Five comments on Patrick Jenkins “Failure to learn lessons of 2008 caused LDI pension blow-up”

Five comments on Patrick Jenkins “Failure to learn lessons of 2008 caused LDI pension blow-up”. Not sent by a letter to the Financial Times.

“There’s no such thing as risk-free” 

Especially if you take into account that e.g., major bank crises always result from the build-up of dangerously excessive exposures with assets perceived or decreed by regulators as especially safe.

“Ultra-low interest rates have obscure side-effects”

Indeed, especially when those ultra-low interest rates are the result of manipulations. The current risk-free rate has nothing to do with the risk-free rate before risk weighted bank capital requirements and QEs.

“A leveraged bet — to ‘juice’ otherwise low returns”

“Assets assigned the lowest risk, for which bank capital requirements were therefore nonexistent or low, were what had the most political support: sovereign credits & home mortgages...A ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

“In the UK, the government wants to make it easier for pension funds and life insurers to invest in riskier assets”

And it should be done, but only by removing the artificialities that have pension funds, life insurers and banks investing excessively in “safe” assets.

“Amateurish governance is dangerous. One of the lessons of bank failures in 2007-8 was that expertise matters”

No! Trusting too much the expertise, e.g., credit rating agencies, introduces a much more dangerous systemic risk.

And I could make many more similar comments.

Any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.

Sir, I refer to Patrick Jenkins “In our warming world, stranded energy assets are a growing concern” March 3. It evidences the difficulties in understanding how bankers adjust to risks, before and after the introduction of risk weighted bank capital requirements.

The current risk weighted bank capital requirements, which are based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived safe, only guarantees too much exposures to what’s “safe” and too little to what’s “risky”. So now banks, while “goose herds and whaling ships” are perceived as safe, run the risk of building up too large exposures that are harder to manage when these begin to look risky. 

Therefore, in the old days, before these regulatory distortions, banks were able to handle much better than now any slowly becoming apparent perceived risks, like with “goose herds and whaling ships”. 

What was more dangerous then, and MUCH more dangerous now, is of course the unexpected… like coronavirus.

Again Sir, for the umpteenth time, before, for around 600 years, banks cleared for perceived risk by means of interest rates and size of exposures. But then the Basel Committee instructed banks to clear for exactly those same risks, in the capital too. Sadly Sir, any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.

@PerKurowski

We might need to parade current bank regulators down our avenues wearing cones of shame.

Sir, Patrick Jenkins writes: “Bill Coen, secretary-general of the Basel Committee on Banking Supervision… said auditors should be given responsibility for checking banks’ calculations [so as to have] another line of defence to ensure assets are [given] the proper risk weighting”, “Metro Bank sparks call for external checks on loan risks” February 4.

I totally disagree, auditors look at ex post realities, on what banks have already incorporated into their balance sheets, What most matters are the ex ante perceptions of risk. 

Jenkins opines here “The error at Metro was to put some loans into standard risk-weighting buckets, determined by the UK regulator”. Sir, I ask, is that not evidence enough that we should get rid of current bank regulators?

If somebody is to blame, that is precisely the Basel Committee who with its risk weighted capital requirements for banks decided that what bankers perceived ex ante perceived as safe, was so much safer to our bank system than what they perceived as risky.

Basel Committee’s Bill Coen should be asked to explain the rationale of a standardized 20% risk weight for what, rated AAA, is dangerous to our bank systems, and 150% for what, rated below BB-, becomes so innocous. 

Jenkins opines: “The error at Metro was to put some loans into standard risk-weighting buckets, determined by the UK regulator”. Sir, I ask, is that not evidence enough that it behooves us to hold our bank regulators very accountable, perhaps even by parading them down our avenues wearing cones of shame? Perhaps hand in hand with those unable or unwilling to question them.

@PerKurowski

European banks that leveraged more than 40 (25) times were (are) not banks; only scary betting propositions.

Sir, Stephen Morris, summarizing the state of European banks writes, “Poor profitability, outdated business models, negative rates and little cause for optimism have driven investors away”“Europe’s banks languish in a climate of gloom”, December 28.

As I see it, something leveraged way over 40 times, as many European banks were before the 2008 crisis, should hardly be called bank. When regulators went along with some bankers’ plea to reduce the capital the banks needed to hold, perhaps for bankers to be able to pay themselves larger bonuses, they simply destroyed the bank system that was. 

If I was a regulator, and wanted my banks to grow stronger than their competitors, the last thing I would do, is to allow them to hold little capital.

The regulators, with Basel II in 2004, showed they believe banks could leverage 62.5 times with assets that have obtained an AAA to AA rating. The market initially believed their risk-weighing capacity and valued banks accordingly. The markets, after 2008, no longer believe such nonsense; “There is better risk-reward elsewhere,” one fund manager is here quoted to have said.

The European Commission assigned a sovereign debt privilege of a 0% risk weighting, meaning no bank capital requirement, to all those sovereigns within the Eurozone that take on debt denominated in a currency that de facto is not their domestic (printable) one. The market had blamed Greece for its excessive public debt and is only now beginning to wake up to that statist horror.

Morris writes: “One activist is trying to force it to exit large swaths of the business, arguing it absorbs too much capital for too little return”. That does not mean capital is unavailable for banks.

Do you want bank investors to return? Then offer them to invest in well-capitalized banks with well-diversified portfolios. To invest in banks that values the highest first class loan officers, not some bright equity minimizing financial engineers.

PS. Seeing “Mary Poppins return” reminded me of why good old George Banks went to fly a kite.

@PerKurowski

Europe, if you spoil your kids too much they will not grow strong. That goes for banks too.

Sir, Patrick Jenkins analyzes several concerns expressed about European banks when policymakers gathered to mark the retirement of Danièle Nouy from ECB’s Single Supervisory Mechanism (SSM); who is to be succeeded by Andrea Enria as the Eurozone’s chief banking regulator. “As European banks regulator retires, six big challenges remain” December 11.

The former Grand-Chair of the Federal Reserve, Paul Volcker, in his recent book “Keeping at it”, co-written with Christine Harper, recounts the following when, in 1986, the G10 central banking group tried to establish an international consensus on bank regulations and capital requirements:

“The US practice had been to asses capital adequacy by using a simple “leverage ratio”-in other words, the bank’s total assets based compared with the margin of capital available to absorb any losses on those assets. (Historically, before, the 1931 banking collapse, a ten percent ratio was considered normal)

The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be.”

Sir, even though the Basel Accord was signed in 1988 and further developed in 2004 with Basel II, and with which the European risk weighting was adopted, I am sure we can trace the differences between US and Europe banks to these original differences on capital requirements. The US has been much more strict on capital than Europe. In fact the problems with American banks during the 2008 crisis were mostly restricted to those investment banks, which supervised by the SEC, had been allowed in 2004 to adopt Basel II criteria.

In Europe meanwhile banks could do with much less capital, which meant that much more was left over for bankers’ bonuses. In essence, Europe’s banks were dangerously spoiled. The challenge these now faces is having to substitute their equity minimizing financial engineers with good old time loan officers; and convince the capital markets of that. Good luck!

@PerKurowski

Risk weighted capital requirements expelled many traditional bank risks into the shadows

Sir, Patrick Jenkins, when discussing regulator’s growing concerns for the growth of shadow banking”, lists some reasons for why policymakers bear some of the blame, among these the “regulatory crackdown on banks in the aftermath of 2008 may well have derisked those institutions by boosting equity, thus cutting leverage. But it displaced many of the risks to non-banks”, “Why policymakers are to blame for the shadow bank boom”, October 2.

Did they really “derisk” banks, cutting leverage as a result of “boosting equity”, or was it not a continuations of banks expelling that what perceived as risky required them to hold more capital, all because of the permanence of a portion of risk weighted capital requirements? My opinion is that it is much more the second option that is at play.

The moment risk weighted capital requirements were introduced then the risk adjusted return on bank equity no longer depended on managing a portfolio of risk intelligently, with help of savvy loan officers, but financial engineering came into place, because then much of the bank returns on equity would depend on having as little equity as possible.

And of course bankers loved it. The less equity there needs to be, the more is left over for their bonuses.

And where would that “risky” business then go? To the shadows of course!

Jenkins writes, “The relatively loose regulation of many non-banks means data on areas of risk, such as leverage, are scant.” Indeed but it is very hard to believe that in the shadows they would allow remotely as generous leverages as regulators allowed the banks in the sunlight… like 62.5 times to 1 if only an AAA to AA credit rating was present.

@PerKurowski

The direction into which banks go remains the same as the one before the crisis.

Martin Arnold, discussing the weakening of European banks when compared to the American quotes John Vickers, the former Chair of the UK's Independent Commission on Banking (ICB)with, “You had in effect a huge taxpayer-backed subsidy for risk-taking and that ended in tears. So pulling back from that is directionally a good thing” "How US banks took over the financial world", September 16.

Sir, do you see how little the world has learnt? The huge taxpayer-backed subsidy was not at all for risk-taking but for the excessive build up of exposures to what was perceived as safe, and against which regulators therefore allowed them to hold especially little capital.

“So pulling back from that is directionally a good thing” No! There has unfortunately not been any change in directions. By keeping the risk weighted capital requirements, the banks are still pushed towards what is perceived, decreed or can be concocted as safe, and away from what is perceived as risky.

The reason for it? The fact that the real causes of the bank crisis have been classified by those responsible for these, as something that shall not be named. And Sir, FT, sadly, is complicit in such cover up. In doing so FT, sadly, is absolutely not living up to its motto.

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

Sweden got to be an economic powerhouse with its banks financing “risky” entrepreneurs, not by these financing “safer” houses.

Sir, Patrick Jenkins reports: “Nordea has a core equity capital ratio of close to 20 per cent, double that of some European rivals. It can expect lesser capital demands from the ECB” “Nordic noir: the outlook darkens for Sweden’s banks” May 1.

Let us suppose that Nordea has only Basel II’s 35% risk weighted residential mortgages on its books. Then, a 20 percent capital ratio, would translate as having Nordea 7% in equity against all its assets meaning it is leveraged 14.2 times to 1.

So when we then read that in Sweden “house prices have declined 10 per cent since last summer, although in prime Stockholm the slump has been closer to 20 per cent” of course that should be enough to besides giving “Jitters about the sustainability of property prices” causing jitters about its banking sector.

I have a close relation to Sweden in that not only was my mother Swedish but I also spend my most formative years, high school and university there. So it saddens me to see what is happening. Sweden that got to be so strong by its banks financing “risky” entrepreneurs is now getting weaker by its banks mostly financing “safer” assets, like mortgages.

“Sweden’s Financial Supervisory Authority, late last year, proposed Sweden’s Financial rules [that] would mean those taking out new home loans of more than 4.5 times their salary would have to pay off an extra 1 per cent of their mortgage annually.” Are we to be impressed with that?

Stefan Ingves the Governor of Sveriges Riksbank has since 2011 been the Chairman of the Basel Committee for Banking Supervision. Why has he not proposed to stop distorting the banks allocation of credit, by requiring these to hold the same capital when extracting value and placing a reverse mortgage on the “safer” present economy, than when financing the riskier future, that the young Swedes need and deserve is financed?

In Swedish churches there was (is) a psalm (#288) that prays for: “God make us daring”. It would seem Mr Ingves never heard less sang it. 

Why do FT reporters refuse to implicate regulators and their risk weighted capital requirements for banks in the 2007-08 crisis?

Sir, Patrick Jenkins writes: “As a correspondent in Frankfurt in the early 2000s, I saw first-hand how a sector that had grown fat on government-supported AAA credit ratings, turned hubristic. The situation was at its worst — and most dangerous — after the EU pressured Berlin to end the government guarantee regime in 2005. That ruling prompted the banks to raise three years’ worth of money in the bond markets within a matter of months. It gave them vast investment resources to deploy just at the time when Wall Street and the City of London were aggressively pushing complex collateralised debt obligations underpinned by sub-prime mortgages and other nominally safe, but ultimately toxic, products to anyone that would buy them”, “The role of dumb money in Carillion’s crash”, January 18.

Amazing! Jenkins does not mention the fact that in June 2004, with Basel II, the Basel Committee approved a risk weight of only 20% for all private sector debt rated AAA to AA. That, with a basic capital requirement of 8%, meant banks needed to hold only 1.6% in capital against what was so rated; which meant the banks could leverage a mind-blowing 62.5 times with such assets.

It was pure regulatory lunacy! And the same loony regulators are still at it. How FT’s journalists and experts can keep so mum on the role of dumb and irresponsible regulations escapes me.

Jenkins refers to “complex collateralised debt obligations underpinned by sub-prime mortgages and other nominally safe” What a BS. These were AAA rated securities, that was what the market and bankers saw.

In January 2003 the Financial Times published a letter I wrote and that ended with: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

PS. FT, Jenkins, do yourself a favor. Go to all banks that had any involvement with Carillion and carefully research how much capital they held against exposures to it, before the blow-up. And ask to have a look at their equity requirements’ minimizing sophisticated risk-models, or at any “superficial credit analysis” … and don’t just naively believe anything they tell you.


@PerKurowski

Some might see Donald Trump’s bankruptcies as a weakness, but others, especially in America, as a symbol of go-get-it strength.

Laura Noonan, Patrick Jenkins and Olaf Storbeck write: “Deutsche Bank has been one of Mr Trump’s longest-standing and most supportive lenders, extending him hundreds of millions of dollars in credit for real estate deals and other ventures despite his history of bankruptcies.” “Deutsche Bank hands over Trump files to Mueller probe of Russian influence” December 6.

Sir, the way it is phrased might reflect some profound cultural differences. Is it really “despite Trump’s history of bankruptcies”, or could it precisely because of it, that Deutsche Bank could be interested, as that would indicate business opportunities?

Let me quote the following from “The Wisdom of Finance” by Mihir A. Desai, 2017, Chapter Seven “Failing Forward”:

“Until 1800 [in America], borrowers who could not service their debts were moral failures. As a consequence, imprisonment was common for debtors…

Failure would be redefined away from moral failing or a sin and toward a more natural consequence of risk taking with the 1800 Bankruptcy Act. [The first bankruptcy law]… the new republic desperately needed risk takers, and punishing them so severely froze commerce in the late 1790. If the young country was to flourish, failure had to be redefined, and the moral stigma associated with it had to be lessened.”

Sir, after current regulators, with their risk weighted capital requirements, for soon three decades now, have exacerbated the normal risk aversion of our bankers… I would argue we currently are also in desperate need of risk takers. God make us daring!

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html 

PS. That 1800 law was to be repealed in 1803 and followed by many other laws. The last major one the Bankruptcy Reform Act of 1978

@PerKurowski

How did the world get into such a mess, and will it happen again? Here is why, and yes, as is, it will happen again!

Sir, Patrick Jenkins quotes Lord King — now a professor at the LSE and New York University with: “it was inevitable that a crisis was going to occur… The banking system as a whole was very highly leveraged. It had on its balance sheet a large volume of assets that were very difficult to value and no one could work out what the exposure of one individual bank was” “Financial crisis: 10 years on Where are we now?” September 2.

“How had the world ended up in such a mess — and has enough been done to stop something similar happening again?”, asks Jenkins.

First: The crisis resulted from: Basel II of 2004 allowing banks to leverage capital (equity) more than 60 times if only there was an AAA-to AA rating presents or if the exposure was to a friendly sovereign, like Greece. 

Jenkins writes “When the 2007 crisis broke, fingers of blame were pointed in all directions…. at policymakers for presiding over an environment of low interest rates and lax regulation” Lax regulation? No! Extremely distorting regulations. Had banks not been regulated by means of risk weighted capital requirements for sure some other crisis could have happened… but not that one that is here referred to.

Second: Since the risk weighing of some capital requirements is still used that guarantees that sooner or later, some safe-haven, like that of sovereign debt, will become dangerously overpopulated. Add to that the fact that risky bays, like SMEs and entrepreneurs, will not, as a result have sufficient access to credit, which will debilitate the real economy… and you can only come to the conclusion that, yes a crisis of the same nature is bound to happen again.

How can we stop it! To begin by removing all those who had something to do with current bank regulations because, as Einstein said: “No problem can be solved from the same level of consciousness that created it”.

To not debilitate the banks with fines and go after those responsible for any misbehavior would also help.

What would I do? Impose a straight 10% capital requirement against all assets; and if that puts a too big squeeze on bank capital, I would go a Chilean route of having central banks take on loans in order to capitalize the banks; and thereafter prohibiting banks from paying dividends before those shares that would have a preferential dividend have all been repurchased from the central banks. But that’s just me.

@PerKurowski

The financial packaging / securitization process includes an evil incentive

Sir, Patrick Jenkins in the Spectrum special “Financial crisis: 10 years on: Where are we now?” September 1 writes: “So great was investors’ appetite for these high-yielding MBSs and CDOs that mortgage companies lowered their underwriting standards to feed the securitisation sausage machine.”

Yes and no! First these MBSs had the additional quality of being rated by the credit rating agencies as very safe, AAA in many cases; and so in fact offered extremely high risk-adjusted yields, which made their great attractiveness perfectly logical. Naturally many investors would fall for these.

But then we have the problem with the securitization process itself. If you package something safe and sell it of as something safer, the profits are much smaller than if you manage to package something very risky and are able to sell it off as safe. So “mortgage companies lowered their underwriting standards”, not only because of the demand, but also because that allowed the original mortgages to carry higher interest rates, and so the profits of the packaging team would be larger larger. Here is how I have described that on my blog for more than a decade.

“If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy profit of $210.000”

@PerKurowski

The outsized bank revenues and the crash were caused by the monstrous huge leverages authorized by their regulators

Sir, Patrick Jenkins writes: “The outsized revenues and profits that banks and other financial groups made in the run-up to the crash, much of it inflated by mis-selling and manipulation, have given way to lower income” “Banks can become an engine of productivity instead of a brake” July 11.

Jenkins just does not get it. “The outsized revenues and profits that banks and other financial groups made in the run-up to the crash” were the direct result of regulators allowing banks to leverage their balance sheets tremendously. For instance Basel II of 2004 authorized banks to leverage 62.5 times to 1 if an AAA rating was present, and a lot of times more when lending to a “safe” sovereign. Had banks been allowed to leverage with all assets only 12.5 times, as Basel’s 8% basic capital requirement implied, there would not have been outsized bank revenues and profits, nor the crash. Capisci?

How could banks become an engine of productivity again? Stop discriminating against the “riskier” future and in favor of the “safer” present.

@PerKurowski

Patrick Jenkins, in banking, its current regulators lie out of their teeth’s, or are just incredibly dumb and inept.

Sir, Patrick Jenkins writes: “No sector, though, can compete with banking for the scale, depth, longevity or variety of lying that has infected a whole way of doing business.” “Bank bosses have to ensure that honesty is the best policy” March 14.

Perhaps but if so that lying is shared with its regulators.

Not a week goes by without at least one major financial media referring to Basel ratios that indicate banks are well capitalized. A responsible regulator should be out there answering such affirmations by reminding everyone that these ratios are; first not at all comparable with historic capital ratios based on non-weighted assets; and that they mean nothing if the risk weights are wrong. But the regulators don’t! They just play along. 

And to state that those rated AAA, those who regulators assign a risk weight of 20%, are more dangerous to the bank system than those rated below BB-, those who regulators assigns a 150% risk weight to, is a mindboggling blatant lie, or a stupidity out of this world… have a pick!

Jenkins concludes among other with “More important still is that bank bosses themselves prioritise long-termist decency over short-termist profit-chasing”

Few things are more short-termist, or less long termist, than allowing banks to leverage more their equity, which means earning higher risk adjusted returns, with what is “safe”, usually the past and present, than with what is “risky”, usually the future.

Just think of it, a 35% risk weight on residential mortgages, and one of 100% for SMEs. That would seem to doom our young to have to live without jobs, forever in their parents’ basements… or, if there is a reverse mortgage on it, until the house is repossessed by the bank.

And Sir, if not directly lying, is not keeping mum on it at least sort of withholding the truth?

@PerKurowski

On FT’s Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance

Sir, I refer to Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance this month”; as “decoded by a sceptic”, “Trump’s battle with red tape will hurt consumers and world” February 14.

1. “A swipe at the Consumer Financial Protection Bureau, the new body that has returned $12bn to more than 25m Americans ill-treated by financial groups.”

That comes to an average of $480 per person, which leaves open the questions of: At what cost? Should Americans because of CFPB’s feel safer and, if they do so, are they really safer? What has happened to good and useful old “Caveat emptor”?

2. “Mr Gary Cohn blamed regulatory capital requirements for a shortage of credit to the economy: “Banks do not lend money to companies . . . because they’re forced to hoard capital,” he said. Nonsense, given that equity capital is free to be used for lending.” What? Has Patrick Jenkins not yet understood how for instance requiring banks to hold more capital against “risky” SMEs than against the sovereign and the “safe” AAA-risktocracy, distorts the allocation of bank credit?

3. “There has in any case been pretty strong credit growth, about 6 per cent a year since 2012.”

Credit for what? Yes: for corporation repurchasing their shares; for more loans to “safe” sovereign; for increased automobile financing portfolios; for residential mortgages… but what about the financing of the riskier future our kids and grandchildren need to be financed?

4. “It may also be a pop at the Financial Stability Oversight Council, the only US federal body that assesses risk across banks and non-banks… disbanding FSOC, would… be dangerous”

No! All those involved with bank regulations that do not understand the fundamental reality that what is perceived as very safe, is much more dangerous to the bank system than what is perceived as very risky, should be disbanded… the faster the better.

5. “Enable American companies to be competitive with foreign groups in domestic and foreign markets. A natural adjunct of the president’s all-encompassing call for national greatness… is likely to translate into… deregulation.”

What? If banks have needed to hold the same amount of capital against loans to Greece or AAA rated securities that they needed to hold against loans to SMEs and entrepreneurs we might have had other type of crisis, but not the 2007/08 one, nor would we be suffering such lazy economic responses to all the huge stimuli doled out?

6. “be in no doubt: this president will deregulate”

If that means to take away what distorts the allocation of bank credit to the real economy then welcome, not a moment too soon. To just modify the regulations is not to deregulate, but only to neo-misregulate.

7. “Restore public accountability within Federal financial regulatory agencies”

That would be not a second too late. Not only the Federal financial regulatory agencies, but also most of the world’s bank regulators, refuse to answer some simple questions such as: Why do you assign a low 20% risk weight to the so dangerous for the banking system AAA rated, and a whopping 150% to the so innocuous below BB- rated?

@PerKurowski

Our younger generations have much more valid reasons than savers and bankers to profoundly resent bank regulators

Sir, Patrick Jenkins reports that the world’s savers and bankers have every reason to resent the posse of policymakers, one of the most powerful quangos in the world, the Group of Central Bank Governors and Heads of Supervision — GHOS for short, and that will meet on January 8”, “Time for GHOS train to leave the shadows and reconnect” January 3.

At the meeting the group will discuss “the future direction of global financial regulation” the “system of risk-weighting the assets on banks’ books” and “the riskiness of banks’ mortgages and SME lending”

Well no. Those who most should resent GHOS (and the Basel Committee for Banking Supervision) are the young.

These irresponsible bank experts, without considering the purpose of banks, and without any empirical studies on what causes bank crises, decided that it was much better and safer for banks to finance “safe” houses than to finance “riskier” SMEs.

That translated into bank financing more the basements where unemployed young can live with their parents, than financing the job creation that can allow the young to be able to afford becoming parents too.

To top it up, they also decided that it was much safer to lend to the governments than to the private sector.

I have for more than a decade and in more than 2.500 letters tried to convince FT to help me to ask these “bizarrely secretive” regulators some very basic questions. Unfortunately until now I have had no such luck.

@PerKurowski

The way FT insists in treating bank regulators so gently, can only lead us to conclude it is part of the establishment

Sir, with respect to Italian bank securities, like Monte dei Paschi di Siena’s €6bn of junior bonds, Patrick Jenkins writes that “it was the banks — not the state — that mis-sold these”, “Italian state must act as backstop to bolster ailing banking system” December 6.

Why on earth does Jenkins’, and you all, defend in such a way the innocence of the state, or more precisely, that of the bank-regulating establishment? Had regulators no responsibility towards the buyers of these bonds? No Sir, I tell you FT has no role washing the hands of the regulators.

First, what got banks into problems, were that regulators allowed banks to hold very low capital against what was perceived as safe. Though of course much of what could have been perceived as risky has suffered a lot after the crisis, nothing of that detonated it. And, if what was perceived ex ante as “safe” would have required banks to hold the same capital as against what was perceived as risky, the overall crisis would not have happened, or would have been much smaller.

Second, don’t tell me that regulators, with their reports on satisfactory levels of capital against risk weighted assets, have not been misinforming the markets all the time, and not only in Italy. Time after time we read or hear “experts” comparing bank capitalizations in the past against all assets, with capitalizations in the present against weighted assets. And that is apples and oranges of course. 

@PerKurowski

What’s wrong with deregulating lousy regulations? Get rid of risk-weighted capital requirements for banks… but gently

Sir, Patrick Jenkins speculates on what Trump will do to bank regulations and regulators and how the latter would respond in America and in Europe. “Trump’s agenda on deregulation is as vital as his Nato policy” November 15.

I just know that with statist and distorting regulations, like the current risk weighted capital requirements, deregulation and getting rid of regulators, would be a good thing. But of course, that needs to be done with utter care, since you could otherwise easily make the cure worse than the disease.

The basic principle with respect to any changes in the capital requirements should be grandfathering, so that these only operate on the margin of the new, without shaking up the average of the old. Of course grandfathering should not be a tradable feature. If a European bank carries a low capital requirements mortgage on its book, and holds it that way until it runs out that is ok, but it should not be able to profit by selling low capital requirement’s mortgages to other more "needy" banks.

@PerKurowski

Why is it so hard to understand that risks should not only be correctly perceived but also correctly considered?

Sir, Patrick Jenkins, discussing the Basel Committee’s push “to finalise another leg of post-crisis global financial reform” writes that “financial and economic stability is more important than a blinkered crackdown.”, “Basel Committee boss needs to reconsider hard line on reform” October 18.

What? “financial AND economic stability”? That’s a new one. Until now it has only been financial stability, which is why regulators (and journalists) have not cared to analyze how much current bank regulations distort the allocation of credit to the real economy. For instance Stefan Ingves, the chair of the Swedish Riksbank and of the Basel Committee, seems not to understand at all that the so much lower risk weight assigned to financing houses (35% in Basel II), when compared to the risk weight when financing SMEs (100%), has something to do with prices of houses going up and up, and the credits to SMEs going down and down.

Jenkins, on the possibility of part of the capital requirements to be based on the conduct of the banks, like misdeeds, argues: “The logic is flawed”, since “basing future capital demands on past fines duplicates the impact of a penalty”.

Indeed, but why Sir is it so hard for Jenkins, for the Basel Committee, for you and for all other in FT to understand that, basing capital requirements on ex ante perceived credit risks already cleared for by banks with interest rates and size of exposures, also “duplicates the impact” of perceived credit risks?

Is it really so hard to understand that any risk, even if perfectly perceived, causes faulty actions, if that risk is excessively considered?

@PerKurowski ©

Senator Elizabeth Warren, what about the staggering bad bank regulations that came out of the Basel Committee?

Sir, Patrick Jenkins writes: “Today, Mr Stumpf will face an inquisition at the Senate banking committee. It promises to be a hostile experience — no-nonsense committee member Elizabeth Warren is not known for her love of the banking sector and has already talked of Wells’ “staggering fraud”. “Wells Fargo chief ’s high noon is Senate committee grilling” September 20.

I’ve got no problem with any “grilling” of bankers, give it to them! But, Senator Warren, in all fairness, do not turn it all into another simpleton Bank-Bashing fair, We the People need it to be much more. If anything, look at how the bank regulators set up all the incentives for bankers to do wrong.

Why on earth should we expect bankers to be saints and resist the temptations? Aren’t they supposed to maximize their risk adjusted returns on equity?

What am I talking about? THIS

http://subprimeregulations.blogspot.com/2016/09/if-ever-allowed-following-would-be-my.html

PS. And Senator Warren, why would you agree with those who decreed inequality?

http://subprimeregulations.blogspot.com/2016/03/decreed-inequality.htm

@PerKurowski ©