The risk weighted capital requirements doomed our banks to impotence, and our economies to obesity.

Sir, I would like to make some of my own observations on two terms of those exposed by Robert Shrimsley in “Menopause, impotence and other useful economic terms” May 18.

Shrimsley writes: “Impotence: An underperforming economy is distressing for all parties. This kind of dysfunction can be either structural or cyclical or psychological”. 

Indeed but it can also be physiological. When the Basel Committee introduced risk weighted capital requirements for banks they impeded banks from feeling any attraction to what’s perceived as risky, like the entrepreneurs. That has our banks only masturbating by lending to what’s “safe”, like houses and sovereigns… and all the Viagra in the world won’t help. Our only salvation lies in a delicate intervention that removes this regulatory object that causes this ED; so that banks can, little by little, throwing out the equity minimizers and reincorporating some savvy loan officers, learn again to perform their societal duties.

Shrimsley writes: “Obesity: This is an economy…which has given up going to the gym and is too heavily dependent on house price inflation and junk commodities like lightly regulated financial products” 

When regulators told banks that if they only stayed away from what is perceived as risky, what bankers don’t like, like risky entrepreneurs and broccoli; and went for what’s safe, what bankers love, like residential mortgages and ice cream, then they would be rewarded with the chocolate cake of higher expected risk adjusted returns on equity…they guaranteed the economy to become obese.

@PerKurowski

The Financial Times “a better newspaper for the modern age” ignored the financial story of the century.

Sir, I refer to your new look as described in a special FT supplement on September 15.

Mark Twain said, so we are told, that bankers are those who lend you the umbrella when the sun is out, but want it back, immediately, when it looks like it is going to rain.

But for the Basel Committee bank regulators that was not enough, and so they told the bankers, if you lend while the sun is out, meaning to someone perceived credit risk wise as “absolutely safe”, then we will reward you by allowing you to hold much less capital (equity) than if you lend to someone when it rains, meaning some perceived as risky.

And so, if bankers were risk adverse before, they were now castrated… and of course they started to sing in falsetto accumulating extremely large exposures to what was officially perceive as “absolutely safe”, like AAA rated securities backed with mortgages to the subprime mortgage sector in the US, real estate in Spain and “infallible sovereigns” like Greece.

But, as if those regulations were not risk adverse enough, most financial commentators insisted on an excess of testosterone in the financial system, and so no corrections were made, and all those “risky” medium and small businesses, entrepreneurs and start ups, and who are the tough risky risk-takers we need to get going when the going gets tough, were left without having fair access to bank credit.

And about this story, the de-testosterone-mania that has affected and almost conquered the banks in the western world, the Financial Times has kept mum. And not that they were not informed about it. Truly amazing!

PS. Does this all mean that I would be against banks being well capitalized and therefore more risky? Of course not, requiring players to put plenty of their own skin on the line (or something private specifically related :-), increases the need for testosterone, as well as the need to know how to simultaneously control for it.

Let us aim for bankers capable of that reasoned audacity that can help our economies to move forward and avoid that risk aversion which only guarantees we will stall and fall.

Private innovation needs government help, but it also needs not to be blocked by regulators

Sir, of course nations need to be bold, and take risks, in order to have a better future. That is, or at least was, why we used to go to our churches and pray “God make us daring!”

And so of course most of us would wholeheartedly support Marianna Mazzucato’s call for more government financed basic research; especially if this resulted from redirecting to it other governmental waste; and this even though we suspect the argument will, as usual, be exploited by those who 

just want to increase taxes, “Why private innovation needs government help”, August 22.

But, that said, the fact is that currently, if a bank lends directly to a innovation project, like the failed solar power company Solyndra in the US, then it is required to hold about 8 percent in capital, but, if it instead lends that money to the government, so that a bureaucrat can relend it to a Solyndra, then it has to hold no risk-weighted capital... which skews all too much in favor of the government.

I do understand the importance of Mazzucato´s call, but, frankly, to me, it is of secondary importance when considered in relation to the fact that bank regulators, with their risk-weighted capital requirements, are effectively castrating our banks, making them sing in fAAAlsetto.

Again, can we please have a Financial Functionability Board?

Sir, Gillian Tett writes, “After all a financial system in which transactions are secured on assets is likely to be a healthier system than one which is largely – or patchily – unsecured”, “Cyber finance takes its collateral thinking test”, August 6. Why is that so, how on earth does Ms. Tett know that? 

Ms. Tett, like most, is stuck in a Financial Stability Board mentality of let us castrate the banks so that they do no harm. She, like most, is seemingly incapable of understanding that giving the banks incentives to go for the officially not risky and avoid the risky, was a primary cause for this crisis. 

The healthiest banking system will always be the one helping to produce the healthiest economy. In this respect we urgently need a Financial Functionability Board, able and willing to understand also the risks of risk-avoidance, so as to stop the regulators from digging us further in this hole of “L’economia castrata” where we find ourselves.