Showing posts with label UK. Show all posts
Showing posts with label UK. Show all posts

June 28, 2014

Why does John Authers keep mum on how low capital requirements for banks on house financing helps to inflate the bubble?

Sir last Thursday was the 10th anniversary of the G10 approving the absolutely senseless Basel II bank regulations. And here we are and still one of your star columnists, John Authers writes about the need to prevent bubbles, in this case a bubble in the value of UK housing sector… and does not even mention the role that preferential bank capital requirements can have in inflating a bubble, “Rate rises pose biggest test for BoE bubble theory” June 28.

The risk-weight on a residential mortgage is 35%, while the risk weight for a loan to an SME or an entrepreneur is 100%. And so a bank can leverage its capital about 20 times more when financing the purchase of a house, than when giving business those loans that could create the jobs that could help home buyers to pay their mortgage and their utilities.

And I am sure John Authers must understand that this helps to inflate the house bubble, and so that we could at least expect that if BoE perceived the risk of a bubble, it would increase the risk-weight for new mortgages, before toying around with other tools… but yet Authers chooses to keep mum about all that … why?

May 15, 2014

With respect to the UK housing boom FT has not earned the right to criticize much.

Sir, you express a lot of concern over excessive financing of houses, like the Help to Buy scheme, “Carney and the UK housing boom” May 15.

But you never express concern about the sad fact that if a bank lends to a small business or an entrepreneur, those who could help create the jobs by which house owners could pay their bills, then it needs to hold much more equity than when financing the purchase of a house.

And this of course means banks make much higher risk-adjusted returns financing houses than financing jobs… which is pure lunacy… and that of course means immensely more subsidizing of houses than the Help to Buy could ever aspire to signify.

And so with respect to this I consider that FT has not really earned the right to criticize that much.

February 13, 2014

Richard Lambert, before concerning himself with bankers’ education should think about bank regulators’

Sir, I refer to John Gapper’s “There is no such thing as the banking profession” February 13.

There Gapper writes that an option favored, among others by Sir Richard Lambert, head of UK’s Banking Standards Review, “is to encourage bankers to take professional exams and rebuild their sense of pride and identity. Bad bankers might be struck off by professional bodies”

Good idea, but what about the professional exams for bank regulators which right now seems of even urgent importance.

You know Sir I hold this because bank regulators who decide to use perceived risk of expected losses to set the capital requirements for banks, that which is primarily to cover for any unexpected losses, evidence they do not know what they are doing. With their amateurism they not only created this crisis, by making banks create dangerous exposures to what is “absolutely safe”, but they also keep us from getting out of the crisis, by de-incentivizing banks from lending to “risky” medium and small businesses, entrepreneurs and start-ups.

So please, enroll regulators in a Bank Regulations 101 course… as fast as possible. With their distortions they have put the current generation on the track of becoming a lost one.

November 19, 2013

The quality of its unemployed is also vital for the strength of a nation

Sir, Janan Ganesh refers to the relative political tranquility that has prevailed in Britain over the last years, even in the face of 21 percent unemployment among young people, and other hardships resulting from the current crisis/recession, “The British have met crisis with understatement”, November 19.

That is of course extremely valuable and commendable, as long as it is of course much more the result of stiff upper lips, than of a feeling of resignation or sheer apathy, especially in coming generations.

In June 2012 in an Op-Ed I wrote “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, at least in the sense of these not interrupting those working.”

November 12, 2013

The Help to Buy scheme, has also something of a Help to Sell Expensively flair about it.

Sir, Janan Ganesh opines that “Britain’s flawed Help to Buy scheme is smart politics”, November 12. And this because it allows the Tories, to “connect with the many young to middle age voters priced out of the housing market”.

Yeah, yeah, that is as long as no one informs those many young to middle age voters that they are priced out of the housing market, precisely because of this type of assistance.

Was the government not helping or hindering with permits the housing market in any way, houses could actually be quite affordable. As is, it looks more like a diabolical design to help aging baby boomers get rid of assets, at great prices, sticking those to the generations after them.

October 03, 2013

Current low interest rates on sovereign debt could, in hindsight, be the highest real rates ever.

Sir, Kenneth Rogoff writes that “with hindsight, yes, the UK could have borrowed more –but we do not have hindsight when decisions are taken”, "Britain should not take its credit status for granted” October 3.

The underlying assumption of that is that current interest rates on much public debt, not only in UK, are very low… and that, in future hindsight, might not be true.

The risk weighted capital requirements for banks favor immensely bank lending to the “infallible sovereign” (and the AAAristocracy), in detriment of the access to bank credit of “The Risky”, the medium and small businesses, entrepreneurs and startups.

And so the cost of public debt which is currently not recorded anywhere, are the most certainly monstrous opportunity costs derived from the distortions in the allocation of bank credit this regulation produces. In fact, it is akin to taking the spark-plug out of the real economy. Yes, our economies might be moving, but perhaps that is only because they are going downhill.

September 25, 2013

Why should banks earn higher risk adjusted returns on equity financing property than when financing businesses?

Sir, John Plender writes “Historically, the biggest single cause of financial crises in the UK has been the bursting of property bubbles” “BoE lacks tools needed to prick property bubble” September 25.

If that is so, which I have no reason to suspect it is not then would he, or Lord Turner, explain to us, why were regulators allowing banks to lend to property against less capital than when doing much other lending? Did that not signify that banks would be earning higher risk adjusted returns on equity on property lending than on other lending? Did that not doom banks, next time a property bubble burst, that everything would be so much worse, since banks would be standing there with especially little capital?

BoE does not lack tools. It just needs to arm itself with a new generation of regulators capable of understanding that risk-taking is not something dirty, even when banks do it. And of understanding that there is nothing as risky as excessive risk-aversion.

June 21, 2013

More blah, blah, blah about the safety of banks… but what about the safety of the real economy?

A sturdy healthy real economy will produce mostly safe banks no matter how little capital these have, while a weak and distorted real economy will produce unsafe banks no matter how much capital these have.

Sir, Martin Wolf, in “Reform of British banking needs to go further” June 21 mentions “distorted incentives distort risk-taking”, but this only from the perspective of the distortion produced in the banks, and among bankers, and not about the distortions produced in the real economy.

Allowing banks to leverage more and therefore be able to obtain a higher return on equity, just because something is officially perceived as “absolutely safe”, is about the most stupid way to serve the credit needs of the real economy. That means that what is perceived as “risky” will have to pay even higher interest rates and become even more risky than what it would without regulations; and that what is perceived as “absolutely safe”, will have access to even lower rates and more credit than what it should, and therefore might also become risky with time.

It is a problem that the typical borrowers of the real economy are never invited to discuss bank regulations, only bankers, some journalists, and some of the AAAristocracy are.

In the USA there is the Equal Credit Opportunity Act, also known as Regulation B, but, unfortunately, it would seem that their regulators do not care one iota about violating it.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.

June 19, 2013

The UK Parliamentary Commission on Banking Standards report “Changing banking for good” is, unfortunately, incomplete.

Sir, I refer to your “Holding UK banks to higher standards” were you comment on the just published report by “The Parliamentary Commission on Banking Standards” June 19. Unfortunately, it is seriously incomplete.

Current bank regulations allow for different capital requirements for different bank assets, based on their perceived risk. But, since these perceived risks are already cleared for by interest rates, amounts of exposures and other terms, this introduces a distortion that makes it impossible for the banks to perform with efficiency, their vital function of allocating resources in the real economy.

In fact, the risk-weighting calibration procedure used in Basel II is absolute lunacy and only the result of the regulators not having been sufficiently questioned by weak egos who do not want anyone to know that they don´t understand an iota about it all.

And, I am not the only one arguing this. For instance in a recent paper titled “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked” Anat Admati and Martin Hellwig write: “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

And therefore, the report, which starts so correctly by referencing “The UK banking sector’s ability both to perform its crucial role in support of the real economy” should, as a minimum, have asked regulators to explain, satisfactorily, why their capital requirements based on perceived risks are not flawed, meaningless and highly distortive. But, of course, FT should also have asked the regulators those same questions, a long time ago.

June 18, 2013

The crisis afflicting the western world is not fiscal it is the running out of daringness.

Sir I refer to Janan Ganesh’s “Britain ought to be thankful for its political class”, June 18. I cannot really tell whether it is backed by real empirical fundaments, but yet it is a fabulous ode that should at least help to stimulate, or shame out, a better behavior of politicians.

Frankly, I have no seen any similar constructive article in any of all the other divided countries that abound, and I just pray, at least for Britain’s sake, that it does not just reflect some delicate English black Jonathan Swiftish humor which has eluded me.

That said, when Janan Ganesh writes “The crisis afflicting the western world is fiscal”, he is being way too optimistic. The crisis of the western world is much deeper and reflects more baby-boomers economies reaching the point where they do not want to risk developing further, if that could endanger what they already have. In other words, a world that has reached the level of satisfaction that initially guarantees stagnation and then later leads to its fall.

The main expression of having run out of daringness, are regulatory capital requirements for banks based on perceived risk, which much favors bank lending to The Infallible and therefore hinders banks lending to The Risky.

June 07, 2013

Why cannot Martin Wolf understand the distortions the risk-weighting of bank assets produces in the real economy?

Sir, of course Martin Wolf is right when he writes “Britain must fix its banks – not its monetary policy”, June 7, I have been telling him that for years. And he is also quite correct stating that banks have become far too accustomed to the rewards of a business model based in minimal equity and support of taxpayers”, But when he limits his discussion of risk-weighing describing it as a “way of pretending assets are safer than they are”, it shows that economist Wolf has not yet understood the extent of the distortions capital requirements based on risk-weights cause.

Risk-weighting implies that banks are allowed to leverage their equity more with some assets than others, and since return on equity is their natural objective, then of course some assets, those perceived as safe, will be artificially favored by the banks, and other, those perceived as risky, artificially disfavored. And that leads to a very inefficient resource allocation in the real economy… and that will certainly prove more expensive long-term for the economy than whether banks are safe of not. And that I have been explaining to Wolf in hundreds of letters.

Yes, capitalize banks, a lot, by means of incentives or by brute force, but, most of all, we must stop bank regulators, or other bureaucrats, from acting, with immense hubris, like the risk-managers of the world.

PS. The final report of the Independent Commission on Banking, on which Martin Wolf  informs us he served, suggests keeping the concept of risk-weighting and says not a word about the distortions this produces

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.

May 24, 2013

What UK (and Europe) needs, is a massive capital injection into the banking system

This is in reference to “Osborne is too complacent about Britain’s economy” Martin Wolf, May 24.

Sir, first, in the UK, if a bank would give a loan to a Solyndra, the solar power company that recently went bankrupt in the US, it would need to hold, according to Basel II, 8 percent in capital. But, if the bank instead lent that money to the UK government, and so that a UK government bureaucrat could relend it to a Solyndra then, according to Basel II, the bank needs to hold no capital at all against that. That is a huge distortion that needs to be eliminated, and to be replaced by a general capital requirements against any asset, 8 to 10 percent.

Second, because of such regulatory distortions UK banks (as all European banks) have ended up with a dramatic gross, not risk-weighted, shortfall of capital, and which now not only stops them from being able to lend but even forces them to contract. And so, when Martin Wolf writes about “the private sector has a huge structural excess of income over spending” my recommendation, instead of those huge government investment programs Wolf suggests, would be to launch a massive bank capitalization program, offering special tax incentives for all “private excesses” which are converted into bank equity.

How much capital? Whatever is needed for the banks to hold 8 to 10 percent of it, against all assets, including government debt. At that moment the general risk-profile of banks would also change dramatically. At that moment banks can start to contribute to help the real economy to grow.

Why is it that some insist that all rescue actions is to be carried out by governments? Could it be that this crisis is being exploited to advance some political agenda through the backdoor?

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

May 23, 2013

Get over it. Set a high credible capital requirement for banks and ask for it to be met within a very short time.

Sir, you finish your “Noise and truths in the IMF’s verdict” May 23 writing: “Inadequately capitalised lenders will continue limit lending. This in turn, will hamper growth. For all the brouhaha about changing tack on fiscal policy, Britain’s priority should be to fix its banks”.

Absolutely right… and we all have known that for many years…right?

To fix the banks you need to set a high but achievable goal, let us say 8 to 10 percent of capital for all bank assets, and ask for it to be complied with in a very short time. It would also be recommendable to help out in the process of raising all that bank capital, by for instance offering some special tax incentives.

What you cannot do is to meekly be tip-toeing around the issue, because before bank investors are absolutely sure that the capital raised will be the capital needed, and that it will dramatically reduce the risk-profile of banking, they will not volunteer to try it out.

March 13, 2013

Martin Wolf’s risk aversion, which favors bureaucrats over banks making investment decisions, is indefensible.

Sir, Martin Wolf writes: “What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross of gross domestic product retrenches as the private sector retrenches is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started”. And then Wolf repeats his beliefs that “the markets deem the government solvent, since they are willing to it at the lowest rates in UK history” and so therefore he concludes, in essence, that the UK Government should invest more, “Britain’s austerity is indefensible” March 13.

To me what is truly incredible is that Mr Wolf does not understand that while there is a severe shortage of capital in banks, and banks are required to hold immensely much more capital when lending to the private small businesses and entrepreneurs, than when lending to the infallible sovereign, those who are the first private line of responders in any crisis, will not have access to bank credit in competitive terms, while the government will find the demand for its debt artificially increased, and therefore the rates it pays subsidized.

Wolf ends with “we have to consider why the economy has proved so fragile and rebalancing so difficult”. I have tried to explain it to him many times. Once again, if you allow banks to earn immensely more expected risk-adjusted returns on their equity when lending or investing in what is perceived as “absolutely safe”, than when lending to what is perceived as “risky”, you are doomed to end up with a fragile and dying economy. It is the risky risk-takers those who most can make it move forward, so as not to stall and fall, especially in a crisis.

So Mr Wolf, why this insistence in favoring bureaucrats over bankers making investments decisions? What is needed instead is something like, while the capital ratios of banks are rebuilt, the banks are allowed to lend to both “risky” and “infallible” alike, with their current capital ratio.

PS. I just read again, I guess I could not believe it the first time, Wolf opining: “The rating of a sovereign that cannot default on its debt in its own currency means little”. I am amazed, as if it would not matter whether they repay you with something worth something or with something worthless.

March 01, 2013

Why must UK say “No!” to EU on a bonuses cap, without presenting any decent counterproposals?

Sir, I refer to your editorial “Diplomatic fallout from EU bonus cap” March 1. 

Solving the absolutely valid concerns about excessive bonuses paid in banks, by means of capping the bonuses to staff to a maximum percentage of their salaries as the European Parliament proposes, only introduces another distortion… on the road to overmedication 

What I would suggest doing, and thought it might seem to be similar regulatory distortions to you, is in fact reducing other distortions that influence the bonuses paid. 

First, since tax-deductibility is in itself a source of distortion that favors big bonuses, I would limit how much remuneration a banker can get in order for it to be a tax deductable expense, 

And secondly, I would eliminate those extremely low capital requirements for banks for exposures to what is considered as infallible, since these impede the existence of sufficient shareholder´s compensation requirements which can keep the bonuses in check. 

I would of course also do the latter as you know, because the minimalistic capital requirement for what is “safe” and which thereby discriminate what is perceived as “risky” is in fact, on its own, the greatest source of distortions which makes it completely impossible for banks to help allocate economic resources efficiently. 

Why must UK say “No!” to EU on a bonuses cap, without presenting any decent counterproposals?

February 25, 2013

Does FT really want to impede banks to help out, so that we must rely on government? I pray it is not so.

Sir, “Moody’s grows nervous at Britain’s extension of austerity” reports Sarah O’Connor, February 25. 

But what Moody really should be nervous about is the fact that bank regulators allow banks to make so much higher expected risk-adjusted profits when lending to someone with a good rating than when lending to for instance someone unrated. That will of course dampen the risk-taking a nation needs to move forward. And, if Moody and the others don’t know that, then they should lose their credit rating quality ratings. 

And in “British credit fears” you hold Sir that “ratings decisions can sometimes have real effects because of the wrong-headed way investment mandates and capital rules are designed to rely on them”. And that leads me to ask you, if you believe it “wrong-headed”, why have you then been so silent about it? Might it be because you are too hard-headed? 

You write “As this newspaper has long argued, there is room to shift resources from inefficient subsidies to uses that can stimulate the economy [and] to unclog banking and tilt Britain away from over relying on finance”. But Sir, if there is a real clog that stops banks from helping us to efficiently allocate resources in our real economy that is precisely imposing different capital requirements for banks based on perceptions of risk. 

Sir, you sometimes leave me feeling very uneasy. Could it really be that you want to impede banks to help out, just so that we must rely more on government? I do pray I am wrong.

December 07, 2012

The best help Britain’s Financial Conduct Authority can give on payday lending is to diminish the need for payday borrowings.

Sir, in “Payday lending”, December 7, you refer to Britain’s new Financial Conduct Authority to be given powers to cap the cost and duration of loans that target the low-paid and vulnerable. 

But the truth is that in terms of the accumulated amounts of excessive interest all vulnerable have to pay, nothing beats what the normal bank borrowers perceived as “The Risky” need to pay in extra interests to the banks, just in order to make up for the fact that bank regulators, for no particular good reason at all, allow banks to hold less capital when lending to “The Infallible”. 

If these regulatory discrimination which make access to bank credit so much scarcer and onerous that they would ordinary be for ‘The Risky”, those which includes small businesses and entrepreneurs, is eliminated, then they would perhaps not be so much need for payday loans. 

In July 2012 I registered a complaint on this with the Financial Ombudsman Service in UK, so I guess I might need to re-register it with the Financial Conduct Authority.

November 30, 2012

Regulators bully banks, banks bully “The Risky”, and “The Infallible”, they just have a blast.

Sir, Brooke Masters, Claire Jones and Patrick Jenkins report “Big banks’ capital needs under microscope” November 30. 

"Regulators suspect banks have understated possible losses and need a 'material' amount of extra capital"

Of course I favor more capital in the banks, at least for their exposures to ‘The Infallible”, which are seriously under-capitalized as a result of overly generous capital requirements. 

But what regulators must remember is that while different capital requirements for different assets exists, their pressures on banks to increase their capital, will be mostly felt by those who generate the largest capital requirements, namely “The Risky”, like small business and entrepreneurs. 

Regulators bully banks, banks bully “The Risky”, the small businesses and entrepreneurs, and “The Infallible”, sovereigns and triple-A ,they just have a blast getting even more bank funds at even lower interest rates.

PS. Could these type of capital adjustments not trigger the conversion into zero clause of Barclays' recent $3bn contingent capital notes deal?   

Mr. Mark Carney, what are you thinking to do about Britain, keep on making it wimpy, or making it great?

Sir, and FT’s experts and journalists, this is the letter that I would send to Mr. Carney 

Dear Mr. Carney. 

As a chairman of the Financial Stability Board, and a bank regulator, you share the responsibility for imposing on banks, capital requirement that are much lower for assets ex-ante perceived as not risky than for those perceived as risky. 

And you must of course understand this allows the banks to earn a much higher expected risk adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. 

And you must of course understand this means too much bank credit will go on too generous terms to “The Infallible”, and that “The Risky”, like all small businesses and entrepreneurs, will see their access to bank credit made much more difficult and expensive than without your intervention. 

And so, is it your intention to keep these capital requirements and have Britain little by little go wimpy, withdrawing more and more into a falsely perceived safety, like a young boy who stays in his room with his computer and never dares to walk the streets of his hometown, or are you going to put an end to this nonsense and thereby at least allow Britain the chance to remain great? 

And just in case you have not had time to think about the fundamentals lately, let me remind you of the fact that nations grow great thanks to risk-taking; and also of that all bank crisis in history have always resulted from excessive exposures to what was considered ex-ante as absolutely- not- risky, and never ever from excessive exposures to what was ex-ante seen as risky. 

By the way Mr. Carney, just out of curiosity, has a conservative government hired you to keep the capital requirements for banks when lending to the government much lower than when lending to the citizens, or, hopefully, to get rid of that odious pro-state regulation? 

Oh, and before I forget, Good Luck! 


Per Kurowski 
A former Executive Director at the World Bank (2002-2004) 
Currently censored by the Financial Times

November 16, 2012

I do not know if Paul Tucker is or not the right man for the Old Lady, but he sure does not seem the right man for Britain.

Sir, you hold that Paul Tucker is “The right man for the Old Lady”, November 16. And though I do not know much about the Old Lady I must disagree, because the last thing I feel that Britain needs at this moment, is someone who quite recently opined that “Stability comes before the good things in life”. 

It was stability searching nannies, with their silly and uncontrolled risk adverseness that made the banks to excessively increase their exposures to what was considered absolutely not risky, “The Infallible” and to doing so, not only causing many safe havens to become dangerously overpopulated but also stopping “The Risky”, like small businesses and entrepreneurs, from having access to bank credit on equal terms. 

You suggest that “the new governor should make room for intellectual free spirits, such as Andrew Haldane”. Though in some ways I have not felt Mr. Haldane yet to be free enough, I wonder why someone like him could not directly replace Sir Mervyn King.