More blah, blah, blah about the safety of banks… but what about the safety of the real economy?

A sturdy healthy real economy will produce mostly safe banks no matter how little capital these have, while a weak and distorted real economy will produce unsafe banks no matter how much capital these have.

Sir, Martin Wolf, in “Reform of British banking needs to go further” June 21 mentions “distorted incentives distort risk-taking”, but this only from the perspective of the distortion produced in the banks, and among bankers, and not about the distortions produced in the real economy.

Allowing banks to leverage more and therefore be able to obtain a higher return on equity, just because something is officially perceived as “absolutely safe”, is about the most stupid way to serve the credit needs of the real economy. That means that what is perceived as “risky” will have to pay even higher interest rates and become even more risky than what it would without regulations; and that what is perceived as “absolutely safe”, will have access to even lower rates and more credit than what it should, and therefore might also become risky with time.

It is a problem that the typical borrowers of the real economy are never invited to discuss bank regulations, only bankers, some journalists, and some of the AAAristocracy are.

In the USA there is the Equal Credit Opportunity Act, also known as Regulation B, but, unfortunately, it would seem that their regulators do not care one iota about violating it.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.

The UK Parliamentary Commission on Banking Standards report “Changing banking for good” is, unfortunately, incomplete.

Sir, I refer to your “Holding UK banks to higher standards” were you comment on the just published report by “The Parliamentary Commission on Banking Standards” June 19. Unfortunately, it is seriously incomplete.

Current bank regulations allow for different capital requirements for different bank assets, based on their perceived risk. But, since these perceived risks are already cleared for by interest rates, amounts of exposures and other terms, this introduces a distortion that makes it impossible for the banks to perform with efficiency, their vital function of allocating resources in the real economy.

In fact, the risk-weighting calibration procedure used in Basel II is absolute lunacy and only the result of the regulators not having been sufficiently questioned by weak egos who do not want anyone to know that they don´t understand an iota about it all.

And, I am not the only one arguing this. For instance in a recent paper titled “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked” Anat Admati and Martin Hellwig write: “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

And therefore, the report, which starts so correctly by referencing “The UK banking sector’s ability both to perform its crucial role in support of the real economy” should, as a minimum, have asked regulators to explain, satisfactorily, why their capital requirements based on perceived risks are not flawed, meaningless and highly distortive. But, of course, FT should also have asked the regulators those same questions, a long time ago.

More than protecting banks from future crisis, we need to protect our real economy from dysfunctional banks

Sir, Philip Augar, writes “Britain´s regulators were feted for their light touch” “Salz offers a prescription to protect banks from future crisis” April 9.

What? If Augar believes regulations which intrude on the markets through capital requirements for banks which allow banks to leverage 60 times or more on their equity any interest rates paid by “The Infallible” while restricting to a 12 to 1 leverage interest rates paid by “The Risky”, are “light touch” he has just not informed himself of what has been happening.

Augar writes that the most important recommendation by the recent Salz Review, commissioned by Barclays to study its culture and business practices, is the “necessity of creating the right environment for feedback… and to question accepted wisdom constantly”.

Indeed, I have for years been trying to ask regulators about their reasons for capital requirements for banks which are based on perceived risks, when those perceived risks are already cleared for by the banks in the interest rate they charge, the size of the exposure and other terms. And I have never ever received an explanation more than the normal “more risk more capital, less risk less capital that sounds logical” mumbo jumbo.

Those differential capital requirements are distorting all common sense out of the real economy. Let us remember that much more important than to protect our banks from future crisis is to protect our real economy from being assaulted by banks made dysfunctional by regulators.

And so much more urgent than opening up the boardrooms of banks, is opening up The Basel Committee, the mother of all the non-accountable to anyone mutual admiration clubs.

Andrew Tyrie and the Parliamentary Commission on Banking Standards should start with the capital requirements for banks

Sir, Andrew Tyrie, the chairman of the Parliamentary Commission on Banking Standards, in “A mandate to tackle the deep-rooted failures of our banks” October 2, states that “banks are not serving the real economy”. 

Indeed, and, if the commission really wants to get to the most important root of why is that, it needs to look into how current capital requirements for banks distort the economic efficient resource allocation role of the banks. These capital requirements discriminate hugely in favor of banks lending to the “not risky” and against those perceived ex ante as “risky”, like the small businesses and entrepreneurs… and that is of course not how you really can serve the real economy. 

The only thing those regulations do serve is to instill some overly concerned regulatory nannies with a false sense of security; false because never ever has a major bank crisis resulted from excessive exposure to those perceived as “risky” (consult with Mark Twain), these have always resulted from excessive exposures to what was ex ante erroneously considered as “absolutely-not-risky”.