Sometimes, quite often, a government’s help costs you more than it is worth

Sir, Sarah Gordon with respect to the possible consequences of Brexit for small business writes: “The British government has failed to provide the support that is needed” “Aloof state abandons UK small businesses to their Brexit fate” October 18.

Since any government assistance way too often goes hand in hand with having to waste your time, or your money paying their crony consultants for a lot of tasks not necessarily relevant to the problem at hand, I’m not really sure small businesses are here net losers as a result of that lack of support.

Besides what’s to be expected from a government that allows banks to hold much less capital when lending to the sovereign and financing house purchases, than when lending to small businesses?

@PerKurowski

Jean-Claude Juncker, while bank regulatory risk aversion remains, Europe will stall and fall, no matter what you do

Sir, Sarah Gordon writes: “There is no doubt that a boost to investment in Europe is still needed. Its recovery since the financial crisis has been the weakest in 30 years, and most of the region’s economies are still underperforming their potential. The Juncker plan was an ambitious and imaginative attempt. But as for many such grands projets, implementation has lagged behind conception” “Juncker’s European investment plan: rhetoric vs reality” March 29.

But in parallel to that, the regulators, with their risk weighted capital requirements for banks, distorted the allocation of credit to the real economy. 

By doubling down on risk perceptions they de facto decreed that those perceived as risky, like SMEs, were less worthy of bank credit than those perceived as safe, like sovereigns.

And Jean-Claude Juncker, not wanting to criticize technocrat colleagues preferred to launch this bureaucrats directed investment plan. 

Forget it! While current bank regulatory risk aversion remains, Europe has no way to go but to stall and fall.

Here my pending questions that are not answered by the regulators. 

@PerKurowski

Italy has no chance of solving its bank and economy problems, if it does not understand the regulatory distortions

Sir, Sarah Gordon writes: “Thousands of small and medium-sized companies have gone under, taking with them the bank loans on which they depended, as well as demand for lending”, “The spreading pain of Italy’s bank saga”, August 11.

First let us make on thing very clear, those thousand and SMEs that have gone under more than they were expected to go under, did so as a result of the 2007-08 crisis. They had not one iota to do with causing the crisis.

And so let me explain it again, for the umpteenth time: Before current bank regulations, pre 1988, pre Basel Committee, no one made a distinction between a Lira or an Euro in capital invested in something perceived as safe, or in something perceived as risky.

But then the Basel Committee came along and decided that, if banks invested in something perceived, decreed or concocted as safe, then a unit of their capital (equity) could be leveraged more than 60 to 1, while, if invested in for instance some loans to SMEs and entrepreneurs, that same unit could only be leveraged 12.5 to 1.

And so of course that introduced a very serious distortion of the allocation of bank credit to the real economy, which persists until today, all because our besserwisser bank regulators, insist on that they are besserwissers.

If Italy does not allow its SMEs or entrepreneurs to have fair access to bank credit then it is doomed to stagnation… that is unless La Banca Sommersa comes to its rescue.

@PerKurowski ©

Why is Europe so little appreciative of our more than $300bn non-reimbursable oil price easing?

Sir, I completely agree with Sarah Gordon in that “Worries over deflation have been puffed up by prophets of doom” January 15.

For instance I cannot for the world understand why Europe is so little appreciative of the more than $300bn non-reimbursable easing the recent drop in oil prices represents. ECB’s QEs are to be repaid, not this one.

There we oil suppliers (I am Venezuelan) stand in the door, bearing what is for us very expensive gifts, and we have to hear about nasty suspicions that we want to infect Europe with the virus of deflation. Come on, what are friends for?

Why should companies be banks and banks not? The real challenge for the European Commission

Sir, I refer to Sarah Gordon’s “Juncker’s plan needs companies to open up their healthy coffers” December 30.

And I ask why should companies turn into banks? Why should companies finance “Europe’s younger and smaller firms which, research suggests, create a disproportionate number of new net jobs”.

What’s wrong with banks financing these? And as banks would were it not for the credit-risk-weighted capital requirements for banks, which create such real hurdles for banks when financing what is perceived as “risky”… and this even though those “risky” could signify the safest way out of the crisis.

Who is going to stop the frankly idiotic bank regulations coming out of the Basel Committee? That would be the real challenge for the European Commission. 

While risk based capital requirements for banks remain, small companies will not have fair access to bank credit.

Sir Sarah Gordon writes: “Smaller companies [in Europe] have also been able to take advantage of easier borrowing conditions”, “Light amid the gloom”, November 28.

Yes, in absolute terms, the smaller companies might indeed currently face easier borrowing conditions but, in a competitive economy, what most matters for the correct allocation of bank credit, is not the absolute but the relative borrowing conditions. And in that respect, let me assure you that smaller companies, those primarily squeezed by the credit risk weighted capital requirements for banks, are worse of than ever, as a result of the increasing capital/equity squeeze on banks.

And Gordon also wrote: “Even the lack of access to bank lending during the financial crisis [and thereafter] has had positive effects, with small and medium-sized enterprises reducing their over reliance on banks and diversifying their funding sources.” And I am not sure what to make of it. 

Is Sarah Gordon, blaming small and medium-sized companies for their over reliance on banks? If so whoever told her it is their responsibility to achieve a diversification of their funding sources? Have they not enough problems as is, running their smaller companies’ businesses?

No, those really responsible for allowing small businesses to have fair access to bank credit are primarily the regulators, and they are not acknowledging, or much worse yet, perhaps not even understanding the fact that they do impede it… and so, sadly, there is still too much darkness amid the gloom.

Europe, why should chief executives of businesses with cash on hand take risks when banks are officially paid not to?

Sir, Sarah Gordon quotes Chris Gentle with: “Who is owning the growth agenda? It should be chief executives, but they have not been rewarded recently for taking risks. The danger is that Europe will lose competitiveness in the long term?”, “Europe shuns growth in favour of ‘safety first’” September 15.

What’s strange about that? Why on earth should chief executives of businesses with cash surpluses invest and take risks when banks, those who should be the forefront in financial intermediation, are officially ordered not to take risks.

Europe, for some decades now, has actually paid its bankers to avoid risks, by allowing them to earn much higher risk adjusted returns on equity on exposures officially deemed as safe like to infallible sovereigns, the housing sector and the AAAristocracy than on assets deemed as “risky”. And of course that stalls any economy.

There´s no bank lending to non-financial corporates as it requires the most of what is most scarce in Europe, bank capital.

Sir, Sarah Gordon writes that in Europe “bank lending to non-financial corporates has, almost unbelievably, been contracting for the past five years”, “Easy credit conditions are benefiting only the few” July 31.

What is unbelievable with that? As I have explained in hundreds of letter to you and your reporters for about soon a decade, bank lending to non-financial corporate requires, because of the risk-weighted capital requirements, the most of what is most scarce in Europe, namely bank capital… and so of course there is no lending. It is as easy as that!

And that is why liquidity does not reach where it is most needed. And the real problem is that some, like Mario Draghi, do not want to recognize how stupid these bank regulations are.

The labour pains of Europe are made worse, and permanent, by the risk-weighted capital requirements for banks.

Sir, I refer to Sarah Gordon´s, Claire Jones´ and Peter Wise´s report on the eurozone unemployment “Labor pains” July 7.

I just wish those three would take perhaps an hour or so to sit down and discuss among themselves which of the following two Europe they would prefer, if worried about the future job perspectives of their children or grandchildren.

One, like today´s, where regulators thinking this will bring stability to the banking sector allow banks to hold less capital against what is perceived as safe than against what is ex ante perceived as risky, or one, where banks must maintain the same capital (a leverage ratio), against any asset?

In today´s Europe banks therefore earn much higher risk adjusted returns on equity when lending to the infallible sovereigns, the housing sector or a member of the AAAristocracy, than when lending to “risky” medium and small businesses, entrepreneurs and start-ups. In the hypothetical Europe, in fact the Europe that used to be some decades ago, there is no such discrimination or distortion, though of course banks would as always consider the perceived credit risks in order to set interest rates, size of exposures and their other terms.

And I argue that banks in today´s Europe, as a consequence cannot finance “the risky”, those which represents so much of Europe´s potential future, but are forced to dedicate themselves mostly, or even exclusively, to re-finance the safer past… and that simply means that a new generation of jobs will never have a chance to see the light.

Please, when deciding, do not forget that most safety and prosperity of today is the result of the risk-taking of yesterday. God make us daring! Are you really going to exploit the past for your own benefit and refuse your children their future?

And I also hold that the current bank capital risk-weight distortions are, at the end of the day, absolutely useless even from the perspective of bringing stability to the banks. Because the only thing it guarantees, is that the absolutely safe will get too much credit in too lenient terms and therefore, sooner or later, ex-post, turn into absolutely risky.

And history is 100% on my side. Never ever has there been a major bank crisis caused by excessive bank exposures to what was ex-ante perceived as “risky”, these have always been caused, no exceptions by excessive exposures to what was perceived as absolutely safe but that ex-post turn out not to be.

PS. I believe FT and its journalists should be weary of the fact that there is not a chance in hell that the European Commission will order Google to eliminate the links to all the letters I have sent to all of you on the subject of the distortions caused by risk-weighted capital requirements for banks, and so you will have to live with the fact that for whatever reasons, these might indeed be very petty, you have decided to ignore my arguments.

Who brainwashed FT’s Sarah Gordon?

Sir, Sarah Gordon writes “The relationships between local lenders and their clients … were often too cosy, with loans handed over without the due diligence that should have accompanied them. Generations of family relied on one source of borrowing. Generations of banks asked too few searching questions about companies´ growth plans”, “Europe´s small companies get back in the funding picture” June 19.

Indeed Sarah Gordon, that is not good, but so what? Is that an excuse from locking out small businesses in general from access to bank credit, as the risk-weighted capital requirements for banks do?

Yes there has been many problems with some of these companies… but can you remember any one of them that caused so much damage as the AAA-rated securities backed with badly awarded subprime mortgages in the US, and which were so much in demand because regulators thought these to be so safe… only because credit ratings said so?

It is high noon for some intellectual honesty. Don’t you think so Sarah Gordon?

PS. And of course I am not picking on you specifically Sarah Gordon. In FT with respect to the distortions risk-weighted capital requirements produce, there are many much worse brainwashed than you! (As you know :-))

PS. And by the way, if it comes to too cozy relations, I much prefer those between banks and small to medium sized borrowers, than that between the banks and their infallible sovereign.

When referencing cash, remember it is usually not really cash... & do we need special taxes on profits from patents?

Sir, I refer to Sarah Gordon’s “Be wary of the tax incentives in pharma’s deal financing” May 1, in order to make the following two observations:

First I believe that we should take the opportunity of the inequality frenzy that Piketty’s Capital has brought on, to discuss the treatment given to intellectual property right profits… as there can be little discussion that patents and similar, are among the biggest de facto inequality drivers. I, for instance, have held for some years that profits obtained under the umbrella of patents, and or of extravagant market shares, should be taxed higher than profits obtained from competing naked in the markets.

Second, when Gordon writes about the “$1.64tn of cash” that Moody estimates US companies held at the end of 2013, she would do better referring to “$1.64tn of liquid assets”… since we have no reason to believe the CFO’s of those companies keep stacks of notes hidden in their mattresses. I say this because we should not forget that any alternative use of these assets, will require their disposal… which has other effects in the market.

Europe needs energy, indeed, but more than electricity human energy, that which is propelled by risk taking.

Sir, Leif Johansson, the chairman of Ericsson and Astra Seneca, when urged by the FT to pick out one issue that needs to be addressed to make Europe more competitive, suggests: “energy; both security of supply but also energy competitiveness especially versus the US”, March 31.

I would agree but, instead of energy represented by electricity, which is what Johansson refers to, I would argue for the need of more human energy… that which is driven by the willingness to take risks.

That human energy is currently being killed by regulations which allow, in Europe more than anywhere else, banks to earn higher risk adjusted returns when lending to the “infallible sovereigns” and the AAAristocracy, than when lending to the “risky” medium and small businesses entrepreneurs and start ups.

Leif Johansson should remember that in the churches of Sweden psalms were often sung imploring “Gud gör oss djärva”, “God make us daring”.

Right now banks in Europe are not financing the risky future, they are just refinancing the safer past… and that Europe, is no way to go.

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.

There will not be any normalization of bank credit in Europe until regulators do a 180 degrees volte-face.

Sir, Sarah Gordon writes that “While the region’s [highly credit rated] groups have gorged on cheap credit, its multitude of smaller companies have had to deal with a scarcity of funding”, “Poor corporate credit is holding back Europe’s recovery”, January 31.

Of course, how could it be otherwise, when regulators, especially in times of scarce bank capital, require banks to hold much more capital when lending to those who are perceived as having higher expected losses than to those who possess a high credit rating.

Gordon mentions that because companies are “now driven by the desire to invest. This will inevitably, result in normalization of credit at some point.” Forget it! There will be no normalization of credit until regulators realize that capital requirements for banks should have very little to do with expected losses, and a lot to do with unexpected losses, and therefore get rid of the current system of risk-weighting.

But also beware of the much greater risk derived from excessive lack of testosterone and dopamine

Sir, the fundamental problem with good articles like Sarah Gordon´s “Call in the nerds – finance is no place for extroverts”, April 25, is that they tend to analyze risks from the perspective of when risk-taking goes bad, without caring much for when risk-taking goes right.

The problem we are facing now is that bank regulators, with too little testosterone, and too little dopamine, and too little understanding of what they were doing, gave the banks extraordinary incentives to lend and invest in what was perceived as “safe” and to stay away from what was perceived as “risky”… and so the banks did… and loaded up on AAA rated securities, Greece, Spanish real estate and others safes.

Indeed if regulators had incorporated more behavioral analysis then they would not have based the capital requirements for the banks based on perceived risk, like that in credit ratings, but based to how bankers react to perceived risk. And then, instead of more-risk-more-capital less-risk-less capital, they might have applied a somewhat inverse capital requirements, since bank crisis have never ever resulted from excessive bank exposures to something perceived ex ante as “risky.

PS. As gold is mentioned, just as a curiosity let me remind you that in the Report on Global Financial Stability 2012, of April last year, the IMF listed 77.4 trillion dollars in safe assets and therein gold represented 11 percent.