do that just in order for banks to obtain higher returns on equity or to only lend to those perceived as absolutely safe. We do that so that banks can allocate credit efficiently, and daringly, to the real economy.

I agree 100 percent with Christian Clausen of Nordea, in his description of 50 percent of the problem with SMEs and bank capital/equity.

Sir, I refer to Richard Milne’s “Tide of regulation has gone so far it means unacceptably high premium for SME borrowers” November 17.

In there Christian Clausen, chief executive of Nordea and president of the European Banking Federation, is quoted saying: “Ever-increasing capital demands of regulators meant banks needed to charge a margin of 6-7 percentage points to small and medium-sized enterprises (SMEs), companies which are often seen as the backbone of the EU economy. Show me an SME that can do a business case on opening a new factory or doing an investment where they can start by absorbing 600-700 basis points on margin. In this environment, it’s not possible."

And Clausen asks: "Don’t you want to allocate risk capital to the young entrepreneurs and the companies that can grow and export and create jobs? We have gone too far. Why on earth as a politician do you want to allocate the limited amount of risk capital in your society more than necessary to the banking sector? Don’t you want to allocate risk capital to the young entrepreneurs and the companies that can grow and export and create jobs? We will not create more jobs by piling up more capital, we will create negative growth because our lending costs will go up.”

Absolutely, Clausen is 100 percent correct, but unfortunately that is only in 50 percent of the story.

The other 50 percent is: Why would bank regulators require banks to have more capital when lending to SME’s, the backbone of the economy, than when lending to for instance those who possess an AAA rating or lending to an “infallible sovereign”.

Is it not so that much of the higher margin banks now need to charge SME is a direct result of the low margins they charge when lending to the “absolutely safe” because these are subsidized by the very low capital requirements that then apply?

My rephrased Clausen questions would be: Why on earth as a politician do you want banks to consume more of the limited amount of bank risk capital in your society when lending to the risky that when lending to the safe? Do you really want to discriminate against the fair access to bank credit of the young entrepreneurs and the companies that can grow and export and create jobs?

​Do you really want your banks financing the riskier future settling instead for refinancing the safer-past?

Sir, for the real economy, a stress test of banks, which analyzes only what is on the banks’ balance sheets, and ignores what should have been on these, is a useless test.

PS. Yesterday in church I was reminded of the “The Parable of the Talents”. It would do us much good if bank regulators read Matthew 25:14-30