Wolfgang Münchau has not earned the right to now appear as the one demanding “banks to take on more risk”

Sir, Wolfgang Münchau writes “One useful measure that would bring immediate benefits would be purchases of non-performing loans in the banking sector…. The objective should be not to protect bank profits but to get banks to take on more risk” “Eurozone woes demand a much bolder response” March 7.

And he also writes that he favors helicopter droppings over QEs because that “policy would bypass governments and the financial sector. The financial markets would hate it. There is nothing in it for them. But who cares?”

Is he wrong? Of course not! But who is he to now demand that kind of bold action?

Over the years Münchau has kept mum on all letters I sent reminding him of the dangers of credit risk aversion caused by the risk weighted capital requirements for banks, like one in 2007. And equally mum on the letters were I informed him that, because of such risk weighing, the liquidity provided by QEs did not reach where it was most needed by the real economy, like one in 2012

Here is but one example of my many letters to Wolfgang Münchau and that by the way suggests the capitalization he now speaks of.

Sir, you can find many many more letters to Münchau here:

And even though ideas can be dressed up in different words Münchau should be careful. “Never plagiarize. Always attribute” is a simple, clear statement in the Society of Professional Journalists Code of Ethics that leaves no room for ambiguity.

@PerKurowski ©

No President Obama. No country with bank regulations based on credit risk aversion can speak of having a bold voice

Sir, Barack Obama writes “the US is ready to lead a global effort on behalf of new jobs, stronger growth, and lasting prosperity for all our people well into the 21st century. “America’s bold voice cannot be the only one” November 13.

He mentions: 1. “fiscal policy that supports short-term demand and invests in our future”; 2. “boost demand by putting more money into the pockets of middle-class consumers who drive growth”; 3. “more inclusive growth by lowering barriers to entering the labour force.” 4. “high-standard trade agreements that actually benefit the middle class” 5. “greater public investment… through new private investment in clean energy.”

Nowhere does he make a reference to the need of getting rid of bank regulations that are blocking the risk-taking needed to achieve sustainable economic growth.

The pillar of current bank regulations is the credit-risk weighted capital requirements for banks; more risk, more capital -less risk, less capital. Since banks, when deciding on risk premiums and amounts of exposure, already clears for credit risk, this results in an excessive consideration of credit risk. Any risk, even though perfectly perceived leads to the wrong results if excessively considered.

And therefore, in words attributed to Mark Twain, we now have banks that lend you the umbrella, much faster than usual if the sun is out, and take it away, much faster than usual if it seems like it could rain. In other words our bank’s, by having been given permissions to leverage much more with what is perceived as safe, earn much higher risk-adjusted returns on equity when lending to the safe are, consequentially, behaving more risk-averse than ever.

If one wants banks to be constructively bold, then one should set the capital requirements based, not on pitiful credit risk weights, but on daring purpose weights, like for instance based on “clean energy” and job-creation ratings, and SDGs in general.

And this will not cause the banking sector to become unstable, just the opposite. Never ever are major bank crisis the result of excessive exposures to something perceived as risky when placed on the balance sheets of banks… only of something ex ante perceived as safe that ex post turns out risky.

PS. This is also a civil rights issue. These regulations that double down on credit risk, discriminate against the rights of the risky, like SMEs and entrepreneurs, to have fair access to bank credit.

@PerKurowski ©

Pär Boman, at the end of the day, your children and grandchildren, and your nation, are your most important customers

Sir, Andrew Hill refers to that the chief executive of Handelsbanken told the “FT in 2013 that he had studied 5,000 years of credit risk, while the bank draws on minutes of board meetings from the past 140 years to inform its attitude to customer loans and business cycle”, “Creative forces”, “Boldness in business” March 20.

What a splendid occasion that would have been to ask Pär Boman whether in all that information, he had found any sort of evidence supporting that bank regulators should require banks to hold more equity against what is from a credit point of view perceived as risky from, than against what is perceived as absolutely safe.

That as you know Sir, has in my opinion introduced the most serious disruptive distortion in the allocation of bank credit to the real economy.

Unfortunately, in “Customers first”, Richard Milne later reports that Boman opines: “I don’t think it’s our role to have an opinion on whether the democratic system has taken the right or wrong decision. We see regulation more as a signal system from parliament on how we want banks to behave”.

That’s a shame. My opinion is that it is precisely persons like Pär Boman who owe their customers’ society, the duty to speak out if they feel signals provided by regulations could be taking banks down the wrong route.

Richard Milne quotes Boman in that the “main lesson [from] the 140 years of board minutes that lie in the basement… is that about every 17 years there is a financial crisis.”

That could be… but another lesson that should be extracted from that data is when did banks do the most for their nation between crisis and crisis… and I doubt the answer to that would be… “When we took no risks.”

On the web I find that Pär Boman has three kids… and one of this days he might have grandchildren too. He should never forget that, at the end of the day, they and his nation are his most important customers. And I am absolutely sure they do not need regulators like the Basel Committee and the Financial Stability Board to infuse their banks with dumb credit-risk aversion. That is no way how to finance their future. 

And Andrew Hill and Richard Milne, your duty, that is to press Pär Boman and others to speak out.

God make us daring!

@PerKurowski

FT, you need more journalistic boldness to live up to your motto, “Without fear and without favour”

Sir, again you publish the “Boldness in Business” extra in which you celebrate boldness. And yet you are still not been able to write about that absurdly misguided and extremely dangerous cowardness that has taken over bank regulations.

For the umpteenth time… current risk based capital requirements allow banks to earn much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”.

That not only stops banks from giving adequate access to bank credit to those who most need it, like medium and small businesses, entrepreneurs and start ups, but it also guarantees that banks will, against much too little capital, be building up dangerous exposures to “infallible sovereigns”, to “safe” sectors as housing, and to the AAAristocracy.

What is keeping FT from putting forward this matter for discussion” Might it be some lack of boldness among those who so proudly proclaim “Without fear and without favour”?

FT is unbelievably inconsistent!

Sir suppose that the market, which includes banks, looks at the credit information, which includes credit ratings, and decides that the risk premium of a triple-A rated company should be 1 percent; and then it similarly looks at a company rated BBB and decides that the risk premium there should be 4 percent.

Now if a bank would have to hold 8 percent in capital for all its assets and therefore be able to leverage its capital 12.5 to 1 it would receive 12.5 percent of risk premiums on its capital when lending to a triple-A rated company and 50 percent of risk premium on its capital when lending to a BBB rated company, and it has deemed these risk returns to be equivalent.

But then comes the Basel Committee and in Basel II tells the bank that in the case of triple-A rated companies it can leverage 62.5 to 1 which means that now suddenly the banks receives 62.5 percent of risk premiums on its capital when lending to triple-A rated companies which in this case is, even on a gross basis, more risk premiums than what is obtained when lending to BBB rated companies.

How can you then reward Boldness in Business March 17, and yet not say a word about the distortive risk aversion of current bank regulations? You are being unbelievably inconsistent.

Did the financial crisis originate from anything officially or unofficially perceived as risky? Of course not! They never do.