Where are the occupational licensing requirements when they are really needed, like in bank regulations?

Sir, Simon Samuels writes: “A manufacturing company would not be expected to operate without knowing its cost of production. Not knowing how much capital is needed to lend money is the banking equivalent” “Confusion over bank capital requirements fails us all” February 23.

So there is a banking consultant at Veritum Partners, clearly stating (confessing) that the production cost of credit depends on the capital requirement. Of course, less capital equals lower credit production cost, higher capital higher production cost.

And so again I ask, for the umpteenth time, why on earth should regulators, with their risk weighted capital requirements favor those ex ante perceived as safe with lower cost produced credit, than those ex ante perceived as risky? Do they not understand that dangerously distorts the allocation of bank credit? Do they not know that guarantees, sooner or later dangerously overpopulating a safe haven… against especially little capital?

I have recently read that in forty-one US states license for makeup artists is required and in thirteen states you need a license to be a bartender. So tell me, when are the occupational licensing requirements when we really need them, like for that extremely delicate function of regulating banks? The lack of it has saddled us with regulators who believe that what’s perceived as risky is more dangerous to our bank system that what’s perceived, decreed or concocted as safe! Unbelievable eh?

@PerKurowski

Should bank shareholders really want lower capital requirements for what’s perceived as “safe” than for what’s “risky”?

Sir, Simon Samuels writes, “it may soon be time for shareholders to place their bets on how they like their banks — skinny on capital but with a ton of rules designed to cramp their riskier activities, or fat on capital with the freedom to take more risks… should [bank] shareholders celebrate or fear more lenient regulators?”, “Shareholders’ dilemma on financial regulation” April 17.

That is a faulty or at least incomplete description of the problem.

Current capital requirements are lenient for what is perceived, decreed or concocted as safe, and more severe for what is ex-ante perceived as risky. And that means, in one word, DISTORTION.

As a consequence banks will not be allocating credit efficiently, so the real economy will stall and fall, something that has severe consequences, at least for the bank shareholders’ grandchildren.

Also, though low equity against assets perceived as safe might in the interim produce high risk adjusted returns o equity, sooner or later the bank will, GUARANTEED, end up holding dangerously large exposures to something ex ante perceived as safe but that ex post suddenly turns out to be very risky.

I can understand some bank managers going for maximizing their bonuses in the short run, at whatever cost, they don’t have to give back their bonuses when shit hits the fan; but I cannot understand a bank shareholder who, aware of the regulatory distortions, find this acceptable.

Samuels ends with “shareholders should focus less on the rules the regulators set and more on how managers navigate their business. To quote Warren Buffett: “Banking is a very good business, if you don’t do anything dumb.”

On the contrary, as is, the regulators must focus on the rules the regulators set because these rules, this interference, is the greatest source of dangers for their banks and for everyone’s economy.

Sir, what good does a great run on bank profits do you if at the end of the day you find yourself standing on top of some worthless rubbles?

PS. Sir, do not forget that, amazingly, these risk weighted capital requirements are portfolio invariant.

PS. THE QUESTIONS

@PerKurowski

If banks want to keep the society’s support, they must again become efficient allocators of credit to the real economy.

Sir, Simon Samuels, a banking consultant, writes that “the priority of regulators and policymakers in Europe…should be developing financing solutions other than banks from which customers can borrow” and one way he suggests is “to give borrowers an incentive to shun banks and so deepen Europe’s capital markets.” That sure does not sound like a consultant working for the long term interest of his clients. Does Samuels really believe banks will keep the huge taxpayer support they now have, if they abandon lending to all in the real economy? “Bank regulators, be careful what you wish for” July 25.

But then Samuels dutifully defends the profitability of banks by warning against increased capital requirements. He writes: “If the return on equity from mortgage lending or corporate lending falls by more than half — as has been widely estimated under the proposals as drafted — then banks will either ration lending in these areas or try to raise prices.”

But Samuels also keeps mum about the fact that, for the purpose of the capital requirements for banks, the risk-weight for mortgage lending is 35%, while the risk weight for any corporate rated BBB+ or below is 100% or more. Which means that banks already earn much higher risk-adjusted returns on equity when financing houses, or investing in other perceived, decreed or concocted safe assets, than when financing those “risky” SMEs and entrepreneurs, those that could create the jobs needed for house owners to service mortgages and pay the utilities.

Of course, as someone interested in the well-being of the real economy, I would also tell the regulators to go very easy on the increase in any capital requirements for banks. But, much more than that, as I have done for soon two decades, I would beg regulators to eliminate that regulatory risk-aversion that has stopped banks from financing the risky future and now have these only refinancing the safer past.

If the banks and bankers forget that their role is to allocate credit efficiently to the economy, and that that is the only reason why society supports them, they will very soon be out of business… and out of bonuses.

PS. I dare you all to have a look at some of the mind-blowing mistakes of current bank regulations.

PS. I have had some other occasions to opine on Simon Samuels opinions.

@PerKurowski ©

Regulation distortions, sure makes finance information on banks extra hard to grasp.

Simon Samuels writes about bank financial reports of 600 pages, “Too much information makes finance hard to grasp” April 25.

Sir, since the 2007-08 crisis, I have read at least 50 editorials, articles or research papers, written by first class newspapers, experts or renowned academicians, that have compared the capital to assets ratios of banks of before the 90s, with the capital to risk weighted assets of the Basel I, II and III… in order to show how bank capitalization has evolved.

In fact even prominent regulators have fallen in their own trap.

For instance in this letter I pointed out the mistakes of Alan Greenspan.

Besides, what’s the use of risk weighted capital to asset ratios if no one understands what the risk weights are and how these came into being, like for instance the zero percent for sovereigns?

Sir this is the prime example of how regulation has distorted information and makes the finance information on banks hard to grasp.

PS. Do you want me to review my blog and count the times FT and its people got it wrong but ignored my letters on it?

PS. By the way in my letters I have found that Simon Samuels, related to the Financial Stability Board, seemingly has not much against the concept that regulators should act as risk managers for the world. Boy it does takes a lot of hubris for that! 

@PerKurowski ©

If we are going to have a Basel IV that works for the economy, it cannot be built on principles of Basel I, II or III

Sir, Simon Samuels is half right when opining: “It is one thing to decide that tighter regulations are worth the cost. It is another to exacerbate that cost through delay and indecision” “Make up your mind on banking regulation” August 27.

Half right because much more than tighter regulations, we need better and less distorting regulations.

In his article Samuels, surely quite unwittingly, describes well how the risk-weighted capital requirements in Basel regulations distort the allocation of bank credit. When he writes: “a business that has a 17 per cent return on equity under Basel III might earn a paltry 3 or 4 per cent under Basel IV”, he should not ignore that a lot of lending that previously gave banks a decent return on equity, equally became bad business with the introduction of the risk-weighted capital requirements.

Before the introduction of credit risk weights, all borrowers competed with their risk-adjusted margins on equal terms for the access to bank credit. Now those who are perceived as safe, and which therefore generate lower capital requirements, are favored because their risk-adjusted margins can be leveraged many times more on bank equity than those of the “risky”. The problem of SMEs and entrepreneurs is that their voice is much less heard than that of the banks and of the AAArisktocracy.

I do understand that Samuel, as a bank consultant, shows much concern for the banks… but let me assure him that any delays and indecisions about correcting current bank regulations are hurting the real economy much more… and, implicitly, therefore also hurting the banks too.

Bankers, if good citizens, should know that making great returns on equity based on misallocations of credit to the real economy… hurts the future of which their kids are also a part.

@PerKurowski

Europe, urgently, fire Basel Committee’s members; and ask ECB to inject €1tn as equity in Europe’s banks

Sir, Simon Samuel’s mentions as a consequence of Basel III the possibility of a collapse in bank lending in Europe that would dwarf the €1tn or 2€tn of QEs that ECB might carry out, “Withering regulations will make for shriveled banks”, January 14.

Good for him, someone for the inner circle of bank regulators, is finally beginning to speak up on what needed to be said… sort of ages ago. Let us now see if FT also dares to live up to its motto “Without fear and without favour”.

That said the reality is worse than what Simon Samuels describes, because the credit shrinkage he refers to would primarily affect those Europe most needs to have access to bank credit, namely risky small businesses and entrepreneurs, "The Excluded" . And that because the “withering regulations” are still including the portfolio invariant credit risk weighted equity requirements for banks, which operating on the margin, excludes the risky in favor of “the infallible”.

What would I do? Throw the risk-weights out and hope that history forgets our stupidity. Impose a 10 percent equity requirement on all assets, and then, to get us from where Europe’s banks are, because of Basel I, II and III, to where they must be, have the ECB “offer” to subscribe all equity needed to meet those new requirements. ECB should of course commit not to use the voting rights of that bank equity and to resell for instance 10 percent of those shares per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Sir any ECB-QEs, or excessive fiscal stimulus, before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

PS. Sir, if my Tea-with-FT blog post in November last year helped to push Simon Samuel to speak up against other members of their mutual admiration club… then I have been right insisting in sending you the letters you do not welcome or acknowledge.

Simon Samuels, bank regulators’ own ‘risk culture’ is as bad as it gets

Sir, Simon Samuel’s holds that “the driver of bank failure is not insufficient capital but rather a bad ‘risk culture’”, “A culture ratio is more important than a capital ratio”, November 25.

Absolutely, just like it is not the risk of the assets that a bank has on its books that matters, but how the bank manages those risks.

And in this respect no ‘risk culture’ has been as bad and damaging than that of bank regulators who came up with portfolio invariant ex ante perceived credit risk weighted equity requirements for banks.

With it they gave incentives for banks to accumulate dangerous high exposures against little equity in assets like loans to Greece or AAA rated securities.

And with it, by making it easier and cheaper for the “infallible” sovereigns and the AAAristocracy to access bank credit, and thereby much harder to do so for the peasants, our small businesses and entrepreneurs, they also imposed destructive financial feudalism 

Simon Samuels would do good looking at what he himself and his colleagues are up to in the Financial Stability Board, and in the Basel Committee, since only excessive hubris could explain them thinking themselves able to play risk managers for the banks of the world.