If only the Basel Committee of Banking Supervision ‘Swallowed the brave pill’

Sir, I refer to Emma Jacobs "‘Swallow the brave pill,’ advises the tech executive turned entrepreneur" July 23

Currently regulators, by means of lower capital requirements, give banks incentives to build up large exposures on what is perceived, decreed or concocted as safe, like house financing, sovereigns like Greece and AAA rated securities. That is like feeding our banks carbs only, something which makes our bank system obese.

As a result those perceived as risky, like SMEs and entrepreneurs, and who are so important for the future of the economy, are also kept on an anorexic credit diet. 

That is all because regulators, even if banks with size of exposure and risk premiums already clear credit risk, are, quite infantile I would say, more concerned with the risks perceived ex ante than with what could happen ex post. Had they not been so, they would have long time ago realized that what puts our bank system in danger of major crisis, is never what is perceived ex ante as risky, but always what has been wrongly perceived as safe.

Wouldn’t it be nice Thomas Davies helped those regulators to “swallow a brave pill” in order to get over their affliction that so much hurts us? Then our bank system would be safer and our economies stronger.

@PerKurowski

More food for the hungry and less food for the less hungry sounds logical and decent, that is unless the hungry are obese and the less hungry anorexic.

Sir, Martin Wolf writes: “More equity capital would make banks less fragile.” “Fix the roof while the sun is shining” December 6.

That is only true as long as we get rid of the distorting risk weighted capital requirements for banks. Though “more risk more capital - less risk less capital” sounds logical, that is unless “The Safe” get too much credit and “The Risky” too little. If that happens, both banks and the economy will end up more fragile.

Wolf writes: “The world economy is enjoying a synchronised recovery. But it will prove unsustainable if investment does not pick up, especially in high-income economies. Debt mountains also threaten the recovery’s sustainability”. Let me comment on that this way:

First: “a synchronised recovery” is a way to generous description of what is mostly a QE high that has just helped kick the crisis can down the road.

Second: The investments most lacking in the “unsustainable if investment does not pick up” part, is that of entrepreneurs and SMEs, those which have seen their access to bank credit curtailed by regulators. It is high time we leave the safer but riskier present and get back to the riskier but safer future.

Third: The “Debt mountains [that] threaten” are either those for which regulators allow banks to hold much less capital against, like sovereigns and residential mortgages; or those consumer credits at high interest rates that dangerously anticipate consumption and leaves us open to future problems.

Sir, let me again make a comment on Wolf’s recurrent recommendation of “Public investment to improve infrastructure”. He usually argues this in order to take advantage of the very low interest rates. That ignores that those low rates are not real rates but regulatory subsidized rates. If banks had to hold the same capital against loans to sovereign than against loans to citizens, and if also central banks refrained from additional QEs, I guarantee that the interest rates on public debt would be much higher.

Besides, given the fast technological advances, we do not even know what infrastructure will be so much needed in the future so as to be able to repay the loans, instead of just burdening more our grandchildren.

@PerKurowski

FT, you do not support intelligent bank regulations by silencing its stupidities

Banks consider the perceived risks of default of borrowers when setting the interest rates, the amounts of the loans and all other terms. Therefore, to also favor with bank regulations bank exposure to what is officially perceived as absolutely not risky, like triple-A rated and infallible sovereigns, and thereby castigating their exposure to what is officially deemed as risky, like small business and entrepreneurs, dooms the banks to dangerously obese exposures to the “not-risky”, and to the for the economy equally dangerous anorexic exposures to the “risky”. And that, no matter how you look at it, is plain stupid bank regulations.

Since FT has clearly, and I would say deliberately ignored the previous argument, about which I have sent FT over 600 letters the last 7 years, I find it absurd when in “Lost in translation”, April 14, FT expresses that it has “always favored intelligent banking regulations”

For example just earlier this week Martin Wolf wrote, for the umpteenth time, about balance of payment problems in Europe stating “In the years of euphoria before the financial crisis private capital flowed freely [to] Greece, Portugal and Spain”, and again completely ignoring the fact that these capital flows were actually much pushed by the dumb capital requirements for banks, “Why the Bundesbank is wrong”, April 11. 

No wonder Margaret Atwood can express so much bile against powerful uncontrollable and unaccountable private sector Gods of high finance, “Our faith is fraying in the faceless god of money” April 14. No one has cared to inform her that without the stupid bank regulations there would have been no market for those bad mortgages she rightly abhors. No one has cared to inform her that those who really played Gods, and with immense hubris thought themselves risk managers of the world, were the bank regulators, and who now, instead of being held accountable, for instance for Basel II, are in charge of producing its sequel Basel III, which, by the looks of it, will just dig us all deeper in the hole.

What we need to check is the bank regulators testosterone levels to see if it is sufficient.

Sir, I am not sure about the applicability to banks of Gillian Tett´s “Regulators should get a grip on traders´ hormones” March 16, since Mark Twain´s “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” would indicate that the testosterone level of bankers is far from being abnormally high. 

But what might behoove us is to test the regulators hormones. When these decided that even though banks were already clearing for perceived risks of default of borrowers by means of interest rates, amounts exposed and other terms, they should also consider those same perceptions for their capital requirements, they most definitely evidenced what would seem to be a severe case of lack of testosterone. 

As a direct consequence of the risk-adverseness of the regulatory nannies, we are now suffering from obese bank exposures to what was officially perceived as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what was officially perceived as risky, like the small businesses and entrepreneurs.