Regulation distortions, sure makes finance information on banks extra hard to grasp.

Simon Samuels writes about bank financial reports of 600 pages, “Too much information makes finance hard to grasp” April 25.

Sir, since the 2007-08 crisis, I have read at least 50 editorials, articles or research papers, written by first class newspapers, experts or renowned academicians, that have compared the capital to assets ratios of banks of before the 90s, with the capital to risk weighted assets of the Basel I, II and III… in order to show how bank capitalization has evolved.

In fact even prominent regulators have fallen in their own trap.

For instance in this letter I pointed out the mistakes of Alan Greenspan.

Besides, what’s the use of risk weighted capital to asset ratios if no one understands what the risk weights are and how these came into being, like for instance the zero percent for sovereigns?

Sir this is the prime example of how regulation has distorted information and makes the finance information on banks hard to grasp.

PS. Do you want me to review my blog and count the times FT and its people got it wrong but ignored my letters on it?

PS. By the way in my letters I have found that Simon Samuels, related to the Financial Stability Board, seemingly has not much against the concept that regulators should act as risk managers for the world. Boy it does takes a lot of hubris for that! 

@PerKurowski ©

The regulators’ search for financial stability has distorted the allocation of bank credit to the real economy.

Sir, you hold “G20 governments would do well to recognize that financial instability can rapidly translate into trouble for the real economy.” “Central banks alone cannot conjure growth” February 20

Sir, you should know by now the regulators’ search for financial stability, has already created much trouble for real economy.

You quote Zhou Xiaochuan, governor of the People’s Bank of China, with “The central bank is neither God nor a magician who can turn uncertainties into certainties.”

The correct reply to that would be: So why then do central banks, as regulators, act like God or magicians arrogantly imposing their besserwisser founded credit risk weighted capital requirements for banks?

If you allow banks to leverage more their equity (and the support they receive from society/taxpayers) with assets ex ante perceived as safe, than with assets perceived as risky; then what is perceived or deemed to be “safe” will produce higher risk adjusted returns on equity than what is “risky”.

And anyone who does not understand how that distorts the allocation of bank credit on Main Street, has never walked on Main Street; has never seen how difficult it is for SMEs and entrepreneurs to access bank credit even without the regulators making that harder for them.

And if you do not understand how useless such distortion is, because major bank crises never ever result from excessive exposures to something ex ante perceived as risky, then you have not read financial history.

Who authorized bank regulators to decide on the allocation of bank credit to the real economy?

Or is it really so bad that banks regulators are not even aware of that they distort the allocation of bank credit to the real economy?

PS. In 1999 in an Op-Ed I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

@PerKurowski ©

What would the founding fathers say?

Sir Sam Natapoff recounts part of the US financial history in “Finance and the Fed: the battle is not over” July 17. What I would have found really interesting though is to hear him speculate on what the founding fathers would have said about the following issues:

a. The empowerment of the credit rating agencies with the capacity to influence where the capitals should flow, as they currently do through the minimum capital requirements for the banks that are primarily based on the risk ratings.

b. Favouring the government coffers, because when a bank lends money to the government it does not have to put up any capital, something equivalent to an infinite credit multiplier, but if it instead wants to lend to a private, then the shareholders would have to put up 8 dollars or more for each 100 lent.

c. That the savings of the nation are by means of the current regulatory system strongly biased towards financing sectors that can be construed as low risk, such as mortgage lending (ha!) when compared to other more risky but perhaps more nation developing endeavours such as decent job creation or the reduction of climate change risks.