What is perceived as “absolutely safe” is the prime source of the unexpected which can cause bank crises

Sir, Roger Altman, referencing the “epic credit collapse of 2008 and the eurozone sovereign and debt banking crisis that began in 2010” writes “the message of history is the repetition of such crises and how the next one can occur at any time and from an unexpected source”, “Why the Fed needs Summer’s firefighting skills”, August 13.

And it is that part of “from an unexpected source”, which is precisely one of the most important things the next Fed chair needs to understand, in order to help correct totally dysfunctional bank regulations.

Currently the capital requirements for banks are much lower for what is perceived as “absolutely safe” than for what is perceived as “risky”. And these do not only distort the allocation of bank credit in the real economy, by discriminating in favor of The Infallible and against The Risky, but are also perfectly useless when it comes to increasing the safety of the banking system.

I have been trying for a decade now to get regulators to justify these capital requirements that I find to be dangerous and loony, but all the responses I get are in terms of “more-risk more capital less-risk less capital… does that not sound logical?

I am sorry, it is not enough to sound logical for us to bet our future on it, it has to be logical.

Small and frequent tremors might help to keep the big one away.

Sir, Roger Altman concludes “We need not fret over the omnipotent markets” December 2, with “There may be more frequent market crisis. We should not rush to conclude that they will end in tears”. I would word it differently, the more frequent the market crisis, the less the probability it will end in tears. 

In May 2003, as an Executive Director of the World Bank (just 1 of 24) I made the following comment at a workshop for bank regulators at the World Bank: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises. Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size” 

In my country, Venezuela, when it trembles just a little, many of us applaud, because we feel that small tremors might help to keep the huge ones away.

America, though undeserving, should remain a triple-A

Sir, Roger Altman in “Why America deserves to stay a triple A” August 4, argues as if a triple-A rating has something to do with a pure absolute and objective risk-free reality. Of course it hasn´t, and it can never thought have been meant so... except perhaps by some truly in the “In God we trust” minds. 

The reason why America, though quite undeserving, should remain a triple A is that if America is downgraded, all other countries would then also have to be downgraded, and the credit rating agencies would have to start adding letters to classify the bottom. 

The US suffers from the safe-haven curse

Though both Roger Altman “How to avoid greenback grief”, and Wolfgang Münchau “The case for a weaker dollar” October 12, are very right in their comments they are, for the time being, sorry to say, somewhat irrelevant.

The US is currently suffering from a safe-haven curse, which has the world buying dollars not really because of monetary parameters but more as parking permits to what they perceive is one of the few safe havens to whether out the storm. All of us who come from resource cursed nations, in my case Venezuela, know how difficult it is living with a curse, not least the fact that even though we know those resources are finite, and investors will wake up one morning suddenly thinking the dollar safe-haven to be unsafely overcrowded, there is little to be done until that happens. Just like no one stopped until they had chopped down the last tree on Easter Island.

But, having said that, let us not forget that, on the positive side, once the curse is lifted, a lot of new opportunities arise and so we do not necessarily have to be so pessimistic about the future of the US.

On a separate issue I would also recommend Mr. Altman that he performs a stress test on the willingness of the US tax payer to pay for the current public debt being contracted; he might find it even weaker than the current outlook for US consumer spending.

The risks never gone are now coming back with vengeance.

Sir Roger Altman in “Modern history greatest regulatory failure” September 18 ascribes this to the extraordinary leverage that some institutions took on and the development of a huge financial system outside the normal banking network.

He is right in the secondary causes but the origin of the whole leisured and blasé attitude to risks of the market that allowed for leverage to happen had its origin in the crazy notion that you can have some credit rating agencies correctly measuring risks without creating systemic risks; and the push for a system outside of banking was a direct result of the regulatory arbitrage that arose when the regulators imposed on banks minimum capital requirements based on risks.

Everyone were busy congratulating each other they had beat the risks and so everyone relaxed… and there you have it, the risks never gone are now coming back with vengeance.