If regulators keep on regulating as bad as now, will it really help much to ringfence the banks?

Sir, you write: “By the start of 2019, Britain’s largest lenders will need to put their retail banking units inside a heavily capitalised subsidiary, protecting them in case the group fails.”, “Ringfencing will help in the next banking crisis”, January 10.

Do you really think that as long as government/tax-payers are not exposed to having to pay for a bank crisis, then its effects are smaller? If so, why did you not say so before lending support to governments and central banks, on behalf of unwilling or at least un-consulted taxpayers, with Tarp and QEs and similar paying out so much to alleviate the last crisis?

You refer to the Vickers Commission with admiration I do not share. In June 2015, in one of my thousands of ignored letters to you, when commenting on one of Martin Wolf articles I wrote: “The number one priority for any bank regulator, long before thinking about ring-fencing and similar “safety” devices, is to make sure the allocation of bank credit to the real economy is not distorted. To look for banks to be able to survive in shining armor in the midst of the rubbles of a destroyed economy is just insane.”

Sir, I’ve seen very little rectification coming out from bank regulators. Worse yet, the few correct movements they have done in moving towards simpler leverage ratios, because they kept in place some risk-weighting element, have in fact, on the margin, only increased the distortions in the allocation of bank credit to the real economy.

FT, in this matter of Basel’s bank regulations, you are so behind the curve. As is, I am almost tempted to say: “No ringfencing, let the banks run loose, with no supervision!”

@PerKurowski

To think credit-risk weighted capital requirements for banks are compatible with efficient flow of credit is loony.

Sir, Martin Wolf, in reference to “the financial crises that hit western economies in 2007” writes: “This is the fourth most costly fiscal event of the past 225 years… Mismanaged finance imposes fiscal costs that are not far short of world wars.” “Indispensable banks need a sturdy ringfence” June 26.

Wolf, as most other, is fixated on the “event”, on the explosion of the financial crisis. By doing so he fails to give sufficient attention to the build-up of pressures that caused the explosion, namely the misallocation of bank credit.

What set up the crisis of 2007? Regulatory distortion. Regulators allowed that which was perceived as safe to be financed against less bank equity; thereby permitting banks to obtain higher risk adjusted returns on equity on those assets; therefore causing too large exposures to what was perceived as safe.

From this perspective the “fiscal costs” Wolf refers to, could be seen as the reversal of fiscal income that should never have been earned… e.g. property taxes on properties artificially valued too high.

The number one priority for any bank regulator, long before thinking about ring-fencing and similar “safety” devices, is to make sure the allocation of bank credit to the real economy is not distorted. To look for banks to be able to survive in shining armor in the midst of the rubbles of a destroyed economy is just insane.

The Independent Commission on Banking, of which Wolf was a member, listed among its objectives in its Report (The Vickers Report) to “efficiently channelling savings to productive investments”; and yet it recommended “Ring-fenced banks with a ratio of risk-weighted assets (RWAs) to UK GDP of 3% or more should be required to have an equity-to-RWAs ratio of at least 10%. ”

The members of the ICB, and other regulators too of course, believing that credit risk-weighted capital requirements is in any way compatible with maintaining the efficient flow of credit to the economy, simply evidence they do not know what they are doing.

For the umpteenth time: Banks, primarily by means of risk premiums and size of exposures, already clear for perceived credit risks. To require banks to also adjust for perceived risk in their equity guarantees the system to malfunction. That which is perceived as “safe” will get too much credit at too low rates… that which is perceived as “risky” will get too little credit, or no credit at all, at too high relative rates.

If anything the risks to be considered is the risk of banks being able to manage the credit risks they perceive.

Bank equity requirements should foremost be a buffer against unexpected losses, and unexpected losses has nothing, zilch, zero to do with perceived risks… except perhaps that the higher the perceived risks are… the less room there is for unexpected losses.

Sir, more than anything we need to get regulators who know what they are doing, and who are much humbler about their own capacities.

@PerKurowski

Should insurance companies hold more capital for insuring “The Unhealthy” than when insuring “The Healthy One Percent”?

Sir you refer to the discussions on the issue of separating of splitting up banks in retail and capital market units, as suggested by The Vickers Reports and the Parliamentary Commission on Banking Standards chaired by Andrew Tyrie, “Banking reform”, December 21. 

That is OK but let me remind you that though there have been many scandals which may have resulted from these two activities occurring under one roof, the current crisis, like for instance the losses in loans to Irish banks, in AAA rated securities, in loans to sovereigns, and in real estate financing in Spain, has absolutely nothing to do with that. 

No!, as long as you are able for instance to be more concerned with interest rates manipulation in The Libor Affair, than you are about the much more significant and perverse interest rate manipulation produced in The Basel Affair with its capital requirements for banks based on perceived risk, you stand no chance of achieving any type of real useful fundamental banking reform. 

As I see it anyone who for whatever reason on purpose ignores what Basel II really did to our banking system is an immoral co-conspirator of The Basel Affair. 

Today The Libor Affair has most probably ended with fines paid and no one really being sure who won and who lost, but The Basel Affair, is still going strong, immorally discriminating as much as always, and perhaps even more, in favor of “The Infallible” and against “The Risky”. 

I wonder what you would have to say if insurance companies were ordered to hold more capital when insuring “The Unhealthy” those with preexisting conditions or belonging to the poorer which now are reported to have a lower life expectancy, than when insuring “The Healthy of the One Percent”. 

That would mean that “The unhealthy” would have to pay even higher premiums than what their unhealthy status would explain and merit; and that the “The Healthy of the One Percent” would have to pay lower premiums than what their healthy status would explain and merit. And my friends that is in terms of access to bank credit, precisely what those regulators in “The Basel Affair” are up to.

The Vickers Report, like the Basel regulations, would benefit from defining the purpose of banks.

The current crisis was caused, almost entirely, by regulators arbitrarily setting risk-weights which allowed banks to lend or invest in sovereigns and what was triple-A rated with truly minuscule capital, 1.6 percent or less. As the Vickers Report keeps the notion of capital requirements based on risk-weighted assets, it does not protect against what it needs to protect.

Here is a question that I dare John Vickers and his colleagues to answer. Why should banks be allowed to leverage their capital more when earning their risk-adjusted-interest-rates from what ex-ante is perceived as the “not-risky”, than when earning these from the “risky”? Does that not mean that the “risky”, like the job creating small business or entrepreneurs, will then need to pay the banks higher interest rates than would otherwise have been the case without regulatory intervention? Or vice-versa that the “not-risky” will benefit from lower interest rates than the market rates? 

It is high time to stop thinking in terms of “buttressing the banks” and start thinking in terms of “buttressing the role of banks in the economy” For instance, is not the risk of an economy without jobs for our youth much riskier than having some banks failing?