Competition among banks is healthy for all, except when banks are allowed to compete on stratospheric capital leveraged heights.

Sir, Nicholas Megaw reports on some natural concerns derived from the fact that “Britain’s banks and building societies are loosening lending standards and cutting fees to maintain growth, as competition and a weakening housing market squeeze profit margins.” “UK banks loosen mortgage standards to maintain growth” August 26.

Competition among banks is always good, what were we borrowers to do without it? If as a result, some banks fail, so be it, and in fact that is quite necessary for the long-term health of the system. 

But when competition occurs where regulators allows too much leverage, because they also perceive it as very safe, then the very high exposures to the same class of assets, by many banks, can really explode and endanger the bank system.

So in conclusion, welcome the lowering of lending standards for loans to entrepreneurs that bank competition can bring about; but the capital requirements for banks when financing residential mortgages need to be increased, in order to make competition less dangerous. 

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

@PerKurowski

Dear Undercover Economist, in the case of banks, much more than deregulation it was/is ​very ​bad miss-regulation

Sir, Tim Harford writes: “As the world economy grows, one might expect markets to become more like the perfectly competitive textbook model, not less. Deregulation should allow more competition; globalisation should expose established players to pressure from overseas; transparent prices should make it harder for fat cats to maintain their position.” “This is the age of the Microsoft economy” May 19.

“Deregulation”? No way Jose! In the case of bank regulation it is missregulation. The globalised risk weighted capital requirements for banks favor directly the access to bank credit of the “fat cats” and so makes any on the ground competition harder.

Sir, it amazes me why this is so hard to understand, even for an undercover economist.

If you have $100.000 to invest, whether you or a financial advisor takes the decisions, you will most probably end up with a portfolio with some larger exposures to assets perceived in the market as safer, earning lower rates, and some smaller exposures to other assets that because these are perceived as risky, will earn you higher rates. And your portfolio will hopefully provide you with a risk-adjusted return that is acceptable to you.

But not once will you consider the $ invested into safe assets to be any different from the $ invested into risky assets… if you lose anyone of these it will hurt all the same.

Bank regulators decided that for banks, that was not to be. They split the banks’ capital into different $, allowing for different leverages, based on the perceived risk of those assets as such, meaning not on their risk for the bank system.

To top it up they came up with such a loony thing as to assign a 20% risk-weight to the so dangerous AAA rated and one of 150% to the so innocuous below BB- rated.

Of course that has distorted the allocation of bank credit in favor of what is perceived, safer, usually the past and present.

Of course that has hindered competition by making it harder for the riskier, usually the future, like SMEs to access bank credit (and who therefore often having to sell out their dreams to any huge safe incumbent).

Sir, Harford finalizes with: “In the very long run a superstar economy could become a technological utopia, where nobody needs to work for a living. That would require quite a realignment in our economic system”. Indeed that is why I have been arguing for quite some while that we need decent and worthy unemployments… something for which most likely a Universal Basic Income is required.

@PerKurowski

How many more human jobs would there be in xxx, was it not for the unfair competition from robots or automations?

Sir, Sarah O’Connor writes “Britain has been remarkably successful in raising the minimum wage (introduced in 1999) without causing job losses.” “For clues to the productivity puzzle, go shopping” February 22.

How does she know? I have not been in England for some time but when I go shopping in the US and Sweden I sure see plenty of jobs having been taken over by robots and automation. And one of the direct reasons for that is that there is no obligation to pay minimum wages or payroll taxes when employing robots.

PS. Also in order to make sure we get really competitive robots, and do not end up with 2nd class robots we need to tax them, quite a lot

@PerKurowski

Why should profits made with IPR protection, patents, be taxed the same as profits made in the nude?

Sir, I refer to Andrew Ward’s “FT’s Big Read on Drug Prices: Tweaking the formula” April 26.

First of all I did not know of Nice and I must admit I am impressed that some formal rulings exist on whether to fund the use or not of some medicines. That certainly must help to put a lid on some bureaucrats’ “flexibility”.

That said, the article reminds me of a question I have posed many times before, including in Op-Eds in my country Venezuela, and in letters to you.

Why on earth should profits derived from operations under the protection of an Intellectual Property Right (IPR), patents, be taxed at the same rate than profits obtained fighting it out in the markets, naked, with no protection at all?

Surely the revenues of a special IPR/Patent profit tax could be ploughed back into some type of insurance scheme that could help cover some medicine costs the society can in general not afford to cover.

@PerKurowski ©

But why does FT’s John Kay not find it wrong when regulators restrict the competition for access to bank credit?

Sir, John Kay writes: “to restrict competition is to damage both the process of innovation and the public interest” “What the other John Kay taught Uber about innovation”, January 27.

Indeed but why does FT’s John Kay steadfastly refuse to apply the same criteria when regulators restrict the competition for access to bank credit?

Regulators tell banks: “You can leverage your equity, and the support we give you by for instance deposit insurance schemes, much more with the net risk adjusted margins paid by “The Safe”, than with the same margins paid by “The Risky”

And by that, regulators are de facto restricting the competition for bank credit for all those who ex ante are perceived as risky, like the SMEs and entrepreneurs.

And that also damages the process of innovation and the public interest.

@PerKurowski ©

Philanthropists of the world, we need a great prize for the competition to pick out bank regulations that work

Sir, Gillian Tett writes about: ‘a fashion among philanthropists for handing out big prizes [and] today, four-fifths of all prize money are ‘incentives’, to spur innovation in different fields” “The prizes for invention that leave everyone a winner” July 4

I have for quite sometime hoped for a competition to be held to find the best bank regulations, and a generous monetary prize on top of the honor would help a lot.

I can guarantee the winning proposition would include such crazy notion as allowing banks to leverage their equity over 60 times to 1 when buying AAA rated securities or lending to the Greek government.

I can guarantee the winning proposition would not include such crazy notion as basing capital requirements on credit risk, the risk already most cleared for by bankers.

I can guarantee the winning proposition would not include such crazy notion as impeding the fair access to bank credit to those most in need of bank credit, like SMEs and entreprenuers.

@PerKurowski

The Basel Committee for Banking Supervision needs artificial intelligence, the human one does seemingly not suffice.

Sir, it was with much interest, and hope, that I read Richard Waters’ report “Investor rush to artificial intelligence is the real deal” January 5. We sure need it, urgently, at least in the Basel Committee for Banking Supervision.

First any reasonably good AI would most certainly not give in to emotions or sole intuitions as the Basel Committee did when for their risk-weighted capital requirements they decided that “risky” was risky and “safe” was safe. AI would see that in fact it is what is perceived as “safe” by bankers that which creates the biggest exposures and as a consequence the biggest dangers, if the ex ante perception turned out ex post to be wrong.

And AI would also be able to impose portfolio variant capital requirements instead of settling for Basel Committee’s “portfolio invariant” because as they admit when in “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” they explain: “Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

And AI would also of course have asked about the purpose of the banks before regulating the banks… and therefore we would probably have saved us from the credit risk weightings that so distort the allocation of bank credit to the real economy.

That said we have to be careful though so that AI does not Frankenstein on us and imposes its own preferences (ideologies); like what the Basel Committee did when they decided that their bosses, the governments of the sovereigns, were infallible… and therefore banks did not need to hold any capital (equity) when lending to these.

PS. Perhaps we can have a competition between different AIs to see who comes up with the best proposal for how to regulate banks.

CMA. Bank regulators have stopped “the risky”, like SMEs, from being able to compete fairly for bank credit.

Sir, John Kay with respect to personal current account banking writes and conclude rightly in that “In banking too much competition is as bad as too little” July 23.

But in reference to banks and competition, I cannot but remind you of that regulators, by allowing banks to have much less capital when lending to “the infallible” than when lending to “the risky”, have hindered all those perceived as risky to be able to compete for bank credit on fair terms. In fact, on those borrowers already burdened by being perceived as risky, they have loaded up tons of extra weights.

And that Sir has an impact that is much worse than anything that could happen on the level of the service of personal checking accounts… and so that is what UK´s Competition and Markets Authority should really prioritize.

What bankers do regulators expect to tell their shareholders, “we should go for lower risk adjusted returns”?

John Authers argues that “Push to beat rivals overtakes good economic sense” April 14. Of course it does!

That is why banks, while the illusion of safety persists, must primarily lend to or invest in what is perceived as absolutely safe, because there is where regulators allow them to hold the least capital, and so there is where they can earn the highest risk-adjusted rates of return they need in order to compete with other bankers doing the same… and this even when they all know that long term it all amounts to pure lunacy. 

And if they do not do so, the risk for the banker to be kicked out, or for his bank to be bought out, is just too large... Regulators, it is as easy as that!

When are they going to fine the bankers and not, suicidally, fine the banks?

Sir, right now, when the European banks are leveraged to the tilt and unable, because of faulty capital requirements and lack of capital, to finance those in the real economy most in need of bank credit, we read, reported by Alex Barker and Daniel Schäfer that “Brussels poised to announce hefty rate-fixing fines on global banks” December 4.

When are they going to fine the bankers and not the banks? Don´t they know that in these days of so little bank capital, derived from regulators requiring so little bank capital with Basel II, that every fine a bank pays, translates into less bank credit… primarily to those medium and small businesses entrepreneurs and start-ups we most need to have access to bank credit in competitive terms?

Stop subsidizing status-quo and taxing development.

Sir Mario Monti in “Watchdogs of the world, unite!” July 29, makes a powerful case for the need of strong antitrust enforcement to keep market competition alive, capitalize on “creative destruction” and minimize “destructive conservation”.

In the same vein I would also request the competition agencies to look into the anti-competition implications imbedded in the capital requirements for banks, by which borrowers who can dress themselves up as having a “low default risk”, when compared to the “higher default risks”, are subsidized by the cost savings that are produced by some extremely low capital requirements. That signifies a subsidy for status-quo (the known) and a tax on development (the unknown). This exaggerated conservative risk-adverseness has already taken us over the cliff of the subprime mortgages… with nothing to show for it.

And who pays me?

Sir I deeply appreciated John Gapper’s “Microsoft problem is close to home” September 20 and where he so valiantly gives voice to the for us layman unthinkable possibility that what has been slowing our computers down is not necessarily bad hardware or virus but Señor Windows himself.

Although I confess still being a bit dizzy, if this was to be right, does Gapper think that I could address the European Commission and ask them to share with me some of the money they collected from Microsoft as a partial reimbursement for all my down time?

Alternatively, since Neelie Kroes, the competition commissioner is caught confessing that he “would like Window’s market share to fall from more than 90 percent to nearer 50 percent” and we can safely assume that he assumes this lack of competition lies at the heart of the problem… would it be better for me to sue the Commission instead for not doing their trust-busting job right?

Do we need a product responsibility and liability legislation that is proportional to the market share? At least in those cases were the society itself by awarding intellectual property rights and investing money in their defences creates some of the possible reasons for a high market share?

FT, keep cool!

Sir, I understand perfectly well the sentiments that you express in “Europe abandons the sanity clause” June 25, where you complain about the EU is dropping the principle of “free and undistorted competition”. Having said that I believe that you should be very careful sounding too principled on this issue, not only because most facets of competition will one way or another always be present in life, no matter the wording of any Treaty, but also because so much of the free competition preaching has lately gone hand in hand with the very strong intellectual property rights assertion trend, and that in many cases has signified a much more serious obstacle to” free and undistorted competition”. Therefore, may I suggest you take it easy and keep cool, as we truly need FT to be very clearheaded on this issue.

In search of answers on search engines

Sir, the discussion around Google issues as in Denise Kingsmill’s “Google’s market power warrants an inquiry” June 13 and Maija Palmer’s FT front page report that same date with respect to the “European fight over storage of personal data” naturally befuddles many of us.

Clearly a search engine should mostly be valued in terms of the services it offers to the searchers but in this case it is actually the searchers that become the searched and this leads to some very strange signalling effects. In fact I would not mind if Google was allotted, by the system, to perform a maximum of free searches, let us say 20 per cent of all the searches on the web during the last 24 hours, and thereafter, in order for a Google search to be allowed, a searcher would have to demonstrate Google’s search worth, by being willing to pay a substantial amount to Google for their service.

Also, with respect to privacy issues, we suddenly read about a possible compromise that would have Google cookies expire after only 18 months instead of 30 years, as if privacy had anything to do with time. On the contrary, if privacy was indeed the case, then one would perhaps be able argue that it is only after 30 years that Google could be allowed to use any personal data.

PS. We might need a Global Web Constitution