How many small bank loans to SMEs and entrepreneurs has Basel Committee’s regulations hindered? Millions?

Sir, Shawn Donnan reports that in his annual economic report to Congress president Obama portrayed an American economy in relatively rude health after weathering one of the most brutal crises in its history. But Obama also acknowledged rising inequality, and that “a lot of Americans feel anxious”, blaming that on an economy that thanks to technological advances had been “changing in profound ways, starting long before the Great Recession”. “Obama rejects allegations economy is on the slide” February 23.

I would suggest to Mr. Obama he poses the following question to some economist at universities and at the Federal Reserve: 

How many bank loans to SMEs and entrepreneurs have not been awarded in America and Europe the last decade because of the risk weighted capital requirements for banks, ten thousands, hundred thousands, millions? I expect their answer to be frightening.

One way to obtain that number would be to look at how many of these loans were on the balance sheets of banks pre Basel II and how many are to be found today.

There is no way in hell America and Europe can regain sturdy and sustainable economic growth with bank regulators who distort the allocation of bank credit to the real economy with a silly and dangerous credit risk aversion.

Ben McLannahan in “US lenders blast proposed capital buffer rules”, reports on the ongoing discussions about rules on banks’ “total loss absorbing capacity” (TLAC). There he writes: “The top lobby groups for banks in the US have blasted proposals to make them build bigger capital buffers against losses, saying the “excessive” requirements could restrict the flow of credit to the world’s biggest economy.”

But, no matter at what percentage they are set, the required total loss absorbing capacity is still based on risk weighted assets (RWAs). And that means banks must hold more TLAC for assets considered as risky than for assets considered as safe.

And so that means those capital requirements especially restrict the flow of credit to those perceived as “risky”, the SMEs and entrepreneurs.

In this world were lobbying has sadly become a part of the government process, how sad it is that “The Risky” have no powerful lobbyist on their side.

The first arguments such a lobbyist could produce is to inform regulators about the fact that SMEs and entrepreneurs, precisely because they are perceived as risky, already count with less and more expensive access to bank credit, and so they never ever set of major bank crises.

And to address the inequality issue they could cite J.K. Galbraith’s “Money: Whence it came where it went” 1975 with: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

“A ship in harbor is safe, but that is not what ships are for.” (John Augustus Shedd, 1850-1926) America, Europe, the World, what goes for ships goes for banks too!

America, Europe, the World, for the sake of next generations, allow your banks to finance the risky future and not only be refinancing the safer past!

@PerKurowski ©

There are social leftwing reformers and statist leftwing reformers. In banking currently only the latter exist.

Sir, John Dizard, referring to Senator Bernie Sanders and Senator Elizabeth Warren writes “The US financial industry should listen to leftwing reformers” December 7.

Frankly, if by leftwing he refers to someone defending the small and poor, then I do not know of any real leftwing reformer. John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And current credit risk weighted capital requirements, to which I have heard none from the supposedly left raise objections, hinders precisely “the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

And, it is only going to get worse. That “Fed’s total loss-absorbing capacity… will require an estimated additional $120bn in equity and debt” Dizard refers to, that one is also based on credit risk weighted assets.

But of course, if it is leftwing reformer as in being statists, then they must be plentiful of them, as very few have raised objections to that in 1988, with the Basel Accord, the risk weight of sovereign (government) was set at zero percent, while the risk weight for the private sector was defined as 100 percent.

No Sir, whether leftwing or rightwing, I would not like to have anyone who fails to state in very clear terms what he believes to be the purpose of the banks, and I agree with that purpose, to have anything to do with regulating banks.

@PerKurowski ©

Risk weighted TLAC intensifies the irresponsible regulatory distortion of bank credit allocation to the real economy

Sir, I refer to Eric Platt’s and Ben McLannahan’s “S&P downgrades 8 US lenders on support fears” and to Lex’s “US banks: losing their safety harness”, December 4.

It is mentioned: “Since the financial crisis of 2008-09 regulators have launched a succession of measures designed to ensure that taxpayers will not be burdened again in the event of another Lehman-like crisis, forcing banks to hold more capital and liquid assets while limiting the amounts they can return to shareholders through buybacks and dividends” “Banks are expected to hold total loss absorbing capacity — TLAC — of at least 18 per cent of their risk-weighted assets.” “S&P on Wednesday pronounced the US Federal Reserve’s latest capital rules as up to the task”

So, on top of the distortions produced by the risk weighted capital requirements now regulators want to add this.

18 percent of risk weighted assets means that normal unrated creditors, and those rated between BBB+ to BB-, will generate the bank an 18 percent TLAC requirement, while for example private sector assets rated AAA to AA will only generate a 3.6 percent requirements TLAC. Those unlucky to have a rating below BB- they will generate a 27 percent TLAC requirement, which of course will not make their plight any easier to solve.

I am so amazed at how bank regulators seem to not care one iota about whether their regulations distort the allocation of bank credit to the real economy. Might it be that they have still not defined the purpose of those banks they are regulating? God, save us from this type of irresponsible regulators.

@PerKurowski ©

Why do so many care so much more about the risks banks should avoid, than about the risks they should take?

Sir, Martin Arnold in reference to Mark Carney’s, the head of the Financial Stability Board proposal for systemically important banks to hold more equity writes “Carney’s ‘too big to fail’ buffer represents clear progress despite doubt”, December 9.

And therein Arnold describes the proposed total-loss-absorbing capacity (TLAC) to be worth between a fifth and a quarter of risk-weighted assets.

That could mean that a bank would need to hold 25 percent in loss absorbing capacity against assets risk-weighted 100%, like loans to small businesses and entrepreneurs, while at the same time only be required to hold between 0 and 5 percent of that same sort of TLAC back up, against assets risk-weighted 0 to 20 percent, like the infallible sovereigns and the AAAristocracy.

Does Arnold really think that increased distortion in the allocation of bank credit signifies any sort of progress? He’s got to be joking... or he signs up wholeheartedly on the après nous le deluge that spoils the future of our children.

Arnold also concludes in that “it is only when the next financial crisis hits that we will find out whether Carney really has consigned taxpayer bailouts of banks to history books.” Is he aware that the taxpayers who are most going to pay for the current crisis will be our children and not we the parents... and they will have to pay those taxes mostly for nothing?

The bank regulatory assassination of the real economy and of opportunities, is about to get much worse with FSB’s TLAC

Sir, I refer to Sam Fleming “FSB warns capital rules for big banks are likely to hit dividends and bonuses” November 11.

The Financial Stability Board announced that: “the basic total loss-absorbing capacity requirement (TLAC) would be in the range of 16-20 percent of a bank’s risk weighted assets.”

That means that when lending to for instance one of the AAAristocracy who carries a risk weight of 20%, the bank will need to hold 4% in TLAC.

But, when lending to a small business, which carries a risk weight of 100%, then the bank will need to hold 20% in TLAC.

This will of course mean that banks will lend too much to “the infallible” at too low interest rates; and will stop lending to small businesses and other “risky”, unless at extremely high relative compensatory interest rates.

And that means in effect the regulatory assassination of the real economy will worsen.

Mark Carney, the FSB chair, holds that this will help to avoid the need for taxpayers to pay out in the case of any bailout. Perhaps, but way before taxpayers pay, perhaps inflation willing they even never will pay, others are paying.

Mark Carney mentions the subsidy in that “the public purse backstops these banks” Indeed…so let him answer us… who gets the most of that subsidy… “the infallible” or “the risky”?

In case of the need for a bailout, that which most often happens when some huge exposures to something perceived as absolutely safe turn risky, why should those perceived as “the risky” have had to pay for the cost of 20 percent of TLAC while “the infallible” only pay 4 percent of it?

And the worse cost of all, to be paid primarily by the future generations of unemployed, are all the opportunities that will never be realized because of lack of bank credit. And that will of course only increase inequalities.

I must say it… Damn these bank regulators who clearly only care about the short term health of banks, and do not give one iota about the real economy.

How can bank regulators deny their children the risk-taking by banks that benefitted them?

PS. And of course, the zero risk weighted infallible sovereigns are the biggest beneficiaries of the public purse backstop of banks subsidy, because, in their case, the required TLAC is zero! How can our bank regulators be so shameless?