When final history on the bank crisis is written, it is going to be about stupid regulations, and the silencing of it

Sir, I refer to Patrick Jenkins’s and Martin Arnold’s “BEYOND BANKING: Tempestuous times” November 11 and December 9.

Therein Philipp Hildebrand, former head of the Swiss National Bank is quoted with: “The banking model is in many ways getting more like we’re turning the clock back to the early 1990s…When the history books are written, the aberration will not be the past crisis but the 15 years running up to 2007.”

Indeed, when history is written it is going to be about the regulatory aberration of allowing banks to hold so little of that capital that is to be there for unexpected losses, because the expected credit risks seemed low.

Indeed, when history is written it is going to be about how bank regulators never understood that, by allowing different capital requirement for different assets based on perceived credit risks, something which allowed different leverages of bank equity and of the support given to banks by the society, they completely distorted the allocation of bank credit to the real economy.

Indeed, when history is written it is going to be about that regulatory aberration of setting a zero risk for sovereigns, while assigning a 100 percent risk weight to the private sector.

But when final history is written, it is also going to be about how expert papers like the Financial Times turned a blind eye to all of the above. And this even when someone like me sent it thousands of letters explaining the problems, and this even though they knew that in previous letters they had published, I had correctly alerted on many of the risks.

@PerKurowski ©

Philipp Hildebrand, unfortunately ECB’s Mario Draghi is too busy covering up for his own mistakes to have time for Europe.

Sir, Philipp Hildebrand writes “QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out”, “The Fed´s regimen will not remedy Europe´s ill” August 19.

And you know that is completely in line with what I have been writing you letters about for about a decade now. And I say this because in my letter of November 18, 2004, one which you did publish, thanks for that, I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world…How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?

Hildebrand also writes “There will be no robust European growth without properly capitalized European banks…Swift action is essential to rectify any capital shortfalls that are discovered [after] comprehensive assessment of eurozone banks”. And he also mentions the “distortions will ultimately lead capital to flow into mispriced financial assets, instead of financing investment in new productive capacity.”

Hildebrand is right but, unfortunately, he ignores or forgets, first, that those comprehensive assessment do not include analyzing what should have been on eurozone balance sheets, like loans to SMEs, and second, that when he writes “Mario Draghi is right to prioritize fixing the banks”, the sad truth is that Draghi, as a former chairman of the Financial Stability Board, is too busy covering up his responsibilities in creating the current mess to have time for Europe.

PS. The day I write the book on how my arguments about how faulty and dangerous risk-weighted capital requirements for banks are were ignored by FT, and by many of its columnists and reporters, your prime line of defense will be exactly the same as the Basel Committee´s, namely people finding it hard to believe some “experts” can be as dumb as that. Am I impolite? Come on, I was extremely polite, outright nice, for years.

The eurozone might be better off fixing its banks the Chilean way

Sir, it is completely counterproductive for the economy if banks can comply with harsher capital requirements by switching to holding assets which require less capital. That is an aspect amiss in Philipp Hildebrand´s and Lee Sachs' “The eurozone should fix its banks in the US way". September 25. 

To have the ECB propose purchasing bank equity in order to blackmail private investor into increasing their bank equity while Basel II or III´s discrimination based on perceived risk is still in effect, does simply not work. 

Set instead a fix capital ratio for any asset, like 8 percent, for loans to infallible sovereigns the same as for loans small businesses, and then you will get some real action. 

If that would require too much capital then perhaps ECB, and Europe, could benefit from doing something along the way Chile did during its monstrously large bank crisis 1981-1983. Excluding for some foreign exchange considerations, those Chilean actions were in summary based on: 

a. The purchase of risky loans by the Central Bank by means of long term promissory notes accruing real interest rates and with a repurchase obligation out of the profits of the banks' shareholders before those promissory notes came due, plus some limitations on the use of their operative income. 

b. There was a forced recapitalization of the banks and in which any shares not purchased by current shareholders, would be acquired by the Central Bank, and resold over a determined number of years. 

c. And finally there was also an extremely generous long term plan for small investors to purchase equity of banks. 

The above, together with some strong revisions of bank regulations, helped to set Chile on a track that Europe would currently envy.