It’s hard to understand how central banks can favor so much safer biggies while making it harder for riskier smaller

Sir, Claire Jones reports “France’s central bank has bought bonds issued by LVMH, Bulgari’s parent company, helping lower the group’s borrowing costs. Under the terms of one of those bonds, LVMH can now pay an annual coupon of just 0.375 per cent to borrow until 2022. “Eurozone investment regains sparkle” October 5.

Unbelievable! How on earth can a central bank intervene and distort the allocation of credit to the real economy this way?

And to top it up, what is the capital requirement for a French bank when lending to LVMH or to Bulgari and what is it when lending to an unrated SME, that wishes to enter into the same market as these giants who can afford tens of millions of euros of investment?

Sir, is it only me that feels something is very wrong?

@PerKurowski

Daft regulators hinder the access to bank credit of “risky” SMEs, those who could most make low interests productive

Sir, Joel Tillinghast, with his letter, and Tony James with his opinion express well serious doubts on the validity of low interests “Low interest rates are leaving pension plans desperately underfunded” and “The Fed can revive the economy with higher rates” October 24.

I would add two comments to theirs. The first is that in my experience little introduces so much pressure to get a project fast to its revenue generating point as high interest rates. In the same manner, low interest rates, can cause project laziness.

The second, much more important, is that too many SMEs and entrepreneurs, and who would love to access those lower rates cannot do so. Since banks are required to hold more capital when lending to SMEs and entrepreneurs, on account of daft regulators thinking these borrowers constitute a risk to the stability of bank systems, they get no bank credit. All worsened by the fact that since banks become less profitable, bank capital itself becomes harder and harder to access. 

As to “alternative” financing sources for those “risky” actors desperate for an opportunity to invest, Tillinghast reminds us well of “that low interest rates do not mean lower credit card or payday loan rates”.

@PerKurowski ©

There’s a curious silence about the odious distortion the Basel Committees' credit-risk-weighted capital requirements produces

Sir, suppose Martin Wolf owned an unrated SME, and Per Kurowski was the CFO of an AAA rated corporation, and both wanted to obtain bank credit for their company. 

Traditionally, naturally, before the Basel Committee’s risk-weighted capital requirements existed, because of clear differences in the perceived credit risk, Per Kurowski would be able to negotiate much more credit, and at much lower interest rates for his AAA rated corporation, when compared to what Martin Wolf could do for his unrated SME.

But now, because regulators decided banks also need to hold more capital when lending to Wolf’s SME than when lending to Kurowski’s AAA corporation, the differences in the amounts of credit obtained and the interest rates charged would be even larger. In other words Wolf’s SME, relative to Kurowski’s AAA, would obtain even less credit, and would need to pay even higher interest rates, than in the absence of these credit risk-weighted capital requirements.

Of course Kurowski does not complain that his AAA rated corporation has access to even more credit at even cheaper rates, and consequentially he himself to larger bonuses.

And of course banks, as a consequence of having to hold little capital and therefore be able to leverage hugely when lending to Kurowski’s AAA rated corporation, do not complain about being able to earn higher risk-adjusted returns on equity when lending to Kurowski’s AAA rated corporation. In fact obtaining the highest risk adjusted returns on equity for what is perceived as safe, sounds like a banker’s dream come true.

But Martin Wolf should of course be furious that bank regulators deny his SME fair access to bank credit.

And of course anyone who calls himself a progressive should be furious against this odious regulatory discrimination that denies fair access to the opportunity of bank credit to those who already find it hard enough to obtain bank credit. That clearly promotes inequality.

And of course anyone who calls himself a free markets defender should be furious about this odious regulatory distortion of the allocation of bank credit to the real economy.

But curiously, Martin Wolf as a journalist, FT, progressives and free market defendants, they all keep mum about it. Is it not a strange world?

Europe has not yet learned the lesson that Greece, the first dead canary in the European mine offers… it must.

Sir, Francesco Giavazzi holds that Europe has spent way too much time and concerns on Greece, “Greeks chose poverty — let them have their way” June 10.

Indeed they have, but, unfortunately, they have still not learned the lesson Greece has to offer.

Greece got into trouble because even though no one really trusted its government it got too much credit. Why? Because regulators allowed banks all over to lend to Greece against minimum capital requirements, something that offered the expectations of very high risk adjusted returns on bank equity; something which therefore resulted too tempting.

And Greece has not been able to get out of there problems. Why? Because banks suffering scarcity of capital can still lend to Greece’s overinflated and over-indebted government against less capital than that what they are required to hold if lending to a Greek SME.

In 1988, the Basel Accord decided that for purpose of weighing the capital requirements for banks, the risk weight of a sovereign was zero percent while the risk weight of the private sector was 100 percent... which de facto also meant they considered that any government bureaucrat would be able to use bank credit more efficiently than a SME. At that moment a deadly venomous gas started to invade many economies… and Greece is just the first canary in Europe to drop… and, if nothing’s done to stop that gas, others will follow… until all are dead.

Europe you choose too risk-adverse regulators... wake up before its too late!

@PerKurowski

FT’s silence makes it unwittingly a lobbyist for “The Infallible” accessing bank credit on preferential terms

Sir, I refer to Sarah Gordon’s Analysis on a serious lack of bank-credit to SME’s in Europe, “Give them some credit” February 19. And how bad things are is not really clear, because for instance “Published interest rates do not take into account potential borrowers who have been offered loans with high interest rates that they then decline, those who have been refused credit, or those who have simply become discouraged and stopped asking.”

Gordon writes “Banks have become more risk-averse since the crisis, not just to protect their bruised balance sheets but also to meet demands from regulators to improve capital buffers”. And the article also quotes Daniel Cloquet, director of entrepreneurship and SMEs at Business Europe, stating “At the moment, the capital requirement rules basically favor [banks holding] government debt.”

So clearly one of the main obstacle for the SMEs accessing bank credit, something about I have been writing you innumerable letters, are the risk-weighted capital requirements. By favoring so much bank lending to the “The Infallible”, like to some sovereigns and the AAAristocracy, these discriminate against the bank borrowings of “The Risky”.

But even though Gordon refers to a serious of other initiatives to help financing SMEs, some of which, like online crowd-funding mechanisms sound truly marginal… again there is not a word about the need of changing the risk-weighted capital requirements, so as to eliminate the distortions they produce in the allocation of bank credit to the real economy. And, this even though FT must be aware by now that never ever has a systemic bank crisis resulted from excessive exposures to SMEs and similar.

And so I have to conclude that for one reason I cannot really comprehend, the Financial Times does not really care about that capital requirement banks makes it harder for SMEs, and similar “risky”, to access bank credit.

And the truth is that FT’s silence on this issue makes it effectively a lobbyist for “The Infallible” accessing bank credit on preferential terms. I assume it is not on purpose.

The question is not whether SMEs are risky but whether risky SMEs pose a threat to banks. They don´t!

Sir, Patrick Jenkins, on the issue of the SME not getting sufficient access to bank credit writes: “Compounding is the reality of global capital regulations which makes it far more costly to lend to smaller businesses. Bankers say a typical SME loan may absorb $5 of capital for every $100 of loan, compared with about $1.50 for an average mortgage”, “Policy makers need to refresh their approach to SMEs” November 26.

What “realities of global capital regulations” is he talking about? Those are not God given realities, those are regulations made by human fallible regulators and, if these had been forcefully questioned, among other by your journalists, these could have been changed years ago.

After so many letters over so many years I have written to you, and Jenkins, how come it is only now that Your Banking Editor acknowledges that “Global regulators should look again at the system of risk weighting ascribed to SME lending”? And why did it take a “Bundesbank research paper…convinced that SME default data are not as bad as everyone thinks” for him to do that?

And besides, that is not even important. The real question to be answered by bank regulators is not whether the SMEs are risky or not, but whether the SMEs ever pose a threat to banks? The answer to that is of course they do not, precisely because SMEs are perceived as risky.

“The Risky” borrowers, if only they knew, would envy like crazy the banks and “The Infallible”, their Basel Committee lapdog

Sir, Patrick Jenkins, reports “Watchdog to retreat from strict capital rules”. September 30. In it Stefan Ingves, the Swedish central banker who is the head of the Basel Committee on Banking Supervision, is quoted opining that perhaps they should be softening the “tough capital rules on securitisation introduced four years ago”. Why do not the “risky” borrowers have a similar access to a regulatory lapdog?

The more the regulators soften the capital requirements for banks on whatever can be construed as belonging to “The Infallible”, the more will these directly discriminate against those already being discriminated against by banks and markets, on account of being perceived as “risky”, such as medium and small businesses, entrepreneurs and startups.

When the “risky” become “safe”, by means of being bundled up in securities, the profits of lowering the capital requirements for banks, goes almost entirely to the bundler and the banks. Why does not that profit go primarily to those being bundled? 

It just comes to show that the small and “risky” of the real economy, even though they have never ever caused a bank crisis, are just chicken shit in the eyes of regulators who just love to mingle with the AAAristocracy.

Save us from these irrational and hysterically risk-adverse bank regulators

Sir, Patrick Jenkins in “State lending targets are grist to the mill of history” (by the way a much too smart title for someone dumb like me) May 23, writes: “Experts estimate that the Basel III rules increase the capital that banks must hold against an average corporate loan by about 30 percent, and by closer to 100 percent for an SME loan”.

Can you now start to understand what I have been shouting about for years that Basel III is only digging us deeper into the hole? What on earth has SMEs, always perceived as risky, to do with this or any other bank crisis? Have not the current capital requirements against SMEs been more than enough? There is only one conclusion we are in the hands of irrational and hysterically risk-adverse regulators! And we will pay dearly for our silence!

What have the SMEs done to you?

Sir, what have those being perceived as more risky, like the SMEs, ever done to you, for you to agree with the financial regulators they should be discriminated against by generating higher capital requirements for the banks when they are lent funds?

Don’t you know that there is no risk of excessive investments in what is perceived as risky, like the SMEs, since that risk is taken care of by the sole perception that a risk exists. There is though always a risk of excessive investments in what is perceived as not risky, because that is precisely a risk that the perception of no risk creates.

Therefore requiring the banks to hold higher capital requirements when the perceived risks are higher is just a stupid argument ably exploited by those who just want to lower the capital requirements for banks when these lend to them.

The market already discriminates against perceived risk by charging higher risk premiums. Therefore, for regulators to put on an additional layer of discrimination against higher perceived risk by requiring the banks to hold more capital for what is perceived as risky is as wrong as it can be.

To eliminate the capital requirements based on risks will not signify a subsidy of any sort to the SMEs, what it signifies is the elimination of an onerous discrimination against the SMEs.