Different bank capital requirements for different assets are worse than too little or too much bank capital.

Sir, Lex opines “Debates over bank capital resemble tennis rallies… On one side of the net you have the big global banks. They say they have plenty of capital and that forcing them to operate with more is a restraint on trade. Pow! On the other side are the regulators, who say more capital is better because you never know what losses you may have to absorb. Thwack!” "Bank capital: silly old buffer" August 31

But there are some few, like me, who argue that much worse than there being much or little capital, is that there are different capital requirements for banks, based on the perceived risk of assets. Riskier, more capital – safer, less capital. In tennis terms it would be like judges allowing those highest ranked to be able to play with the best tennis rackets, and the last ranked to play with ping-pong rackets. And of course that distorted the allocation of bank credit.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Mario Draghi is one of those who decided to put a stop on the egalitarian forces of bank credit, decreeing inequality.

Sir, Motoko Aizawa and Daniel Bradlow write: “Quantitative easing, by raising asset prices, has disproportionately benefited the wealthy, thereby contributing to rising inequality.” And they are of course right questioning why Mario Draghi “does not acknowledge the ECB’s own responsibility for the growing concern about redistribution and inequality in Europe and around the world.” “Draghi must accept ECB contributes to inequality” September 19.

But, when they write “Moreover these policies seem indifferent to the need for a more inclusive financial system that, for example, increases the availability of credit to small businesses and encourages banks to provide financial services more responsive to the needs of the poor and young people.”, they do not focus on what’s really causing this, namely the risk weighted capital requirements for banks.

That specific piece of regulations favors the access to bank credit of the safe, the past, the developed, the old, and the rich; and thereby blocks the opportunities of the risky, the future, the developing, the young and the poor.

John Kenneth Galbraith in his book “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…”

The Basel Committee of which Mario Draghi is the current chair of the Group of Governors and Heads of Supervision; and the Financial Stability Board of which he was the former Chair, decided to put a stop on such egalitarianism… and basically decreed inequality.

@PerKurowski ©

Global and local inequality is much driven by dumb bank regulations. World Bank and IMF should do something about i

Sir, Branco Milanovic, with respect to “global inequality” writes: “While for national statistics and inequality measures, there is at least a national government that citizens can blame for high inequality, there is no comparable body globally.” “Putting a number on global inequality is long overdue" September 19

Oh no! For quite a lot of that inequality, I totally blame the Basel Committee on Banking Supervision. With its risk-weighted capital requirements for banks, which favor the access to bank credit of the “Safe”, the developed, the rich, the past, it is basically decreeing inequality.

The interesting aspect with that global inequality driver is that it also causes inequality on a local national level. Just try to figure out how many millions of SMEs and entrepreneurs, all around the world, have been denied access to bank credit because of this regulation.

And yes both the World Bank and the International Monetary Fund have a role to play correcting this.

The World Bank, as the world’s premier development bank, knowing that risk taking is the oxygen of any development, should send bank regulators clear signals to the effect that nothing is as dangerous as excessive risk aversion.

And the IMF, in charge of worldwide financial stability, should also tell regulators to stop being silly, since no major bank crisis has ever resulted from excessive exposures to something ex ante perceived risky. 

PS. And FT should stop covering up for dangerous and failed bank regulators.

@PerKurowski ©

Shrink & Sage, here is the latest key I am trying to open that lock that stops Financial Times from understanding.

Sir, The Shrink &The Sage’s ask: “Must we get to the bottom of things?” October 24. Of course we must… especially when it really matters.

The Shrink refers to “Steve de Shazer [recommending that instead of looking] more and more effort into finding out why the lock is as it is or why it doesn’t open… we should be looking at keys” Indeed that is what I have done in my TeaWithFT.

I have for a long time, by means of over 2.000 letters to the editor, been looking for the key with which make the Financial Times understand the true horrors of current bank regulations. Seemingly I have not found on yet, but in words of The Sage, I will keep on looking for what is under the turtle.

The latest key I have been trying out is the following:

Data found on the web:

The fatality rate per 100 million vehicle miles traveled in motorcycles is 21.45

The fatality rate per 100 million vehicle miles traveled in cars is 1.14

In 2011 in the US, 4,612 persons died in motorcycle accidents

In 2011 in the US, 32,479 persons died in vehicle accidents

And so, even though travelling by motorcycle is about 20 times riskier than cars, cars cause about 7 times more deaths than motorcyclists. That is of course because the riskier something is perceived, the more care is taken to avoid the risk.

And yet no one at The Financial Times seem to find something wrong with bank regulators having decided on higher capital requirements for banks when lending “the risky” motorcyclist of the economy, SMEs and entrepreneurs, than when lending to “the safe” car drivers, sovereigns and corporations with high ratings… even though clearly dangerous excessive lending to the latter is much more likely to occur… and even though that clearly must lead to a dangerous misallocation of bank credit to the real economy.

What are my chances this key will work? I guess slim, I guess I will just be told I am being boringly monotonous again.

@PerKurowski ©

Capital requirements, non-performing loans, down-ratings and fines are causing severe bank credit austerity.

Sir, Henny Sender writes: “A world awash with dollars is rapidly being replaced by a dollar-scarce world” “Pain for those most in debt looks certain to become more severe” August 26.

Yes, and that dollar scarcity will, as is, primarily generate a contraction of bank credit. Consider what is happening:

Regulators are increasing capital requirements, which put banks lending capacity under pressure.

More non-performing loans and credit down-ratings of borrowers put additional strain on the banks.

And to top it up there are the fines. The recently reported fines of $260bn for the largest 25 banks, when calculated for a leverage of 15 to 1 results in about 4 trillions less bank-credit availability.

But when Sender writes: “It is still not sure how the pain will be distributed though”, I would tend do disagree.

If bank regulations keep the risk-weighted capital requirement component, there is no doubt of who are going to suffer the most; that will be those who generate the highest needs of capital, namely “the risky”, like SMEs, entrepreneurs and the downgraded.

Since those risky already are perceived to generate much expected losses, they will generate much less “unexpected losses”, and so we should lower the capital requirements for banks when holding these assets.

Sir, if austerity has to be imposed, I much prefer that to be government spending austerity than bank credit austerity. Banks have to put up at least some capital (equity) while government bureaucrats need not to risk a dime of their own.

@PerKurowski

$260bn in bank fines results in about 4 trillions less bank-credit availability.

Sir, Laura Noonan, with respect to the 25 largest banks, reports “Banks fine tally since crisis hits $260bn” August 24.

And I do some multiplication $260bn times let us say a 15 to 1 leverage, results in $3.9 trillions less in bank lending capacity. So many scream bloody murder about government austerity, while not caring one iota about bank-credit austerity… how come?

Can you imagine if this $260bn in fines had been paid in fresh issued non-voting bank equity to be held by governments for about a decade?

@PerKurowski

Bank credit: In tough times there are no benefits derived from making it harder for the tough to get going.

Sir, I refer to Kadhim Shubber’s and Gavin Jackson’s report on that “Moody’s warns on lending crackdown” August 4.

Clearly the “risky” part of the economy, like SMEs, entrepreneurs and “highly indebted companies” are, as a consequence of tightening bank capital requirements, having to struggle more than others to obtain access to credit, precisely at the exact moment when we most need them to have fair access to it.

And the tightening of bank capital requirements, which lead to bank credit austerity, are usually most called for by those who oppose government spending austerity. Just read through the articles of most of your columnists over the year and you will find requests for higher capital requirements for banks going hand in hand with similar pleads of less government austerity. The most plausible explanation for that… is that it is all the result of an unconscious or conscious pro-government political agenda.

I repeat what I have argued many times over the years. Before we raise capital requirements we need to get rid of the distortionary implications of the risk weights. Let’s reduce the capital requirements like to 5 percent on all assets and then build it up over a decade to around a more reasonable 10-15 percent.

In tough times there are no benefits derived from making it harder for the tough to get going.

Also I am absolutely convinced that if banks are not distorted, bankers, pursuing maximizing the returns on bank equity, are much more able to allocate credit efficiently than government bureaucrats.

But, if bank regulators absolutely must distort, in order to show us they earn their salaries, then at least let us ask them to distort in favor of something more productive than keeping banks from failing. 

For instance let them authorize slightly lower capital requirements based on job-creation and earth sustainability ratings… so that banks earn slightly higher risk adjusted returns on equity funding what we believe should be funded, and not like now, earning much higher risk adjusted returns on equity when funding what is ex ante perceived as safe… like AAA rated securities were… like Greece was.

@PerKurowski

Mark Carney and Bertrand Badré, if sincere, should be concerned with the abandonment of the vulnerable “risky”

Sir, Mark Carney, chairman of the Financial Stability Board, and Bertrand Badré, the chief financial officer of the World Bank Group write: “The financial abandonment of whole groups of customers — or even countries — is not something that can be ignored by the members of the G20. The FSB and the World Bank are playing our part in co-ordinating efforts to prevent the loss of basic banking services needed to finance investment in some of the most vulnerable areas in the world… if legitimate institutions cannot channel funds between countries through a well-regulated financial system, money will instead circumvent the official channels.” "Do not shut out vulnerable from banking" June 3.

They refer mostly to anti-money-laundering regulations but the truth is that the moment regulators confused bank assets perceived as risky with banks assets being risky, and concocted credit-risk weighted capital requirements for banks, then they abandoned all vulnerable “risky” borrowers, who could then no longer count with fair access to bank credit.

The World Bank’s Global Development Report 2003 (GDR-2003), commenting on Basel II, had the following to say: “The new method of assessing the minimum- capital requirement is expected to have important implications for emerging-market economies, principally because capital charges for credit risk will be explicitly linked to indicators of credit quality, assessed either externally under the standardized approach or internally under the two ratings-based approaches. The implications include the likelihood of increased costs of capital to emerging-market borrowers, both sovereign and corporate; more limited availability of syndicated project-finance loans to borrowers in infrastructure and related industries; and an “unleveling” of the playing field for domestic banks in favor of international banks active in developing countries…A recent study by the OECD (Weder and Wedow 2002) estimates the cost in spreads for lower-rated emerging borrowers to be possibly 200 basis points.”

As an Executive Director in the World Bank (2002-04) I did what I could to fight this odious regulatory discrimination against those already being discriminated against by the banks, precisely because they are perceived as risky. I found no resonance whatsoever… and whatever little World Bank criticism was present in the GDR-2003, has seemingly been abandoned.

If Mark Carney and Bertrand Badré are really sincere, this is where they should start.

Bank nannies can worry about perceived risks and dirty fingernails. Bank regulators should mostly concern themselves with distortions and illusions of safety. Much more than safe banks we need functional banks.

PS. And, whatever you do, banks are much too important for us to allow these to be exploited as combustible material by interested politicians.

@PerKurowski

In finance the structurally discriminated are those perceived as “risky”, the SMEs and entrepreneurs

Sir, Gillian Tett refers to an almost all female conference on economic and finance to ask: “whether it is time to organize an all-black or all-Hispanic financial policy-making event of this sort?” “The power of role models” May 9.

And referencing Simon Kuper’s article “How to tackle structural racism” she reflects: “And, if that occurred, would it help to combat that structural discrimination”.

That is off target. In matters of banking, financial reforms and the future of global finance and economics, the truly structurally discriminated, the “all-black or all-Hispanics”, are those perceived as “risky”, like SMEs and entrepreneurs, while the structurally favored, the “all white males”, are “the safe”, like sovereigns and AAArisktocrats.

So we need more a conference with large representation of those perceives as risky. It would be so interesting if Senator Elizabeth Warren who has exposed “constant criticism of Wall Street and of America’s wealthy elite” were also present there. Can you imagine a small entrepreneur asking Senator Warren the following?

“From a credit point of view I am perceived as risky. I therefore face many difficulties to borrow that umbrella from bankers they only want to lend out when the sun shines. I accept that as a natural fact of life. But why must the regulators make it even harder for me to access bank credit, by allowing banks to have much less equity when lending to “the infallible” than when lending to me?

That results in that banks can leverage their equity, and the implicit or explicit support taxpayers give them, much more with the risk-adjusted net margin dollars paid by “the infallible” than when those same dollars are paid by me.

We the “risky” entrepreneurs and SMEs, we hear we are good for the economy, that we generate growth and jobs and, as far as I know, lending to us has never detonated a major bank crisis… so Senator Warren, can you explain to me why is there such an odious regulatory discrimination against us?

There exists an Equal Credit Opportunity Act (Regulation B) and so I must also ask: Senator Warren why does its benefits not extend to us?

@PerKurowski

​

That banks do not lend to small businesses in Europe has a reason and is not something irreversible

Michael Sherwood and Richard Gnodde write “The international regulatory response to the financial crisis, which is intended to make sure that banks are better capitalised and their lending operations more cautious, could in some ways make the predicament of small business worse”, “A ‘big bang’ to expand the European economy” February 24.

And they go on: “Robust banks will strengthen the financial sector as a whole. But bank credit is likely to become less freely available and more costly — to the detriment of those companies and economies that are more dependent upon it.”

Sir, are we supposed to believe these two vice-chairmen of Goldman Sachs Group do not know, that is not an irreversible process? That what is making it difficult for small businesses to have access to bank credit in Europe, is foremost that banks need to hold much more equity when lending to these than when lending to something able to be perceived as less risky from solely a credit point of view?

I doubt it, the problems is that they, as bankers, have a vested interest in maintaining the current system which allows banks to earn higher risk adjusted returns on equity with exposures to assets perceived, or made to be perceived safe. It is after all a bankers dream come true… a big ROE without having to take risks.

What is hard for me to understand though is why FT, who is not a bank, does not even want to acknowledge the distortionary impact produced in the allocation of bank credits to the real economy by requiring banks to hold different amounts of equity against different assets.

What would make a Negro slave on a cotton plantation in 1800 America, not feel being discriminated against?

Sir, I refer to Luke Johnson’s valedictory essay for the FT “A farewell after eight years championing founders” January 28.

The following Johnson writes is extraordinary: “I believe independent ownership of business assets is incredibly important if we want a vibrant economy. Founders possess animal spirits and optimism that contribute disproportionately to innovation, job creation and tax generation. They are the essential ingredient for a more prosperous society, together with the rule of law and sound property rights. These inventors, mavericks and would-be tycoons exist to take risks most of us seek to avoid in our careers.

Start-ups renew industry and society, and pioneer and implement new technology that established institutions shun, because it would upset their cosy oligopolies. Crony capitalists — whose annual conference was held last week in Davos — are not entrepreneurs, but corporate managers who hate free markets and the idea of proper competition, while squandering most of their time on office politics and games of patronage.”

How extremely sad then that Luke Johnson completely missed out on how bank regulators, with Basel I favoring the “infallible sovereigns”, and with Basel II favoring the AAArisktocracy… impeded the fair access to bank credit of his “risky” risk-taking entrepreneurs.

What is it that makes those who should most see a distortion and discrimination in order to fight it, not seeing it?

Stress testing of banks should foremost test whether these serve the real needs of the real economy.

Sir, I refer to your “Stress testing should not just apply to the banks” December 31.

In it you argue that “Regulators need a holistic approach to risk in the financial system” and therefore they should also include “the non-banks that are playing an increasingly important role in supporting the economy” so that “the world can be confident that the process of making banks safer is not simply shifting risk elsewhere”.

And again Sir, you totally ignore what is the biggest risk with a financial system, namely that it does not allocate bank credit adequately for the needs of the real economy. Again you seem to imply there is a possibility of having save banks standing there in shiny armor in the midst of the rubbles of the real economy… and of that being a worthy goal to pursue.

No Sir! The stress testing of banks we most need now, starts with ascertaining whether our risky small businesses and entrepreneurs are having fair access to bank credit. The stress testing of banks we most need now, should foremost test whether banks are serving the real needs of the real economy.

PS. As I have told you more than a hundred times, banks are not doing that, thanks to our stupid bank regulators... so perhaps they do not dare to stress-test their own mistakes. 

Fed’s Janet Yellen, as a leading equal opportunity killer, has no moral right to speak about inequality.

Sir, I refer to Robin Harding’s “Yellen risks backlash after remarks on inequality”, October 18.

There we read of “the high value Americans have traditionally placed on equality of opportunity”… that “Ms Yellen’s speech was about equality of opportunity”… about “the rise in inequality using recent Fed research and then laid out four “building blocks” for economic opportunity in the US: [among these] business ownership” … and that “owning a business [was an] important routes to economic mobility.

For over a decade I have argued that forcing those who are perceived as “risky”, and who therefore already have to pay higher interests and have lesser access to bank credit, to have to pay even higher interests and get even less access to bank credit, only because regulators think banks need to hold more capital when lending to them than when lending to the “absolutely safe”, is an odious discrimination and a great driver of inequality… a real killer of the equal opportunities the poor deserve in order to progress.

And of course, let us not even think of what the Fed’s QE’s have done in terms of un-leveling the playing fields. The fact is that had it not been for how the financial crisis management favored foremost those who had the most, Thomas Piketty’s "Capital in the Twenty-First Century”, would have remained a manuscript.

Sir, to hear someone who so favors regulatory risk-aversion, daring to speak about American values, in the “home of the brave”, in the land built up on the risk-taking of their daring immigrants… is just sad.

PS. To me it is amazing how bank regulators in America can so blitehly ignore the Equal Credit Opportunity Act (Regulation B)

Now if only regulators allowed banks to be banks again.

Sir, Patrick Jenkins writes about “a small manufacturing company… looking for £150,000 of working capital. It is traditionally the kind of need that might have been met by a bank loan. But, in the post-crisis world of bank belt-tightening, it is now the bread-and-butter of upstart peer-to-peer (P2P) lenders. “Why peer-to-peer lending remains inherently unsafe”, July 23.

No, this is not the result of a “post-crisis belt-tightening” but of pre-crisis bank regulations, Basel II, June 2004, which required banks to hold immensely much more capital (equity) when giving loans as that described, than when lending to the sovereign or the AAAristocracy.

And Jenkins correctly writes “Banks might have done themselves and the world a lot of damage in recent years, but they are still better judges of lending risk than the average investor”. Indeed they are, and they would be the best at handling such loans, if now regulators only allowed the banks to be banks again.

No “fiscal cliff” of the current size can be jumped over without a lot of private risk-taking.

Banks currently need to hold much more capital when lending to “The Risky”, like small businesses and entrepreneurs, than when lending to “The Infallible”, like the government or anything with a good credit rating.

So here the question: How much more does “The Risky” have to pay the banks, on top of their normal risk premiums, in order to be competitive when accessing bank credit? 

That question reveals the profound distortions produced by bank regulations which impede banks to perform with any sort of efficiency their absolute vital role of economic resource allocation. 

Unfortunately, that distortion is a topic not yet discussed by the private sector as can be seen in Ed Crooks’ report “Business calls for accord to boost growth” November 8. And, as for the bank regulators, they won’t even acknowledge questions on it. 

One of the problems is that “The Infallible”, and many banks too, are very much benefitted by such distortions, and so, until “The Risky” lift their own voice in protest, very little will be happening on this front. 

To me it is amazing that in the “Home of the Brave” the private business sector can sit down to discuss the future without discussing what an excessive regulatory risk-aversion must mean for that future. There is no “fiscal cliff” on earth that can be jumped over without abundant, and hopefully smart, private risk-taking.