To allow banks to regain public trust and better serve the UK economy, begin by explaining how their regulators distorted banking.

Sir, you write about “the highly concentrated nature of the UK system, which is dominated by a handful of large institutions, with balance sheets skewed towards mortgage lending and other forms of consumer finance” and of a popular resentment of banker’s pay, “Corbyn’s calculated ‘threat’ to the banks”, December 2.

Banks’ balance sheets are skewed towards less-capital or very high risk-premiums, like lending to the sovereign, mortgage lending and other forms of consumer finance

Banks’ balance sheets are skewed away from what requires holding more capital and cannot afford to pay too high rates, like SMEs and entrepreneurs.

If you required banks to hold as much capital for all their assets as they must hold when lending to SMEs and entrepreneurs, then the story would be much different.

If you allowed banks to hold slightly less capital against loans to SMEs and entrepreneurs than against all other assets, that would more than compensate for the lack “of community banks or Sparkassen”; and introduce such economic dynamism that it could more than help you to confront any Brexit difficulties.

If banks needed to hold more capital in general, and therefore needed to compensate shareholders more, then there would be less available space for current abnormal banker bonuses. Ask Sergio Ermotti how much he has to thank regulators for his bonuses.

So, how to ensure that the banking sector can regain public trust and better serve the needs of the UK economy? Sir, why not begin by explaining what the bank regulators have done. We can of course not ask the bankers to explain that.

Oops, but that would mean you would have to explain why you have silenced my soon 2.700 letter to you on this, and that could be too embarrassing for one with your motto.

A brief aide memoire

@PerKurowski

Ask European SMEs and entrepreneurs if they believe Europe is overbanked?

Sir, I refer to Claire Jones’ and Martin Arnold’s “Bankers signal alarm over Eurozone lenders” October 10.

If were an SME or an entrepreneur, not being able to access the opportunity of the bank credit I need for me to have a chance to fulfill my dreams, I would be furious and desperate if hearing Sergio Ermotti, chief executive of UBS say “Europe is in a huge overcapacity situation, with a combination of private sector and public sector banks and quasi-public sector banks that have been allowed to compete”. 

Gary Cohn, president and chief operating officer of Goldman Sachs is also quoted with, in comparison to Europe and elsewhere with that the US banking sector was “in the best shape ever”. Nonsense, the real strength of any banking sector is a 100% function of the strength of the real economy they depend upon; and few would hold that the US and world economy “in the best shape ever”. That type of affirmation can only come from someone who believes the real economy should be serving the banks, and not caring one iota for need of the banks serving the real economy.

And Nigel Vooght, global head of financial services at PwC, the consultancy is quoted with”: “Banks need to wake up and start to react, because they are an integral part of society, but they don’t have a divine right to be here . . . All the banks are trying to switch from an interest rate-based model to a fee-based model.”

I totally disagree. Banks have, thanks to regulators, not been pursuing “an interest rate-based model” but an interest rate-based capital minimization model. If they are to be an integral part of society, switching from interest rates to fees will just not cut it. Banks need to realize that their fundamental role is to allocate credit efficiently as possible to the real economy, and that’s just not possible using different capital requirements based on ex ante perceived credit risks. 

@PerKurowski ©

When risky things turn out risky, they turn out as expected. It is in what’s “safe” where the real unexpected dangers lurk

Sir Lucy Kellaway when referring to Sergio Ermotti, the chief executive of UBS, telling “all the bankers who work for him that henceforth it was OK for them to make mistakes” writes: “Mistakes are never OK. And they are particularly un-OK in banking” because… “The main point about risks is that they are risky — and risky things have a way of going wrong.” “Listen to brain surgeons, not bankers, for the truth on errors” September 27.

Not so. When risky things turn out risky, they are actually turning out right as expected… it is when safe things turn out risky, that things can really go wrong.

And Kellaway argues: “What Mr Ermotti should have made clear was that sometimes his employees must take risks, and sometimes things will go wrong. When that happens, no one must ever make light of their cock-ups. Instead they should carry the memory of all their mistakes as part of their own internal score sheet of how they have fared as a banker.”

Indeed, but the greatest cock-up in banking history, a cock up so big that it is being frantically ignored, was the one made by bank regulators. It happened when they allowed banks to hold much less capital against assets perceived as safe, meaning against those assets that precisely because they are perceived as safe, represent the biggest danger to the banking system.

Lucy Kellaway, I am sorry, I have no idea why we would need to listen to brain surgeons for the truth on errors… even a bank regulator who knew what he was doing, should know that.

@PerKurowski

Is Ermotti suggesting UBS tinkers with risk measuring, like Volkswagen tinkered with pollution emissions measuring?

Sir, I refer to your most important editorial in over a decade, “Banking cannot prosper within a culture of fear”, September 24.  A more correct title would be: “Our economies cannot prosper when bank regulators have been overtaken by a culture of senseless fear”.

You, who proudly proclaims a “Without fear”, seem to at long last have to come to grips with the fact that risk-taking is much needed in order to avoid even worse risks. Sadly, you should at the latest, have written that in June 2004 when Basel II was announced.

Then silly risk adverse regulators, who clearly had never read The Parable of the Talents, imposed a culture of fear of “The Risky” by excessively embracing “The Safe”. Its risk-weighted capital requirements, clearly instructed banks to avoid taking risk on The Risky, by giving them permission to leverage incredibly, much riskier, with what is perceived ex antes as safe.

And you write: “Sergio Ermotti, the chief executive of UBS, has been so bold as to urge his staff to embrace risk-taking again”. Great, and of course I agree full heartedly with him. That is our responsibility towards those coming after us. God make us daring!

Unfortunately, Ermotti can urge his staff to embrace-risk taking as much as he wants, that will still not happen, not as long as the credit-risk weighted capital requirements remain in place. That is of course unless Ermotti is now suggesting that UBS tinkers with risk measuring, along the way Volkswagen tinkered with emissions measuring.

PS. On a personal note I wish of course you would have had the decency to at least acknowledged that this, Basel’s dangerous regulatory risk aversion, has been the leitmotiv in the over thousand of letters I sent you, which you preferred to ignore. The letters though are still all out there on my http://teawithft.blogspot.com, for the world to see.

PS. When bankers grow old and begin to fade away... what would they regret the most, the risk they took or the ones they did not dare to take?

PS. Here I have a brief YouTube explanation, in red and blue, of our crazy bank regulations.

@PerKurowski