Has Thatcherism run its course, or has Thatcherism been run off its course?

Sir, Martin Wolf asks “once we accept that Thatcherism has run its course, what follows?” “Sunak takes an axe to Thatcher’s low-tax ideology” FT, March 8.

Sir, to keep it brief, let me just ask three questions:

What would Margaret Thatcher have said about risk weighted bank capital requirements that de facto imply Britain’s bureaucrats/politicians know better what to do with credit for which repayment they’re not personally responsible for, than e.g. Britain’s small businesses and entrepreneurs?

What would Margaret Thatcher have said about risk weighted bank capital requirements that de facto imply the financing of residential mortgages is more important to Britain’s economy than the financing of its small businesses and entrepreneurs?

What would Margaret Thatcher have said about risk weighted bank capital requirements that de facto imply that what’s correctly perceived as risky, is more dangerous to Britain’s bank systems than what’s perceived as safe?

Sir, can you dare your Mr. Wolf to answer those questions?

PS. My 2019 letter to the Financial Stability Board

@PerKurowski

Don’t keep adding bank regulations for what is ex ante perceived risky. It is what is ex ante perceived as very safe that should concern us the most.

Sir, I refer to Sheila Bair discussion of how much banks are to set aside in order to cover for loan losses. “Congress should stay out of new bank rules for loan losses” August 5.

Bair mentions, “that FASB wants to switch to a new rule, known by the name of “current expected credit losses” or “CECL.” That rule “says that banks should set aside enough to cover expected losses throughout the life of a loan, taking into account a wide variety of factors, including historic loss rates, market conditions, and the maturity of the economic cycle.”

Bair argues the new rule has two key benefits. “First, banks will start putting aside money on day one of each loan so when trouble hits — as it did in 2008 — they will not be trying to play catch-up with their reserves.” 

Really, what money would they have had to put aside for the AAA rated securities gone bad? What money would they have had to put aside for loans with a default guarantee issued by an AAA rated entity like AIG?

Then “Second, it should make bankers a little more cautious in their lending decisions, as they will have to account for likely losses when the loan is made, not kick the can down the road until the borrower is actually in arrears.”

That all has me concerned with that we might be adding a new layer of discrimination against the access to credit of the risky.

Those perceived ex ante as risky already get less credit and pay higher risk premiums. Those perceived ex ante as risky already cause banks to have to hold more equity against loans to them. 

If those perceived ex ante as risky must now also require banks to set aside reserves earlier than what is required for those perceived as safe, banks might stop altogether lending to the risky, like to entrepreneurs, and that will absolutely hurt the economy.

And Sir, it would all be for nothing, because major bank crises are never caused by excessive exposures to what was ex ante perceived as risky when placed on banks’ balance sheets. 

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

Entrepreneurs should, as an absolute minimum, have the same chance for entrepreneurship than the State.

Sir, with much lower capital requirements for banks when lending to the sovereign than when lending to citizens, regulators de facto indicate they believe bureaucrats know better what to do with credit they are not personally responsible for, than entrepreneurs. And with that they are subsidizing sovereign borrowing paid by less access to bank credit for the private sector.

That is why I strongly oppose when Mariana Mazzucato opines: “The UK doesn’t lack strong economic foundations; it lacks investment opportunities… the entire government, particularly the Treasury… rather than obsessing about the fiscal deficit has to put innovation at the centre of how it thinks about economic growth [and] set bold and strategic goals.” “British industry needs its own version of the moon shot”, May 23.

Sir, way before the government takes on moon shot project, something which I absolutely do not oppose, we must clear away the regulatory distortion which impedes the market sending the correct signals on the costs of public debt, and gives entrepreneurs, as a minimum, an equal chance to have their risk adjusted interest payment offers accepted by banks, so that they too can do their own moon shots.

@PerKurowski

If you finance “safe” consumption more than “risky” production, growth will come to a standstill.

John Dizard writes: “What if global income growth, or even national income growth, cannot cover the cost of servicing capital? Then the capital market machinery would have to shift into generating losses rather than returns.” “Bondholders face greater likelihood of haircuts as system goes into reverse” January 26.

Absolutely! When regulators decided that banks could hold less capital against the “safer” present than against the “riskier future”; meaning they could leverage more with the safer present than with the riskier future; meaning they would be able to earn higher expected risk adjusted returns on equity when financing the safer present than the riskier future, they ordained that to happen.

Basel II assigned a risk weight of 35% to residential mortgages, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 35.7 times.

Basel II assigned a risk weight of 100% to unrated entrepreneurs, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 12.5 times.

That allows banks to earn higher risk adjusted returns on equity financing residential mortgages than giving loans to entrepreneurs.

The consequence? Many will sit in their houses without the jobs needed to service the mortgages or pay the utilities.

@PerKurowski

Loony risk-weighted capital requirements block entrepreneurs’ access to fair credit.

Sir, Eric Schmidt writes“Right now, the UK, the EU and the US share a growing problem: we are experiencing a market failure in the way we support entrepreneurs.” “Our narrow view of entrepreneurs squanders talent”, November 28. 

Absolutely! But some market failures are government produced. 

If a bank lends to someone wanting to buy a house, something perceived as safe, the regulators allow it to hold much less capital that if it lends to an entrepreneur, something perceived as risky. 

So if a bank lends to someone wanting to buy a house, something “safe”, it will be able to leverage its capital much more than it can do if it lends to an entrepreneur, something

So if a bank lends to someone wanting to buy a house, something “safe”, it will be able earn much higher expected risk adjusted returns on its equity than it can do if it lends to an entrepreneur, something “risky”. 

But was it always this way? Of course not! This happened when bank regulators introduced the risk weighted capital requirements for banks. That which is based on that truly loony concept that what bankers perceive as risky, is more dangerous to our bank system than that what bankers perceive as safe. 

Since then millions of credit requests have been either negated or if approved, have had to support a higher than needed interest rate. 

Schmidt also writes about the need to “drop the tunnel vision promoted by many academic and professional specialisations”.

Absolutely! I have often argued that had there been: 

a plumber or a nurse disturbing the regulators’ group-think with an innocent question like “what has caused big bank crises in the past?” 

or a professional that had taken a course in conditional probabilities, 

or someone (incorrectly) quoting Mark Twain with “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”, 

or a golfer asking “why would you assign more handicap strokes to good players taking these away from lousy players like me?”, 

then the 2008 crisis would not have happened… and Lehman Brothers would still be alive and kicking.

God make us daring!

@PerKurowski

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

Odiously inept bank regulators consider ex ante that the entrepreneurs are less worthy of credit than house buyers

Sir, Daniel Davies discussing the work-outs of small business failures seemingly based on what some bad apples did, writes that “unpleasant realities [are swept] into grubby corners so that the banking system can look clean and efficient” “The finance industry’s Achilles heel”, June 27.

Sincerely, as one who has been proudly involved as a consultant in many workouts of all types for more than two decades in Venezuela, before the failure of that nation, I must say that I do not identify much with what Davies writes. For instance what’s wrong with that when real estate loans are renegotiated there is often a “change of valuation basis”? It would surely be more of an Achilles heel for the finance industry, if its valuation of assets did not change with changing circumstances.

Davies wants us to “Consider what happens when an entrepreneur is classified as a “distressed borrower” rather than a “start-up founder”… at that point, the person has been put into a category in which their word is not as good as other people’s.” 

But classifying an entrepreneur ex post, quite naturally, as a distressed borrower, cannot be remotely as bad as when regulators, ex ante, by allowing banks to leverage more when financing “safe” houses than when financing “risky” entrepreneurs are, de facto, saying that the word of an entrepreneur is worth less than that of house buyers. 

If there has been any sweeping of unpleasant realities into grubby corners, that is the role the regulators, with their foolishly risk adverse risk weighted capital requirements, have played in putting bank crisis and economic stagnation on steroids. Had for instance any credit rating agency assigned a 0% risk to Greece and with that doomed that country to a tragic over indebtedness, it would probably be hauled in front of judge… but there are the regulators still regulating as if they had done nothing.

And Sir, you know I think FT has quite shamefully helped the regulators with much of that sweeping.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

Yes, cities can be great, but these can also be dangerous bombs in the making.

Sir, Edward Luce writes about how trying to attract big companies like Amazon to the cities might make it harder on the poor in the city. “Beauty contest reveals ugly truths” June 6.

Yes, of course, the weaker, the poorer, they will always be relatively more squeezed by any development that occurs in cramp conditions where there will be a fight for space.

But it is when Luce quotes Richard Florida with, “America’s most dynamic cities have played right into the company’s hands, rushing to subsidise one of the world’s largest corporations rather than building up their own economic capacities.” where the real discussion should start.

Why would a city want to bet so much of its future on so few actors as would here be the case with Amazon? Have they not seen what happened to Motor City Detroit? If you want to use incentives to attract jobs, which is of course to start “a race to the bottom”, why bet all on a number, would you not be better off diversifying your bets? 

If I was responsible for a city, one of the first things I would be doing is to analyze how its riskiness would be rated compared to other cities? For instance, what are the chances that suddenly another city offers your city’s wealthy, the possibility of moving to a place that has not accumulated impossibly high debts that will need to be served, supposedly primarily by them?

And, if your city faces a financial crash, what would be ones’ first priorities, to help the poor, or to make sure the rich do not leave without being substituted for by other rich?

PS. Luce writes: “Big fund managers… are putting cash into global urban real estate portfolios. As a result, property prices are becoming a function of global capital movements rather than local economic conditions”

Again, for the umpteenth time, what initially feeds high property prices is the inordinate ease of access to financing it, provided among others by regulators allowing banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs. 

The fund managers are just following the results of it… when that regulation-easing plan begins to be reversed, which will happen sooner or later, they run the risk of being left holding the bag. 

@PerKurowski

The regulatory subsidy of house financing has caused much of the financialization of property markets.

Sir, Gillian Tett writes that since some investors are treating housing more like a tradeable asset, chasing yields around the world… [the] housing market is more “financialised”, [and so] a decade of ultra-loose monetary policy in the west has lifted so many geographically dispersed real estate boats” “New York property jitters herald declines elsewhere” May 25.

Since decades regulators allow banks to leverage much more their equity when financing the purchase of a house than for instance financing an entrepreneur. That means that compared to when banks held the same capital against all assets, which it did during most of its history, they now earn higher expected risk adjusted returns on equity when financing the purchase of a house, than for instance financing an entrepreneur.

Anyone who does not think this directly influences house prices should not be writing about finance.

What could the price of houses be in the absence of this regulatory subsidy? It’s hard to say. A static analysis would clearly yield the answer of much lower (30%?), but a dynamical one could perhaps yield higher prices, as a result of so many more affording houses because of more jobs created by entrepreneurs.

How do we get rid of the distortion? The sad fact is that for the redistribution profiteers it is much more interesting to offer affordable houses than to have more people affording their houses, which of course c'est pas la même chose. 

PS. One question I often ask myself is: nowadays when we finance someone’s purchase of a house how much of its price do we need to finance just because of the subsidized financing?

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

Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 

@PerKurowski

Sweden got to be an economic powerhouse with its banks financing “risky” entrepreneurs, not by these financing “safer” houses.

Sir, Patrick Jenkins reports: “Nordea has a core equity capital ratio of close to 20 per cent, double that of some European rivals. It can expect lesser capital demands from the ECB” “Nordic noir: the outlook darkens for Sweden’s banks” May 1.

Let us suppose that Nordea has only Basel II’s 35% risk weighted residential mortgages on its books. Then, a 20 percent capital ratio, would translate as having Nordea 7% in equity against all its assets meaning it is leveraged 14.2 times to 1.

So when we then read that in Sweden “house prices have declined 10 per cent since last summer, although in prime Stockholm the slump has been closer to 20 per cent” of course that should be enough to besides giving “Jitters about the sustainability of property prices” causing jitters about its banking sector.

I have a close relation to Sweden in that not only was my mother Swedish but I also spend my most formative years, high school and university there. So it saddens me to see what is happening. Sweden that got to be so strong by its banks financing “risky” entrepreneurs is now getting weaker by its banks mostly financing “safer” assets, like mortgages.

“Sweden’s Financial Supervisory Authority, late last year, proposed Sweden’s Financial rules [that] would mean those taking out new home loans of more than 4.5 times their salary would have to pay off an extra 1 per cent of their mortgage annually.” Are we to be impressed with that?

Stefan Ingves the Governor of Sveriges Riksbank has since 2011 been the Chairman of the Basel Committee for Banking Supervision. Why has he not proposed to stop distorting the banks allocation of credit, by requiring these to hold the same capital when extracting value and placing a reverse mortgage on the “safer” present economy, than when financing the riskier future, that the young Swedes need and deserve is financed?

In Swedish churches there was (is) a psalm (#288) that prays for: “God make us daring”. It would seem Mr Ingves never heard less sang it. 

The Basel Committee’s tariffs of 35% risk weight on residential mortgages and 100% on loans to entrepreneurs, is pure protectionism.

Sir, Martin Wolf, with respect to President Trumps’ indication that “he would sign an order this week imposing global tariffs of 25 per cent on steel and 10 per cent on aluminum” writes “This is a purely protectionist policy aimed at saving old industries” “Trump’s follies presage more protectionism” March7.

Absolutely! I could not agree more. But what I cannot understand is why Wolf does not react in the same way against the protectionism imbedded in the bank regulators’ risk weights? For instance is not a 35% risk weight on residential mortgages and of 100% risk weight on loans to entrepreneurs represent even a worse protectionism than Trump’s?

That protectionism allows banks to leverage their capital 35.7 times with residential mortgages and only 12.5 times with loans to entrepreneurs.

That protectionism has banks avoiding financing the "riskier" future in order to refinance the older "safer present". Does that not sound extremely dangerous?

PS. And a 0% risk weight of the sovereign and 100% the citizens, is that not the mother of protection of statism?

@PerKurowski

In terms of a short-termism that harms the long run, few are as guilty as current bank regulators.

Sir, Jonathan Ford quote US academic Lynn Stout with “The pressure to keep share prices high drives public companies to adopt strategies that harm long-term returns: hollowing out their workforce; cutting back on product support and on research and development; taking on excessive risks and excessive leverage; selling vital assets and even engaging in wholesale fraud.” “Shareholder primacy lies at heart of modern governance problem” March 5.

Indeed, but I hold that low investments and poor productivity is also the result of regulators’ risk weighted capital requirements for banks based on ex ante perceived risks. These focuses on making the banks safe today, at the price of making it all worse off tomorrow, ex post. How? Because they dangerously push banks to overpopulate, against especially little capital, those safe havens that have always been the main threats to our banking systems; and because they keep banks from exploring those risky bays, those with entrepreneurs and SMEs, those that could give us the growth and the jobs of tomorrow.

@PerKurowski

Easing it for some bureaucrats, like with munis, does mean, de facto, making it harder for other, like entrepreneurs and SMEs

Sir, John Dizard writes “a bipartisan bank regulation reform bill that has passed a crucial Senate committee would require the entire federal regulatory apparatus to loosen the restrictions on counting munis as part of the high-quality liquid assets pool, and reduce the capital charges on holding muni positions.” “Vix horror show will not deter future suckers” February 19.

Sir, that would lead to more demand for munis, so that local bureaucrats can decide what to do with even more funds derived from debts our grandchildren will have to pay; which will naturally lead to less bank credit for those entrepreneurs and SMEs that could help our grandchildren to access jobs and revenues streams that could assist them in repaying these munis... and having a life. Great bipartisan job Senators! 

@PerKurowski

Will Davos 2018, again ignore the financial weapon of mass destruction concocted by the Basel Committee populists?

Sir, Gillian Tett when commenting the concerns that will be expressed at the 2018 Davos meetings writes “The biggest perceived danger of 2018, in terms of impact, is that somebody uses weapons of mass destruction”, Holy moly! and ends with: “keep a close eye on what Davos is not worrying about enough this year: that pesky matter of global finance, particularly in places such as China.” “Populist swing alarms financial titans” January 19.

My concern though is that the technocratic and hubristic populism, proclaimed by the Basel Committee will again not be denounced in Davos, perhaps because doing so might be deemed ungentlemanly or ungentlewomanly behavior in such fine surroundings.

I refer of course to their promise that distorting bank credit with risk weighted capital requirements for banks will make our banks safer.

Higher capital requirements for what’s “risky”, has caused among other that millions of entrepreneurs, those on which so much of our economic future depends, have seen their credit applications rejected or not even received by banks.

Lower capital requirements for what’s “safe”, has among other, helped to fuel house prices which has overloaded that sector with mortgages that, within a future subprime economy, seem impossible to service.

And let’s not even talk about what the 0% risk weight awarded to sovereigns has done in terms of statism and of blurring the risk free rates.

Sir, no doubt about it, the risk weighted capital requirements for banks, is a weapon of financial mass destruction.

Did we not see it explode with AAA rated securities that banks were allowed to leverage 62.5 times with?

Did we not see it explode in Greece with sovereign debt that European regulators allowed their banks to hold against no capital at all?

If a regulator is incapable to provide a clear answer to: “Why do you want banks to hold more capital against what has been made innocous by being perceived as risky, than against what is dangerous because it is perceived as safe?” should he not be fired Sir?

http://theaaa-bomb.blogspot.com

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

PS. On the same page Philip Stephens writes:” The World Economic Forum and the Davos crowd pride themselves on their globalism has set itself the fearsome task of mapping “a shared future in a fractured world”. “Trump, Davos and the special relationship”. The risk weighted capital requirements, which favor refinancing of the “safer” present over financing the “riskier” future, is fracturing the world and causing the future to produce less and less of what could be shared.

@PerKurowski

Here are some actions we should take in order to reduce the threat inequality poses to our democracies.

Sir, the discussions about growing inequality, that tend too often to concentrate on either income or wealth inequality expressed solely as a linear function of monetary terms, are dangerously simplified. Once some basic and non-basic wants have been met, loading up some extra millions does not produce the same amount of marginal benefits per dollar.

But of course for those who do not have the income to satisfy their needs and basic wants inequality matters, a lot. And so more important than worrying about inequality, is to worry about how increase the incomes of those earning less. 

Sometimes the lower incomes for some can have to do with some few other earning unjustifiably or even incorrectly too much, but most often it has little to do with that.

But the redistribution profiteers want to hear nothing of that sort. They prefer to feed envy, with for instance their so frequent mentions of how few wealthy posses more wealth than a billion or so of the poor. That of course can only increase the threat inequality signifies to our democracies that Martin Wolf lays out well in his “Inequality is a threat to our democracies” December 20.

Going from “a stable plutocracy, which manages to keep the mass of the people divided and docile” to the “emergence of a dictator, who rides to power on the back of a faux opposition to just such elites” is what sadly happened in my Venezuela.

What can we do?

When Wolf writes “The market value of the work of relatively unskilled people in high-income countries seems very unlikely to rise” we could for instance see what role risk weighted capital requirements for banks play:

In terms of equality what’s the difference between someone owning a home and someone renting a similar one?

Not much, that is unless the value of the house owned increased a lot and, as a consequence, rents also increase, sometimes more than what the renter can compensate with increased salaries.

That’s what happens when banks are allowed to hold residential mortgages against much less capital than when for instance lending to entrepreneurs; and as a consequence earn higher risk adjusted returns on equity with mortgages than when financing entrepreneurs; which mean banks will make the financing of house purchase abnormally available; which means house prices will go up… until

That is also what happens when central banks inject liquidity that benefits mainly the owner of assets; “now your house is worth more so take out a new loan against it” is not an offer that one renting will hear. 

When Wolf refers to “a desire to enjoy some degree of social harmony and the material abundance of modern economies, [being a] reasons to believe the wealthy might be prepared to share their abundance.” We should be careful of promising more than what could be obtained, because much of that abundance is not easily converted into effective purchase power or transferable income to others; for instance when some wealthy, by means of what could classify as a voluntary tax, decides to freeze on a wall, or in a storage room $450m of his purchase power, in a Leonardo Da Vinci “Salvator Mundi” how do you efficiently reverse that? Of course what’s important here is not the buyer’s paid $450 million but to where the $450million received are going.

Sir, I believe the following actions would go a long way to “ensure the survival of liberal democracy”

1. Getting rid of the distortions produced by bank regulations

2. A monthly Universal Basic Income (UBI) that is sufficient to help you get out of bed but not so large as to permit you to stay in bed. 

3. A Revenue Neutral Carbon Tax that helps fund the UBI and aligns the incentives for saving the environment and reducing inequality. 

4. A special tax on profits obtained under the cover of intellectual property rights to help fund the UBI.

5. Have Facebook, Google and alike pay a minimum fee into the UBI fund for any advertising that they send to us on the web. That would also help us to make sure they do not waste so much of our very scarce attention span.

@PerKurowski

When banks can leverage more their equity financing “safe” built houses than financing “risky” job creation, too many young are doomed to live unemployed in our basements

Sir, Bill Mendenhall in a letter of December 18, “Lord Turner got there first on productive credit” mentions a report by Jim Pickard “Labour looks at making mortgage lending harder for banks” December 12. Pickard’s report was not in FT’s US edition.

Pickard wrote: “Shadow chancellor John McDonnell is considering making mortgage lending more onerous for banks in an effort to push them to lend more to smaller companies…The proposals were set out in “Financing Investment”, a report commissioned by the Labour leadership and written by GFC Economics.

According to GFC, British banks are “diverting resources” away from vital industries and instead focusing on unproductive lending, such as consumer credit borrowing.

The paper argues that the Prudential Regulation Authority, the BoE’s City regulator, should use existing powers to make banks hold relatively more capital against their mortgage lending. The report’s authors say this would be an “incentive to boost SME lending growth”.

The GFC report also claims that the BoE’s Financial Policy Committee “makes no distinction between unproductive and productive lending” to companies, arguing that the banking sector “should be geared towards stimulating productive investment”.

The report calls for the FPC to use existing powers to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy.

The report acknowledges that such interventions would be seen by critics as risky measures that could “impede the smooth functioning of markets” and distort the efficient allocation of capital. But it warns that “financial stability risks will emerge if an economy loses its competitiveness”.

Sir, you must be aware that this includes much of what I have written to you in thousands of letters, for more than a decades, and that you have decided to ignore.

But, if that report acknowledges that “to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy… would be seen by critics as risky measures that could ‘impede the smooth functioning of markets’’, why does it not then question the distortion the current existing differences in risk weights cause?

Pickard also mentions that the report warn that “financial stability risks will emerge if an economy loses its competitiveness”. No doubt! Banks cannot be the sole triumphant survivors in an economy that is losing strength.

And when now Mendenhall writes that “Lord Turner got there first on productive credit” because in his 2015 book Between Debt and the Devil he pointed out that “the banking sector’s decades-long switch away from lending to businesses towards mortgage lending only serves to inflate asset prices, which leads to property bubbles”, that does not mean that Lord Turner really understood or understands what has happened.

In June 2010, during a conference at the Brooking Institute in Washington DC, I asked Lord Turner “Do you really think the banks will perform better their societal capital allocation role if regulators allow them to have much lower capital requirements when lending to the consolidated sectors than when lending to the developing?

To that Lord Turner (partially) responded: "we try to develop risk weights which are truly related to the underlying risks. And the fact is that on the whole lending to small and medium enterprises does show up as having both a higher expected loss but also a greater variance of loss. And, of course, capital is there to absorb unexpected loss or either variance of loss rather than the expected loss.”

Pure BS! With that Lord Turner evidences he ignores that banks already clear for the higher risks when lending, so that when also clearing for it in the capital, the whole credit allocation process gets distorted… and banks end up lending more to build “safe” downstairs for our children to live in with their parents, and lending less to “risky” entrepreneurs who could get them the jobs to afford buying their own “upstairs” 

No, Lord Turner is just one of those too many regulators that want banks to hold the most capital against what is perceived as risky, while in fact it is when something perceived as safe turns out to be risky, that we would most like that to be the case.

@PerKurowski

If bitcoin poses no threat because it’s perceived as risky, why agree with regulations that hold lending to entrepreneurs is dangerous because they are risky?

Sir, I refer to your “Do not worry about bitcoin — at least not yet” December 8.

Of course while bitcoin are perceived risky they pose no major danger. What I cannot understand though is why you do not extend that same reasoning to bank regulations?

What if suddenly bitcoin holdings were suddenly in terms of safety rated AAA by credit rating agencies, and regulators allowed banks to leverage over 60 times with these? That would make these bitcoin really dangerous, as happened when Basel II allowed banks to leverage with AAA rated securities.

That leads me to comment: “A flawed blue print for reform of the Eurozone” also of December 8.

Sir, if it were up to me I would not allow any expert technocrats to come even close to any institution in the Eurozone, before having received a satisfactory answer on why their regulators want banks to hold the most capital against what is perceived as risky. As I see it, it is when something ex ante perceived very safe ex-post turns out to be very risky, that we would like our banks to hold the most of it.

For instance would you like your banks regulated by those who assigned sovereign Greece a 0% risk weights and German entrepreneurs 100% and thereby caused German banks to lend more to Greece than to their local entrepreneurs? I sure would not!

@PerKurowski

More food for the hungry and less food for the less hungry sounds logical and decent, that is unless the hungry are obese and the less hungry anorexic.

Sir, Martin Wolf writes: “More equity capital would make banks less fragile.” “Fix the roof while the sun is shining” December 6.

That is only true as long as we get rid of the distorting risk weighted capital requirements for banks. Though “more risk more capital - less risk less capital” sounds logical, that is unless “The Safe” get too much credit and “The Risky” too little. If that happens, both banks and the economy will end up more fragile.

Wolf writes: “The world economy is enjoying a synchronised recovery. But it will prove unsustainable if investment does not pick up, especially in high-income economies. Debt mountains also threaten the recovery’s sustainability”. Let me comment on that this way:

First: “a synchronised recovery” is a way to generous description of what is mostly a QE high that has just helped kick the crisis can down the road.

Second: The investments most lacking in the “unsustainable if investment does not pick up” part, is that of entrepreneurs and SMEs, those which have seen their access to bank credit curtailed by regulators. It is high time we leave the safer but riskier present and get back to the riskier but safer future.

Third: The “Debt mountains [that] threaten” are either those for which regulators allow banks to hold much less capital against, like sovereigns and residential mortgages; or those consumer credits at high interest rates that dangerously anticipate consumption and leaves us open to future problems.

Sir, let me again make a comment on Wolf’s recurrent recommendation of “Public investment to improve infrastructure”. He usually argues this in order to take advantage of the very low interest rates. That ignores that those low rates are not real rates but regulatory subsidized rates. If banks had to hold the same capital against loans to sovereign than against loans to citizens, and if also central banks refrained from additional QEs, I guarantee that the interest rates on public debt would be much higher.

Besides, given the fast technological advances, we do not even know what infrastructure will be so much needed in the future so as to be able to repay the loans, instead of just burdening more our grandchildren.

@PerKurowski