Where would the City of London be if in the 19th Century it had been placed under the thumb of a Basel Committee?

Sir, I refer to your “The City must not be forgotten in Brexit talks” September 29. In view of the City’s real existential problem, I find it a bit irrelevant 

Creative financial engineers tricked or ably lobbied bank regulators into accommodating their wishes for leverage maximization/equity minimization, by introducing risk weighted bank capital requirements nonsensically based on that what’s perceived as risky is more dangerous to bank system than what’s perceived as safe.

That caused loan officers to allocate credit not as it used to by means risk adjusted interest rates but to allocate it by means of risk adjusted returns on equity. If the City of London is to survive as one of the prime banking centers of the world it needs to get rid of that distortion.

FT, without fear and without favor dare to think what would have been of the City of London if in the 19th Century it had to operate under the thumb of Basel Committee inspired risk adverse regulations?

PS. And if in 1910 that savvy loan officer George Banks had been asked about risk-weights, Tier 1 capital and CoCos, I am sure he would have gone to fly a kite.

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 ©

The haircuts that will result from the mother of all market riggings... will be staggering.

Caroline Binham writes about the Bank of England’ “potential rigging of money market auctions”, “BoE embroiled in fraud probe of crisis-era liquidity moves” March 5.

Sir, whatever those rigging could have been, they must be really minuscule when compared to the mother of all riggings; that which occurred when regulators rigged bank regulations in favor of the sovereigns, to the extent of considering some of these infallible.

Sir, when a sovereign takes on too much credit, it will either pay you back a fraction, this is known as a regular haircut, like that Greece wants to do; or give you a negative interest rate haircut, like Germany does; or give you an inflation haircut, as that which they officially target; or give you a tax increase haircut (we citizens hold de-facto CoCos of our sovereigns); or give foreign currency based investors, a devaluation haircut, like that currently given by the Euro. And there might even be other haircuts I have missed.

And so, giving many sovereigns a zero risk-weight for the purpose of setting the capital requirements for banks, defies all rationality, and can only be explained in terms of the regulators rigging the regulations; whether for ideological reasons or only to ingratiate themselves with their bosses, the governments.

The consequence of a zero risk weight is that banks are able to leverage their equity immensely when lending to the sovereign and so, guaranteed, banks will lend the sovereign too much at too low interest rates… and so the consequential sovereign haircuts, in any which shape or form they come, will be staggering large.

Especially so when governments are, by for instance Martin Wolf, egged on to take advantage of “favorable market conditions for public borrowings”, in order to take on major infrastructure projects.

The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.

Sir, I refer to Christopher Thompson´s “CoCo sell-off uncovers high yield bargains” August 15, and which title surprises a bit as I did not know FT provided specific investment recommendations.

But that said, whenever we read about “underlining investor willingness to shoulder more risk in their hunt for higher-yielding bank assets” you can be absolutely sure that all risks have not been disclosed by the seller of that asset… so what the investor is really willing to shoulder is a little bit more of uncertainty or looked at it from the other angle, or just willing to trust his advisor a little bit more.

What has happened to CoCos is clear. Investors had priced in the risk that deteriorating market conditions could force the conversion of CoCos into bank capital… what they had not priced was the fact that conversions could happen as a result of bankers´ and regulators´ whim playing around with the current capital requirements for banks. In fact, regulators had not thought of this, and also just recently woke up to that fact.

PS. In case you do not remember I hereby send you the link to what George Banks had to say about CoCos.

http://subprimeregulations.blogspot.com/2014/07/mr-george-banks-asked-about-cocos.html

Mark Carney, FSB, to begin, stop giving the Too-Big-To-Fail banks growth hormones.

Sir I refer to Sam Fleming, Ben McLannahan and Gina Chon reporting “BoE chief leads push to break ‘too big to fail’ impasse at G20”, July 21.

There they report on the efforts of Mark Carney as the current chairman of the Financial Stability Board to try to clinch a deal on bailing in creditors of globally significant, cross border banks that get into trouble”.

Mark Carney, to begin with should start by stopping giving the growth hormones that minimalist capital requirements for what is officially perceived as absolutely safe, represents for the Too-Big-to-Fail banks.

And then I would also suggest they think a little bit more about the implications of the Contingent Convertibles. The CoCos, hard to manage even in the presence of solely a leverage ratio rule, are mindboggling difficult when the capital requirements for banks are risk-weighted.

Perhaps Mr. Carney should read what George Banks had to say about CoCos when asked by his Board of Directors at theDawes Tomes Mousley Grubbs Fidelity Fiduciary Bank

Is it ok for a regulator, like EBA, to withhold information from “experienced investors”?

Sir, in previous letters to you, here and here I have expressed concern about 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 now Sam Fleming and Martin Arnold report that the European Banking Authority, EBA, is also expressing some concerns on this issue, “European regulators seek to limit retail sales of bank credit”, May 20 (though not in the US FT issue).

But something is not clear… after the article refers to several reservations about these cocos being sold to retail clients, it informs that “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.

Can bank regulators keep silence on the conversion to equity probabilities of cocos?

Sir, I have one question in reference to Alice Ross’ and Christopher Thompson’s “German banks line up to join coco party”, April 24.

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.

Some disagreements with Professor Persaud´s excellent comments on bank bail-ins and contingent convertible notes, Cocos.

Sir, Avinash Persaud deserves much praise for the clarity of his “Bank bail-ins are no better than fool´s gold” October 22. I do hope the regulators take notice and try sincerely to understand it, though I have many reasons to doubt they will. In the mutual admiration club of the Basel Committee and the Financial Stability Board, they only listen to the members.

That said there are though three issues on which I differ much with Professor Persaud.

The first is when he states “Financial crises are the result of market failure”. This is not always so. The current crisis was produced by regulatory failures present in the loony capital requirements for banks based on, ex ante, perceived risk. These made banks go, excessively, with very little capital, into areas deemed as “absolutely safe” and which we all know, or should know, are precisely those areas capable of creating big financial crises, when, as always happens, some of the perceptions turn out to be wrong, ex post.

The second is when he writes about “the failed philosophy at the heart of the 2004 Basel II global banking rules, which made the market pricing of risk the frontline defence against financial crises.” Where on earth does he get that from? The frontline of Basel II, its only pillar, were the capital requirements I just mentioned… and its implied frontline defence was allowing banks to earn much much higher risk-adjusted returns on their equity on assets deemed as “infallible” than on assets deemed as “risky”. And that is why banks now are not financing the future but only refinancing the past.

The third is when, with respect to Basel II, he mentions “a throwback” and which seems to imply he believes that Basel III is fundamentally different. That is not the case. Where it really matters, on the margins of banks' credit allocation decisions, regulatory risk-weighting is still in full force… and so the distortions of the real economy will keep on occurring… and keep on producing larger and larger crises… to be paid by all, especially by the young.