By not asking all the questions that need to be asked, journalists also fail society.

Sir, Henry Manisty writes “financial journalism plays a vital role in upholding the integrity of financial markets”, “EU regulators have form on obstructing journalists” November 9.

Indeed, but in many respects, financial journalists have often failed society by not doing that. For instance, here are just three examples of questions that should have been posed directly to the regulators, long ago.

We know that those excessive bank exposures that can be dangerous to banks and bank systems are always created with assets perceived as safe, never ever with assets perceived as risky. Therefore, can you please explain your risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous than what’s perceived as safe?

Before risk weighted bank capital requirements credit was allocated on the basis of risk adjusted interest net margins and a view on the portfolio. After that it is allocated based on risk adjusted returns on equity; which obviously those that banks can leverage less with, e.g. “risky” SMEs and entrepreneurs. Explain how this does not distort the allocation of bank credit?

Even though none of Eurozone sovereigns can print euros on their own, for your risk weighted bank capital requirements you decreed a zero-risk weight for all of their debts. What do you think would have happened in the USA if it had done the same with its 50 states?

Sir, paraphrasing Upton Sinclair one could say that “It's difficult to get a journalist to ask something, when his salary, or being invited to Davos, depends on his not asking it.”

PS. My 2019 letter to the Financial Stability Board (FSB)

“Any populism yours can do, mine can do better; mine can do populism better than yours” “No he can’t!” “Yes he can, yes he can, yes he can!!!!”

Sir, Simon Kuper ends his “Secrets from the populist playbook” March 16, with “Some new politicians, notably the new Democrat congresswoman Alexandria Ocasio-Cortez, can rival Trump for engagement. To some degree, we are all populists now.” “Secrets from the populist playbook”, March 16.

Indeed but the populists must also be measured with respect to the success they have when selling their populism.

For instance, our current bank regulators must be some of the most successful populists ever. Just think how they have managed to convince the world (most or all in FT included) that by imposing risk weighted capital requirements for banks, they are reducing the risks for our bank system. With that they have distorted the allocation of bank credit all over the world, weakening the economies and increasing the dangers of a systemic meltdown of our banks. 

Sir, I am from Venezuela, and so unfortunately I know too much about populists, but, when compared to the Basel Committee on Banking Supervision’s and the Financial Stability Board’s populism, Hugo Chavez was just a quite gifted amateur.

@PerKurowski

PS. My 2019 letter to the Financial Stability Board (FSB)

Do we not need a Martin Act to crack down on regulators who dare regulate banks without having a clear idea about what they are doing?

Sir, Brooke Masters writes “global banks and other big financial services groups have lived in fear of an old New York state anti-fraud law. The Martin Act has been used to crack down on biased Wall Street research, insurance bid-rigging and “dark pools” said to mislead traders, among many things” “Loosening the law that haunts bankers puts us at risk” June 20.

Great! But why is there not anything similar when for instance European regulators and central bankers assign a 0% risk weight to Greece. Of course they must have known Greece was not worth it, no sovereign is, and yet they went ahead. And the final consequence of that have been horrible sufferings resulting from excessive public debt, but without the slightest indication of holding those responsible for it accountable.

Yes “The US system relies on fears of prosecution and giant fines to help keep banks and insurers honest”, but what do we have to keep technocrats from regulating when they obviously have no idea about what they are doing… like for instance when they think that what is ex ante perceived as risky poses ex post more dangers to our bank system than what is ex ante perceived as risky.

@PerKurowski

Are those who impose regulations that create generous incentives for these to be gamed entirely without blame?

Sir, Brooke Master while discussing regulations for carmakers and banks refers to “mis-sold mortgage-backed securities and payment protection insurance” “The diesel scandal echoes bankers’ woes” July 27.

The regulators, with Basel II of 2004, allowed banks to leverage 62.5 times if a AAA to AA rating was present… while for instance only 12.5 times if there was no credit rating. That temptation set up the banks to, sooner or later fall into a trap. Are these regulators innocent?

In the same vein carbon emission controllers set up procedures that evidently could easily be cheated on. Are these controllers also entirely innocent?

I ask these questions because from what we have seen neither regulators nor controllers have been demoted, on the contrary, at least with respect to banks many, like Mario Draghi and Stefan Ingves, have been promoted.

Had the credit-rated-risk-weighted capital requirements for banks that distort the allocation of credit to the real economy not been introduced, the 2007/08 crisis and the ensuing slow growth would not have happened.

If a country decides to impose a 1.000% tax on liquor, does it not have any responsibility in that its citizens (including its legislators and tax collectors) start smuggling liquor?

@PerKurowski

More important than air traffic control is to place bank regulation in a public/private non-profit entity

Sir, Gillian Tett discusses the head of the US Council of Economic Advisers’, Gary Cohn, plan to take the air traffic control system away from the Federal Aviation Administration and place it in a non-profit entity, funded by public and private finance. “Canada inspires US reform plans to take off”, April 7.

Sounds like a good idea but, much more important for both America and Canada, would be to place bank regulations in the hands of such an entity… like a BankReg.org!

I mean would BankReg.org have gotten away, like current bank regulators have, with regulating banks without defining the purpose of banks? No way Jose!

I mean would BankReg.org have gotten away, like current bank regulators have, to regulate banks without empirical analysis of what has caused the bank crises in the past? No way Jose!

I mean would BankReg.org have gotten away, like current bank regulators have, with making it harder than it always has been for “risky” SMEs and entrepreneurs to access bank credit? No way Jose!

I mean would BankReg.org have gotten away, like current bank regulators have, with risk-weighing the Sovereign with 0%, and We the People with 100%, and thereby through the Bathroom Window introducing runaway statism? No way Jose!

I mean would BankReg.org have gotten away, like current bank regulators have, with risk-weighing the dangerous corporate AAA rated with 20%, while assigning a 150% risk weight to the so innocuous below BB- rated? No way Jose!

I mean would BankReg.org have gotten away, like current bank regulators have, with giving banks incentives to finance the “safe” basements were our unemployed kids can live over those, who though riskier, could provide our kids with the jobs they need in order to also have kids and basements? No way Jose!

I mean would those working in BankReg.org have gotten away, like current bank regulators have, with not having some psychological tests made on them in order to guarantee their suitability? No way Jose!

I mean would BankReg.org have gotten away, like current bank regulators have, with causing the 2007-08 crisis without suffering any consequences for it… in some cases even being promoted? No way Jose! We would have sued and fined its technocrats for their last socks!

I mean would FT have treated BankReg.org as leniently as it has treated the Basel Committee for Banking Supervision, the Financial Stability Board, IMF and other clearly failed bank regulators? No way Jose!

PS. Here are some of my questions looking for answers

@PerKurowski

To parade badly failed global bank regulators wearing dunce caps, is one right way to silence dangerous nationalism

Sir, I am all for globalization. My father a polish soldier saved from Buchenwald by the Americans; I was born in Venezuela; with high school and university (economist) in Sweden; an MBA in Venezuela, spent over a year as an intern in a British Merchant Bank in London (and LSE and LBS); also a Polish citizen; a financial and strategic consultant in Venezuela; a representative in Caracas for a Chilean bank; having worked for corporations and investors from and in many places; a former Executive Director of the World Bank who wanted migrants to have a seat at its Board so that the world at large would have more representation; since 15 years living in Washington; and now happily with a grandfather of two Canadians, I am, de facto, probably as globalized as you can be.

But, if what’s put on my plate is dumb and dangerous globalism, then I swear I have no problem whatsoever going very local, in order to defend to my very best, my many diverse national interests, of course, primarily, those of my grandchildren.

So now, when I see Martin Wolf, in “The economic perils of nationalism” January 18, writing that those (Davos/Basel Committee) globalizers who created a “financial crisis” have seen “their reputation for probity and competence… devastated” I cannot but say: “My oh my, what a lie!”

There all still there. Those who retired might have written well-reviewed books, or had positive books written about them, and those who have not retired, have actually been promoted.

I am totally for trade, and so I fully agree with Martin Wolf in that “one might gain more from foreigners than fellow citizens”. But that does not have to mean you give foreign citizens the opportunities you deny your own.

When bank regulators introduced their risk weighted capital requirements for banks, they gave banks more incentives to finance “The Safe”, like sovereigns and AAArisktocracy, no matter where these found themselves on the globe, than to finance “The Risky” of their localities, like SMEs and entrepreneurs. And that was wrong, and that did not serve any purpose. If I am going to have to suffer a bank crisis, I prefer a thousand times that to be the result of banks having financed my locals too much, than for instance, in the case of European banks, these having financed the US residential subprime sector too much.

Sir, what’s our real problem? It is that there is more accountability on the local level than on the globalized one, and that of course, opens up the door for any misguided populism.

To for instance start parading bad global bank regulators down our avenues, wearing dunce caps, instead of giving them a red carpet treatment in Davos, would be a good way to begin silencing dangerous nationalism.

PS. That parade would perhaps also have to include all those who have so much favored regulators by keeping so mum about their failures. Mi capisci?

@PerKurowski

Tim Harford, lack of the limited diversity is bad, but much worse is groupthink within mutual admiration clubs.

Sir, Tim Hartford argues that one argument in favor of diversity is “to engage with people who may see the world differently because of their race, nationality, sexuality, disability or gender.” “Economics: a discipline in need of diversity” November 12.

That is a way too restricted view on the importance of diversity. As an Executive Director of the World Bank, back in 2002-04, I often argued with my colleagues that if by lottery we would get rid of two us with so much alike backgrounds, substituting the eliminated with a nurse and a plumber, we would not only have a more knowledgeable Board but, more importantly, a much wiser one. Not surprisingly there was a general lack of enthusiasm in the response to this line of argument.

Likewise, if bank regulators had beside those with banking experience included some with borrowing experience within their ranks, those who could attest to the difficulties they already faced accessing bank credit when perceived as risky (even if all these were white men) we would never have had to suffer the sheer idiocy of the current risk weighted capital requirements for banks.

Sir, so to stuff mutual admiration clubs that can easily fall trap to groupthink with those who meet the current limited meanings of diversity, will result in much less than what is really needed.

@PerKurowski

Do we also need the possibility of clawbacks or prison to concentrate the minds of bank regulators?

Sir, Harvey Clark Greisman, when discussing Gillian Tett’s “Clawbacks emerge as a vital weapon in finance”, September 30, argues: “The only penalty that will concentrate bankers’ minds is prison”, October 10.

And what about regulators? If ever submitted to public shaming, could that suffice? 

How do we keep them from doing such insane things as regulating banks before clearly defining the purpose of the banks? 

How do we keep them from imposing capital requirements in order to make banks safe without one single empirical study on what has caused major bank crises in the past?

How do we keep them foremost concerned with doing no harm?

How do we keep them from committing the list of horrendous mistakes contained in the following aide memoire?

@PerKurowski ©

FT, are you aligned with the interests of redistribution profiteers and besserwissers, or with citizens’?

Sir you refer to that “Next month, Switzerland will hold a referendum on whether to introduce an Unconditional Basic Income”, and then you opine “this measure seems premature today [though] it is worth running data-driven pilot projects to test the concept’s future viability. More effective tax regimes and smarter forms of wealth redistribution will be needed to ease our social strains.” “Bring on the robots but reboot our societies too” May 7.

I come from Venezuela, where the poor, from that so lauded 21st Century Socialism, have not received more than about 15 percent of what should have been their individual share of the fabulous oil revenues over the last 15 years, tops. So please don’t tell me an unconditional universal basic income, in this case funded by oil revenues, “seems premature”… it is way overdue.

And Sir, why do we really need to test the hypothesis that people know better what to do with their own resources than what the governments with other’s resources? Is that to find ways to help profiteers and besserwissers to keep control over the redistribution?

As I have written to you I support a worldwide gas/carbon tax which revenues should be paid out by means of a universal basic income, in order to align the incentives in the fight against climate change and against inequality.

And I also support a social pro-equality tax, which revenues should be paid out entirely by means of a universal basic income, from citizens to citizens, so as to avoid all the dangerous populist and demagoguery intermediaries.

Sir, if we can separate all the redistribution from governments’ normal functions, then we will also be able to make these perform better for us. For instance, we might suddenly realize that all tax evasion and tax avoidance put together could be less than government waste.

PS. And bring on the robots to bank regulations. These at least have smaller egos that stand in their way of admitting and learning from their mistakes. The robots would, long ago, have eliminated the risk weighted capital requirements for banks, which only dangerously distort the allocation of bank credit to the real economy, for absolutely no good reason at all. 

@PerKurowski ©

How could it be in the interest of any bank regulators to have CoCos with unclear and haphazard conversion terms?

Sir, I refer to Thomas Hale’s, Martin Arnold’s and Laura Noonan’s discussion on the regulatory uncertainty that exists, “Coco trade seeks to emerge from dark period” February 24.

I am amazed. If I was a bank regulator and I had signaled that one way for banks to cover for the capital regulators required were the CoCo’s, I would want these to be as clear and transparent as possible. That not only to make sure banks could raise these funds in the most competitive terms, but also to be sure I covered my own share of responsibility in the disclosure process.

Something must have gone seriously wrong if there is still such huge regulatory uncertainty. I mean I could not for a second believe that any regulator would want to withhold such information on purpose.

In April 2014 I sent you a letter that asked “Can bank regulators keep silence on the conversion to equity probabilities of cocos?" 

In it I wrote: “Do regulators have any moral or formal duty to reveal to any interested buyers of cocos if they suspect the possibilities of these having to be converted into bank equity being very high? I say this because if so, and if they keep silent on it, that would make them sort of accomplices of bankers. Would it not?... Of course banks need capital, lots of it, but tricking investors into it, does not seem like the right way for getting it.”

In May 2014 I wrote you a letter asking “Is it ok for a regulator, like EBA, to withhold information from 'experienced investors'?"

In it I asked “What would be the legal responsibility of bank regulators, towards any coco-bond investors, if they withheld important information with respect to the possibilities of those bonds being converted into bank equity?”... and also:“Britain´s regulator, the Financial Conduct Authority, has said it plans to consult on new rules to ensure cocos are only marketed to experienced investors…Would that imply that a regulator can withhold important information from “experienced investors”? If so, just in case, for the record, I have no knowledge about investments whatsoever.

And then in August 2014 I wrote you a letter that alerted: “The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.”

But then again regulators might also have decided it was better to go and fly a kite J

@PerKurowski ©

Could bank regulators, like Mark Carney, have accepted responsibilities for something they are not really qualified for?

Sir, you write: “Mr Carney acknowledges the concern that keeping interest rates very low for a long time may fuel a sharp rise in risky lending. It does not take a genius to see this, he adds, showing some frustration at the chorus of commentators warning of a credit bubble.” “Carney is right to keep UK interest rates on hold” January 20.

But, forget the interest rate for a second. Carney also wears the hat of the Chair of the Financial Stability Board. And, does it take a genius to understand that allowing banks to earn the highest risk adjusted returns where they most want to earn it, where it is perceived as very safe, will create, sooner or later, a bank credit bubble?

Here below is a question that we do not know how Mark Carney would answer it, because seemingly it looks that no one dares to make it… at least not FT.

Introduction:

The Basel Committee decided that in order to make banks safe, these need to hold more capital (equity) against assets perceived as safe from a credit risk point of view than against assets perceived as risky. 

For instance in Basel II a private sector asset rated ‘prime’ AAA carried a 20 percent risk weight while an asset rated ‘highly speculative’ below BB- had a 150 percent risk weight. That meant banks needed to hold 7.5 times more capital against a below BB- rated asset than against an AAA rated asset.

Allowing banks to leverage their equity differently based on credit risks obviously distorts the allocation of bank credit to the real economy, something that by itself could also be very dangerous for the safety of banks.

And the only way those risk weighted capital requirements for banks could be justified, would be if they really made banks safer.

And so the question:

Mark Carney, Sir, would you be so kind so as to provide us with one example of a major bank crisis that has resulted from excessive bank exposures to assets that were perceived as risky when placed on the balance sheet of banks.

I mean we can think of many instances were bankers were lulled into a false sense of security by good credit ratings, but I cannot for my life imagine bankers building up excessive exposures to something rated below BB-. Can you?

Sir, if Carney is not able to answer that very straightforward question adequately, it might indicate he has accepted a responsibility he is not fully up to and that should be worrisome… wouldn’t it?

Could it not be this bank regulatory distortion that impedes low interest rates and other stimulus to reach where it is most needed, like to SMEs and entrepreneurs?

@PerKurowski ©

To manage risks our bankers are always better free, in God’s hands, than in hands of some hubristic sophisticated besserwissers

Sir, Martin Wolf writes: “Market liquidity is likely to disappear when one needs it most. Building our hopes on its durability is risky. That is correct, but when he argues: “the absence of regulation exacerbated the liquidity boom and subsequent bust”, his implicit message is… that regulators should do something about it. “Beware the liquidity delusion” October 7.

I on the other hand have always worried about that bank regulators, when they act on their own perceptions of credit and liquidity risk, in any sort of complex form, introduce distortions, systemic risks, which can make everything so much worse. 

What feeds our credulity to believe something is more safe just because we perceive that something to be more safe? Is it not so that the safer an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby make that asset really risky?

What feeds our credulity to believe something is more liquid just because we perceive that something to be more liquid? Is it not so that the more liquid an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby at one point make that asset absolutely illiquid… at absolutely the worst moment?

Wolf suggests: “It would be better if investors appreciated the risks of a freeze in market liquidity in riskier financial assets”. Yes, but one must also argue the importance for regulators to appreciate the risks of a freeze in market liquidity for “safe” financial assets. A freeze of those assets would obviously hurt much more. (Like what happened with the AAA rated securities collateralized with mortgages to the subprime sector)

Wolf suggests: “markets characterized more by longer-term commitments, and less by hopes of finding ‘greater fools’ willing to buy at all times, might be better for most of us. This will not be true for all assets — notably government bonds. But it will be true for many private instruments”. Indeed, more long-term commitments could be good, but why does Martin Wolf believe that government bonds could never become a dangerously overpopulated safe haven in which we all got stuck gasping for oxygen? Is it ideology?

Of course dangers surround us, our financial markets and our banks, all the times; many more than credit and lack of liquidity risks. To manage those risks I am convinced we are better of being free, in God’s hands, than in the hands of some sophisticated besserwissers suffering immense hubris. But that’s just me.

Does this mean I don’t want any regulations? Of course not! But keeping those simple, and essentially considering the unexpected instead of the expected, would go a long way. The expected always finds a way to take care of itself… though I must admit that sometimes that takes strangers going strange ways and using strange tools.

@PerKurowski ©  J

The best Sovereign Debt Restructuring Mechanism (SDRM) is the one that most reduces the need for it.

Sir I refer to your discussions about a “holy grail… a sovereign debt restructuring mechanism (SDRM) — a bankruptcy procedure for states.” “To err is human, to forgive is statesmanlike”. July 27

Even though I agree with the need for a SDRM, we citizens need to be very alert to how it is designed. Bank regulation’s bureaucrats/technocrats, behind our backs, have already given public borrowings an enormous unearned/undue advantage, by allowing banks to hold much less capital against public debt than what they are required to hold against private sector debt. 

If on top of that we now also make it easier for government bureaucrats/technocrats, hiding behind the mantle of “sovereignty”, to get out of the debt they contracted, then we have really messed things up for ourselves.

In this respect I believe any acceptable SDRM should begin with:

First and foremost by eliminating all incentives that can help governments contract too much debt.

And then by defining clearly what, when compared to ordinary credit to the public sector, should be  deemed as odious credit. For instance, credit not awarded in a transparent way, or awarded when it was clear that the resulting debt might not be sustainable, and was therefore of speculative nature, should not receive the same treatment in a SDRM, as public credit awarded transparently and when there was no doubt about the sovereigns capacity to serve it.

Let us be very clear about that the best SDRM is the one that reduces the need for it.

And of course it is human to err… but that does not mean that bank regulators should not admit their mistakes and be held accountable for it. Pseudo-statesmen forgiving behind curtains their own mistakes... really?

How can you ask creditors, or taxpayers, to take a hit on Greece, while pardoning, even promoting, bank regulators?

@PerKurowski

Shrink and Sage, in these days of skepticism, why are bank regulators so trusted and so obvious questions not asked?

Sir, Psychotherapist Antonia Macaro (The Shrink) and philosopher Juan Baggini (The Sage) ask “Which great thinker is most relevant today?” May 9.

In it The Sage writes: “Ours is a skeptical age, where old certainties have collapsed and no new ones have taken their place. Fewer people in the west now look to religious leaders for guidance but, following various disasters with drugs, pesticides and nuclear power stations, there seems to be at least as much distrust of scientists.”

And “The Shrink & The Sage”, they end by requesting suggestion for questions. Boy, do I have one for them.

Regulators have decided banks need to hold much more equity against assets perceived as risky from a credit point of view than against assets perceived as safe. Though more-risk-more-equity and less-risk-less equity might intuitively make some sense, it absolutely does not. This because never ever have major bank crises resulted from excessive exposures to what was perceived ex ante as risky, but always from excessive bank exposures to what was ex ante perceived as “safe” but which ex post turned out to be very risky.

And by favoring so much the access to bank credit of those perceived as safe, it also introduces a seriously dangerous distortion in the allocation of bank credit to the real economy.

But the members of this “skeptical age”, like journalists who should be on the forefront of skepticism, they do not want to ask why and seemingly they blindly trust regulators to know what they are doing. How come?

For instance Martin Wolf in July 2012 wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

And yet Wolf is unable to take it from there and arrive at the only logical conclusion, which is that if equity requirements are to be based on the risk of assets then, for stability purposes, they should be 180 degrees the opposite… slightly higher for what is perceived as safe than from what is perceived as risky.

So Shrink and Sage… why in this “skeptical age” are questions not asked and scientifically failed bank regulators so trusted so as to keep on regulating banks even when they have failed?

In my blog http://teawithft.blogspot.com you will find copy of all my hundreds of letters sent about this issue to FT and to their journalists and opinion makers for more than a decade. You can use it as evidence for what I am saying.

@PerKurowski

No! We can’t accept markets know more than we the experts do, can we?

Sir, I refer to John Kay’s “Crowd-pleasing theories are no substitute for wise regulations” December 17.

In it he writes “The wisdom of crowds becomes a pathology when the estimates of the crowd cease to be independent of each other, and this is likely when the crowd is large, ill-informed or both. It is in the nature of a crowd to turn on anyone who dissents from what is already an average opinion”.

I fully agree with that but, when the crowd is too small, then the groupthink risks really sets in, and it is in the rules of a mutual admiration group not to dissent in such a way that it could reflect badly on a member of it.

And so that is why “wise” regulators are certainly no perfect substitute for crowds either.

Just look at what our current bank regulators did:

They automatically decided that risky is risky, safe is safe, and therefore banks should be required to hold more capital against risky assets based on perceived risks.

And they ignored any deliberations on that what is risky might not be risky if it is perceived as risky, while what is perceived as safe might be really dangerous if it turns out to be risky, and therefore perhaps banks should be required to hold more capital against what is perceived as safe, than against what is perceived as risky.

Why? Because that would mean that there in their club of great experts regulators they would have to admit that they really do not know much about risks, and that the market could be better at determining it, and of course “We can’t have that… can we?

Capital (equity) requirements for banks, to be correct, need to be based on the perceived credit risks being incorrect.

Sir, the risk weights in Basel II for an AAA to AA rated sovereign was zero percent; the risk weight for a corporate rated AAA to AA was 20 percent; and the risk weight for an unrated corporate, like a small business was 100 percent… and they still are in Basel III

And so it would be interesting to know where Tom Braithwaite got “the risk weights, which obliges the banks to hold more capital against the riskiest assets, were also made tougher” from, “Fed’s push for safety test the business model at US banks”, December 12.

The only real important difference between Basel II and Basel III has been the introduction of the leverage ratio, which is not risk-weighted.

Unfortunately putting the pressure on banks with the leverage ratio to increase their capital (equity) while keeping the risk-weighting in place only means those weighted as “risky” are being more discriminated against that ever.

And Braithwaite writes: The international Basel II rules required banks to hold 2 percent of common equity against risk-weighted assets. The new Base III standards announced in 2010 requires a 7 percent capital ratio by 2019”.

There are of course differences but, since Basel II established “The total capital ratio to risk weighted assets must be no lower than 8%”, while Basel III states that “Total Capital (Tier 1 plus Tier 2 Capital) must be at least 8% of risk-weighted assets at all time”, and so Braithwaite is in my opinion quite shamelessly glossing up differences that really are not that big.

And though Braithwaite correctly states “Adding more equity depresses ROE and makes it more challenging to satisfy investors” he forgets to include the caveat: [those investors who do not appreciate the commensurate reduction in risk].

Nor does Braithwaite seem able to extrapolate from the above that lending to those borrowers against who the banks are forced to hold more equity, will depress ROE the most… and so unfortunately he does not understand how that distorts the allocation of bank credit.

Sir, again, if the perceived risks were correct, banks would need no capital… and any bank in then problem should just be out of business. And that is why it is so utterly silly to have capital requirements for banks based on these perceived risk being correct.

PS. Do I imply then that those experts in the Basel Committee and the Financial Stability Board and other prominent bank regulators are completely wrong? Yes, 180 degrees! 

While risk based capital requirements for banks remain, small companies will not have fair access to bank credit.

Sir Sarah Gordon writes: “Smaller companies [in Europe] have also been able to take advantage of easier borrowing conditions”, “Light amid the gloom”, November 28.

Yes, in absolute terms, the smaller companies might indeed currently face easier borrowing conditions but, in a competitive economy, what most matters for the correct allocation of bank credit, is not the absolute but the relative borrowing conditions. And in that respect, let me assure you that smaller companies, those primarily squeezed by the credit risk weighted capital requirements for banks, are worse of than ever, as a result of the increasing capital/equity squeeze on banks.

And Gordon also wrote: “Even the lack of access to bank lending during the financial crisis [and thereafter] has had positive effects, with small and medium-sized enterprises reducing their over reliance on banks and diversifying their funding sources.” And I am not sure what to make of it. 

Is Sarah Gordon, blaming small and medium-sized companies for their over reliance on banks? If so whoever told her it is their responsibility to achieve a diversification of their funding sources? Have they not enough problems as is, running their smaller companies’ businesses?

No, those really responsible for allowing small businesses to have fair access to bank credit are primarily the regulators, and they are not acknowledging, or much worse yet, perhaps not even understanding the fact that they do impede it… and so, sadly, there is still too much darkness amid the gloom.

The mission statement for our banks as decreed by its regulators does not make any sense.

Sir, Sebastian Mallaby writes: “Banks are underwritten by taxpayers via deposit insurance as well as the too-big-to-fail safety net; they need to be reined in, and if they shrink, so be it”, “Stringent rules for hedge funds make the financial system fragile” November 17.

Indeed but, why are banks underwritten by taxpayers? What are banks supposed to deliver in return?

The current mission statement imposed by regulators on banks, by means of credit risk weighted capital requirements, seems to be that of lending more and cheaper than normal to all those perceived as “absolutely safe”, and to stay away from lending to the “risky”. Is that what we want? I don’t think so. If it were, there would be no reason for us to underwrite anything.

For example the: “We the people underwrite the banks so that these can lend more and cheaper to our "infallible" sovereigns… in the hope that doing so we don’t have to pay taxes”… sounds more like underwriting the sovereign than underwriting the banks.

No, I believe we taxpayers agreed on underwriting the banks so that these would be better equipped to take on the risks of lending to all those risky small business and entrepreneurs we all know should get credit, so that the economy grows and as a result we all are better off. That was the quid pro quo!

And Mallaby also writes: “Regulators need to remember that financial risk will not go away… there will be difficult judgments about how capital should be allocated. So there has to be a theory of where this risk can best be housed. If hedge funds are part of the answer, regulators make the world less safe by clamping down on them.”

Absolutely, if not the banks, then who is going to house the risk-taking we support and that most of the world, not understanding the regulations, still think is housed in the banks?

We citizens need to lay down some strict terms for taming bad regulations risk.

Sir, Sam Fleming and Tracy Alloway report: “Rulemakers lay down terms for taming shadow banking risk” October 14.

And my wish would be for us citizens to be able to lay down some strict terms for taming any bad regulations risk.

For instance, in all shadow banking, a Euro, a Dollar, a Pound or whatever other currency of equity, are all the same equity, no matter what assets risks they are exposed to. Not so in formal regulated banks. There a Euro, a Dollar, a Pound or whatever other currency in equity, represents a different equity, according to the respective credit risk weight of the assets it is backing.

How regulators were fooled by naturally higher returns on bank equity seeking bankers, into believing that would not distort the allocation of bank credit, with great dangers to the real economy and to the stability of the banks, beats me.

And so the first term I would as a concerned citizen lay down for the regulators would be: “Whatever you do, don’t think yourselves smarter than the markets. And if you absolutely must distort the allocation of bank credit, one way or another, make sure you obtain the permission to do so, including of course that of those borrowers who will see their access to bank credit made more difficult and expensive because of it.

Two questions Mr. Kay, on “strict liability” and bank regulators.

Sir, John Kay makes a convincing case for applying “strict liability” to bankers, especially when ending with that clarifying principle “if you take the bonus, you take the rap”, “If you do not want to do the time, prevent the crime” August 6.

That said I have two questions to Kay with respect to “strict liability” and their applicability to bank regulators.

First, suppose a regulator knows very well that allowing for lower capital requirements for banks on assets perceived as absolutely safe than on assets perceived as risky could, in the long run, risk the buildup of dangerously large exposures to what is now perceived as safe, but he allows it anyhow because he does not want to be held responsible for any bank failure under his watch…. are we talking about something for which “strict liability” could be relevant?

Second, if you as a bank regulator are explained something, like that which is contained in the Basel Committee on Banking Supervision’s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, and you do not understand it, but yet, without asking for clarification, because you do not want to see as if you do not understand, you approve of any regulations based on that information, and disaster ensues… are we talking about something for which “strict liability” could be relevant?

In the case of bank regulators, should not something like “if you take the promotion, you take the rap” also apply?