Minimal capital requirements are a potent growth hormone for too big to fail banks.

Sir, I refer to Ben McLannahan’s “Kashkari scheme to end ‘too big to fail’ deserves a fair hearing” November 20.

Neel Kashkari, Jeb Hensarling and Thomas Hoenig are all correct in requiring banks to hold more equity… the minimum capital requirements of 1.6% and less, meaning leverages 62 times to 1, and more, have been the most potent growth hormones ever for the too big to fail banks.

But, since I sincerely believe that one of the greatest dangers for the banks, and for the real economy, is the distortions produced by risk-weighted capital requirements, were this source of distortion to be completely removed, then I think that a 8 to10 percent capital on all assets would suffice… especially if there is a clear reduction in the moral hazard producing government guarantees… especially if the prosecutors of wrong-doings begin to go after the responsible executives and not just shareholders’ capital.

That fixed capital requirement of 8 to 10% should of course also be applied to sovereign debt.

Though I am not a US citizen, I do have immense respect for USA’s Declaration of Independence and Constitution, and I must say, pardon me, that the risk weights of 0% the Sovereign and 100% We the People, reads to me like a slap in the face of the Founding Fathers.

PS. Clearly there is a conflict between wanting the banks to hold more capital, which would be the result of eliminating current risk weighted capital requirements, with wanting the banks to also serve the credit needs of weak economies. But there are ways to harmonize, like grandfathering any changes in the capital rules meaning leaving them as is for all the current assets of banks.

PS. You might ask yourselves what do I have to do with all this. Let me be clear, as a Venezuelan, and a Polish citizen, one whose father was liberated by American soldiers from a concentration camp in 1945, and as a grandfather of two Canadians, I am absolutely sure we all have much skin in the game with respect to how it goes for America… (And that goes for you too Sir… much more that you would naturally want to admit) 

@PerKurowski

FDIC’s Thomas Hoenig is miscast in his current role. Standing up for “The Risky” he would achieve much more

Sir, I refer to: “Corporate person in the news: Thomas Hoenig: A US ‘sentinel on the front lines of the banking system’” April 16.

It states: “In 2010 Hoenig cast eight consecutive dissenting votes against the easy money policies of “quantitative easing”, arguing that they could pave the way for another crisis.”

That to me sounds like a man of character that would do much better if representing the totally unrepresented “risky” bank borrowers; like the SMEs and entrepreneurs.

If he did that, it would be easier for him to understand how absurd it is allowing banks to hold laughingly little capital against some assets, only because these have been perceived, decreed or concocted as safe. Representing The Risky he would be able to argue: “We have never ever caused a major bank crisis. That has been entirely the doings of those ex ante erroneously perceived as safe”

If he did that he would have understood that the strongest argument for banks holding more capital, is the discrimination the little capital required when lending to The Safe causes against The Risky’s access to bank credit.

And had he been able to get rid of the minimalistic capital requirements for the safe assets then, as a big bonus, he would have helped to get rid of the most important growth hormone for the too-big-to-fail banks.

And many, especially the young, would love him. By combating that credit risk aversion so anathema to the Home of the Brave and that is diminishing its economy, he would have helped to restore that risk taking that made America great… and so help create a new generation of jobs.

@PerKurowski ©

Why does not FT, “without fear”, debate the distortions the credit risk weighted capital requirements for banks cause?

Sir, Martin Wolf writes that if that if “hysteresis” — the impact of past experience on subsequent performances” is the cause for the economy failing to recover its “Possible causes [could] include: the effect of prolonged joblessness on employability; slowdowns in investment; declines in the capacity of the financial sector to support innovation; and a pervasive loss of animal spirits” “In the long shadow of the Great Recession” November 11.

For more than a decade I have tried to explain for Mr. Wolf that, if you allow banks to hold less capital against assets that ex ante are perceived as safe than against assets perceived as risky, you allow banks to make higher expected risk adjusted returns on equity on safe assets than on risky, and that of course will decline the willingness of the financial sector to support innovation and erodes the animal spirit. When banks make the good returns on equity, on for instance financing houses, why on earth should they go an finance what requires them to hold more capital and is therefore harder to achieve good ROEs for?

But Martin Wolf, and FT, has never wanted to accept that as a serious source of distortion in the allocation of bank credit. I have never understood why. I dare him, or FT, or any bank regulator for that matter, to a public debate of that issue… come on, show us some of the “without fear”

Thomas Hoenig the Vice Chairman of FDIC has recently said: “Using simple leverage measures instead of risk-based capital measures eliminates relying on the best guesses of financial regulators to guide decisions.” I pray he is able to convince his colleagues of that. The world has had more than enough of that reverse mortgage regulators imposed and that makes banks finance more the safer past than the riskier future.

When I think of those millions of young people who will never get a chance of jobs that help them fulfill dreams, thanks to these hubristic and outright incapable regulators, I get so sad and mad.

PS. Here is a letter that Washington Post published today.

@PerKurowski ©

Failed bank regulators, Mario Draghi, FSB, should not be given a chance, ECB, to cover up for their mistakes, Greece

Sir, Ferdinando Giugliano, Sam Fleming and Claire Jones write: “Mr Draghi is adamant that rules, not politics, have dictated its approach to Greece and other member states.” “Peak Independence?” November 9.

Thomas Hoenig’s the vice chairman of FDIC in a speech delivered on November 5 stated: “Some sources of risk undoubtedly have been fed by current regulations designed to direct banks’ activities in accordance with regulators’ views. For example, banks levered up on sovereign debt of nations such as Greece due to the zero risk-weighting given by “risk-based” rules.”

Clearly FDIC’s vice chairman agrees with what I have been saying for years, namely that it was the Basel Committee, and their associates, who did Greece in.

Mario Draghi the now President of the European Central Bank and the former chairman of the Financial Stability Board, should never have been placed in a position where he could try to cover up for his participation in the mistakes that brought Greece down.

As is the fatal credit risk weighted capital requirements for banks still conspire against all Greek SMEs and entrepreneurs having fair access to bank credit, in order to help their land crawl out of the hole its in.

PS. When I think about all those “risky” who because of regulators have not had fair access to bank credit in order to try to create the new jobs the new generation need… I get so… sad/mad

@PerKurowski ©

On bank regulations why can’t we get to the heart of its problems? Why can’t we keep political agendas out of it?

Sir, I refer to Edward Luce’s “Too big to resist: Wall Street’s come back” December 14.

Anyone who with an open mind reads Daniel Kahneman’s “Thinking, Fast and Slow” 2011, or this years “World Development Report 2015: Mind, Society, and Behavior” issued by the World Bank, should be able to understand the following with respect to current bank regulations:

Regulators (and ours) automatic decision-making makes us believe that safe is safe and risky is risky; while a more deliberative decision-making would have made us understand that in reality very safe could be very risky, and very risky very safe.

And so when so many now scream bloody murder about the influence of big banks in the US congress, because these managed to convince legislators to allow “banks to resume derivative-trading from their taxpayer insured arm”, they posses very little real evidence of what that really means… except, automatically, for the fact that it all sounds so dangerously sophisticated.

No, if there is something we citizens must ask our congressmen to resist, that is the besserwisser bank regulators who, with such incredible hubris, thought themselves capable of being risk-managers for the world, and decided to impose portfolio invariant credit risk weighted capital requirements for banks.

These regulations distorted all common sense out of credit allocation, and cause the banks to expose themselves dangerously much to what is perceived as “absolutely safe”, while exposing themselves dangerously little for the needs of our economy to what is supposedly “risky”, like lending to small businesses and entrepreneurs.

If we, based on what caused the current crisis should prohibit banks to do, it would have very little to do with derivatives, and all to do with investing in AAA rated securities, lending to real estate sector (like in Spain) or lending to “infallible sovereigns” like Greece.

Does this mean for instance that I do not agree with FDIC’s Thomas Hoenig’s objection to US Congress suspending Section 716 of Dodd-Frank? Of course not! But, before starting to scratch the regulatory surface, something which could create false illusions of safety, or even make it all much riskier… we need to get to the heart of what is truly wrong with the current regulations… Sir, enough of distractions!

And also enough of so many trying to make a political agenda and election issue out of bank regulations… as usual it would be our poor and unemployed or under employed youth who most would pay for that.

Are not living wills for banks’ just a nonsensical show to show off that something is being done?

Sir, Gina Chon and Tom Braithwaite report that Fed and FDIC demand better unwinding plans and are split over possible penalties “US rejects bank’s living wills” August 6.

And FT defines on its site those living wills as “Detailed plans that would enable banks to stipulate in advance how they would raise funds in a crisis and how their operations could be dismantled after a collapse”.

Frankly is not the whole concept of living wills for banks’ designed by the bankers themselves after a collapse just a show to show that the regulators are doing something?

I mean if I was a regulator, and wanted to go down that route, I would at least have a third party to look into what could be done in the case a bank passed away, and now and again confront the managers of the bank with those plans, in order to hear their opinions.

For instance there is a world of difference between a living will where the dead are going to be the own executors of the will, and one in which the dead will be dead and others will take care of the embalming.

And talking about that is it not the Fed or the FDIC that should state what contingent plan they really want… one where the bank is placed on artificial survival mode, and for how long, or one where it is sold in one piece, by pieces or even cremated?

To me it would seem that the Fed and FDIC need to give much clearer instructions about what they want those bankers currently working under the premise the bank will live on forever to do… as I can very much understand them being utterly confused.

All dollars paid in interests, should be worth the same when accessing bank credit.

Sir, Frank Keating, President and Chief Executive of the American Bankers Association, writes in response to Thomas Hoenig’s “Safe banks need not mean economic growth” of August 20, that “There is such thing as having too much capital”, August 23.

Keating argues, correctly, that “When regulators set rules, they should be surprised that banks naturally adjust to the incentives created” and also, equally correct, that “too often banks get blamed for making rational decisions based on the rules that have been set by their regulators”.

But what I do not agree with is when Keating sort of implies the debate on capital requirements should be among “the banking industry and regulators”. Banking is much too important for that.

Right now, those perceived as “risky” have much less opportunity to deliver a good return on equity to the banks, only because their borrowings give way to much higher capital requirements for the banks than what the borrowings of the AAAristocracy does.

And that means that a dollar paid by a “The Risky” medium or small businesses, entrepreneur or start-up, is worth less than the dollar of interest paid by one of “The Infallible”. And, sincerely, that so distortive regulatory discrimination, puts the real economy on track of having to regress, perhaps to even what it was in the times of black and white television.

The current huge needs of bank capital, which have resulted exclusively from the fact that so little capital was required from the banks on exposures considered as “absolutely safe”, is indeed a very urgent matter for all, banks, regulators, depositors and borrowers. But, instead of wasting so much time negotiating how much that capital increase should be, we should all be thinking about how to stimulate the mother of all bank capital increases, since the real economy, upon which the safety of the banks really depends in the long run, surely needs it.

FDIC, please go the full way, and rid the banking system of all distorting capital requirements based on risk-weights

Sir, Thomas Hoenig of FDIC should be commended for putting forward such level headed arguments for a higher cap on a bank’s leverage ratio, which would significantly increase the capital requirements for banks, “Safe banks do not mean slow economic growth”, August 20.

And I absolutely agree with the title, that is, if the increases to where the final capital should be, happens fast and is not the result of a long and protracted process. I would, if I was the state and had some bad conscience about having permitted banks have so ridicule little capital before, help them along in the capital increases with some tax benefit packages for their shareholders. This, especially if banks agree to take that cap even higher, say 10 percent. 

Where I disagree though with Hoenig is when he writes “we would also be using Basel risk-weighted capital requirements to complement the leverage ratio and thus mitigate the potential for arbitrage”. And that because some argue that, as a result of the cap, banks could load up on riskier assets.

First, Basel’s risk-weighing does not reduce the risk of the system. On the contrary, it helps to push banks excessively into the arms of what is ex ante perceived as “absolutely safe” assets, which are precisely those assets that have caused the greatest bank disasters.

And second, worse, neither does it reduce the potential for arbitrage. With the risk weighting, the only thing the regulator achieves is to influence the arbitrage process. And in doing so, by favoring the access to bank credit of the AAAristocracy over that of the “risky” medium and small businesses, entrepreneurs and start ups, the regulator dangerously distorts the allocation of bank credit in the real economy.

Hoenig ends writing “The US is a market economy, and we know that bank capital is a source of strength, not a burden”. Absolutely! But, if one has a market economy, he should also know that nothing is gained, and perhaps much lost, by decreasing the possibilities of banks to exercise the reasoned audacity we expect from them, and increasing their risk-aversion. This, most especially, in the Home of the Brave.

The “convenient myth” which supports current bank regulations, needs to be debunked.

Sir, Tom Braithwaite and Patrick Jenkins, in their analysis “Balance sheet battle”, August 15, refer to bank executives and some [regulatory] officials holding that “not using risk-weights when calculating capital requirements for banks can tempt banks to move towards riskier loans that earn higher returns but are more likely to result in losses.” 

Baloney! That so “convenient” for some banks myth, needs urgently to be debunked.

And for that we need first to understand that any “perceived risk” can be cleared for by bankers by the interest rate they apply, the size of the exposure and other contracting terms. 

And so the truth is that lower capital requirements, permitted for something perceived as “absolutely safe”, and which allows the banks to achieve a higher expected risk-adjusted return on equity on those assets, will only help to push the banks to create excessive exposures, while holding very little capital, to precisely that type of exposures which have caused all the bank crises in history, namely assets which were ex-ante perceived as safe but that ex-post turned out to be risk. And, if in doubt, just try to find one single major bank crisis that has resulted from excessive exposures to what was ex-ante, not ex-post, perceived as risky.

The different capital requirements based on perceived risk which so much favors the access to bank credit of The Infallible and thereby discriminates against The Risky, also completely distorts the allocation of bank credit in the real economy. What would for instance a regulator, in the US or in Europe, answer if asked: Sir, why are the capital requirements for our banks lower when they lend to a foreign sovereign, than when they lend to our national small business and entrepreneurs, those who have never ever set off a major bank crisis?

Do not help banks play the liquidity card trying to avoid higher leverage ratios

Sir, Daniel Schäfer begins his “Fix the contradictory rules pushing banks to be riskier”, of August 6, with the question “Can regulations make banks less safe?” And the answer is: Absolutely!

The current crisis was entirely the consequence of bank regulations, primarily Basel II, which allowed banks to hold extremely little capital/equity when lending to or investing in what was perceived as absolutely safe; which meant that banks could earn amazingly high expected risk-adjusted returns on equity when lending to or investing in what was perceived as absolutely safe; which meant that banks went overboard lending to or investing in what was perceived as absolutely safe, like to “infallible sovereigns” and the AAAristocracy; and which finally meant that when the problems arose, like with loans to Greece or with investments in securities collateralized with lousily awarded mortgages to the subprime sector, the banks stood there completely naked without any capital/equity.

The leverage ratio is a tool now used to correct somewhat for the above described miss-regulation, and some banks simply do not like it since it requires them to hold more capital/equity.

From reading Schäfer’s article, it is clear some banks are playing the liquidity card in trying to avoid the threat of even higher leverage ratios, as those proposed for example by Thomas Hoenig of FDIC. I hope the regulators, and the press, do not fall for this dirty trick.

Liquidity for banks was usually provided by the central bank’s discount window, and all it took for the bank in order to access that window, was to have good assets, of basically any kind. The underlying problem with Basel III liquidity requirements, is that is does nothing to solve the problems of Basel II, but layers on new regulations which are also basically based on ex ante perceived risks, on top of the old capital requirements, and thereby distorts and confuses even more.

Schäfer also writes banks will now as a consequence of adjusting to leverage ratios have zillions less in government bonds and deposits in other banks, but the real question is, why should banks have zillions in this type of investments? And what about all the absolutely essential loans to “The Risky”, like the small and medium businesses and entrepreneurs that are not given precisely because of the absence of a non-discriminatory and all encompassing leverage ratio? That to me sounds like a much more important issue, in order to make the real economy less risky, and which is really the best way of making our banking system less risky.

More capital-equity against what is least likely to pose a risk to the bank system is the pillar of Basel II and III

Sir, Edward Luce in “Betting on start-ups can revive a tired presidency” July 29 writes “the effective equity cushion at the largest US banks is between 4 and 6 per cent of their balance sheet. For the small Main Street banks that still make “character loans” – lending money to customers they know – that cushion is 9 per cent. In other words, US regulators are twice as strict with those banks that are least likely to pose a risk to the system.”

That is not a US problem only as in Europe it is even worse. The Basel Committee is in this respect much worse than the US Federal Reserve, FDIC and the Office of the Comptroller of the Currency. The pillar of Basel II and III bank regulations are capital requirements based on perceived risk, which precisely forces bank to hold more capital-equity for what is perceived as risky and is therefore not that risky.

This is the problem that I have written about the Financial Times more than a thousand letters but which you have ignored, presumably because someone did not like something I wrote and decided I should be ignored-censored.

Higher capital will soon turn into banks’ new competitive edge.

Sir I refer to Tracy Alloway’s and Patrick Jenkins’ “US banks face strict leverage proposals” July 10.

At this moment, when warning signs stating “bank creditors, caveat emptor, you won’t be bailed out like before” are being put up all over the world, starting in Cyprus, banks have to be truly insane not knowing they have to substantially raise their capital.

In this respect, though some dumb US banks are complaining that their regulators, are setting too high capital requirements for them, these might turn out to be a blessing in disguise… and perhaps soon all will understand that those even higher ratios favored by FDIC’s Martin Gruenberg and foremost Thomas Hoenig, make all sense in the world.

Just wait until the recent decision of the Basel Committee about having to publish the leverage ratio comes into effect. Then there is a lot of bank-running that is going to be happening from those banks leveraged over 30 to 1 to those banks leveraged 10 to 1, and this no matter the riskiness of the underlying assets.

Frankly, European banks should beware

Gillian Tett describes another reason for using a tangible equity to asset ratio as suggested by Thomas M. Hoenig of FDIC.

Sir, Gillian Tett is on the dot with her warnings in “Watch out for the interest rate hike hit to US banks”, July 14.

And so there we have it again, with regulators fixated with credit risk, while ignoring most of the other millions of risks that abound. Here banks, not only in the US but all over the world, could be holding long term and fixed rate assets classified as absolutely safe, and therefore allowed to be held against very little capital, all of which could be wiped out by some minor interest rates hike.

This is just another evidence for why one simple capital requirement, in my opinion between 8 and 10 percent of tangible equity to assets ratio, such as the one Thomas M. Hoenig of the FDIC is proposing would make so much more sense. In fact any other type of micromanagement would only constitute an expression of regulatory hubris.

Forget Basel III and go directly to Basel IV, but first make the Basel Committee accountable to someone.

Sir, as you can imagine after the over 900 letters I have written to you about the not really discussed  fundamental mistakes of Basel II, Thomas Hoenig’s “Get Basel III right and there will be no need for Basel IV” December 13, is an extremely welcomed analysis. And it is on the dot when it comes to analyzing bank capital in terms of the risk of bank failures and its consequences. 

But different capital requirements for different perceived risks, also translates into allowing different leveraging of the net after risk and transaction cost margins, something which distorts the markets immensely. It favors what is ordinarily already favored “The Infallible”, and thereby discriminates against what is already being discriminated against, “The Risky”, like the unrated small businesses and entrepreneurs. And in this respect it completely stops the banks from performing efficiently their vital economic resource allocation function. 

So add up these two main lines of criticism, that it does not work for making banks safe and that it does not work for making the economy grow sturdier, and it is easy to understand why Basel II and the current pre-Basel III need, for the sake of our banks and our economies, to be thrown out lock stock and barrel. 

Clearly going from a Basel II to a more correct Basel IV with 8-10 percent tangible equity on all assets, requires some deft navigation skills if we want to avoid hurting the current economy more needlessly. But it can be done! 

That said before allowing bank regulatory schemers scheme and tweak our banks more we must make the Basel Committee for Banking Supervision publicly accountable to someone in a transparent way… and of course start by asking them… what is the purpose of our banks?... so as to see if we agree. 

But, knowing us, even if we correct all that needs to be corrected now, I can assure you that there, sooner or later, will still be need for a Basel IV, IV.2, V and so on… and Thomas Hoenig is clearly well aware of that too.

God make us daring!

Basel III is dead because it is just as wrong as Basel II or even worse.

Sir, Brooke Masters writes that “Time is running out for the opponents of Basel III" as “it has been nearly two years since regulators from 27 countries struck a landmark banking reform deal aimed at preventing future financial crisis.”, “Basel naysayers delve into detail in battle to dilute reforms", September 29. That is sheer nonsense. 

If the "deal struck" had any chance to prevent better a future financial crisis then that could be correct, but, as it stands, it can only result in causing the repeat of another financial crisis, precisely because of the same reasons as the current. In Basel III, not only do capital requirements for the banks remain as in Basel II determined by the ex-ante perceived risks, favoring any assets officially perceived as “not risky”, and discriminating against assets deemed “risky”, but now, to top it up, the liquidity requirements will also do so.

I agree completely with those who want simplified rules and banks to rely exclusively on a “leverage ratio” and to that effect I have written some couple of hundred letters to FT over several years, which were all simply ignored in the name of I do not know what. 

But the real reasons for the need of change have not surfaced yet, basically because they are too embarrassing for those responsible, but they will, sooner or later, and you can bet on that. 

What happened? Bank regulators, scared witless by the possibility that bankers would expose themselves too much to assets deemed as “risky”, something that bankers never or very rarely do, created huge incentives for banks to concentrate on assets that were, ex ante, perceived as “not risky” and, in doing so, they fomented an incredible dangerous highly leveraged bank exposure to the “not risky”, something which has us already placed over the brink of disaster. 

You do not create jobs, or a sturdy economy, based on favoring the access to bank credit of the “not-risky” more than it is already favored, and thereby making it harder and more expensive for the "risky", like small businesses and entrepreneurs to access the bank credit they need. If you do so, your economy will become flabbier and flabbier, day by day, until it completely breaks down. Capice?