What distortion causes Martin Wolf’s silence about the distortions produced by the different bank equity requirements?

Sir, Martin Wolf writes: “The rising price of housing… also distorts the financial system: 70 per cent of bank loans outstanding (after netting out lending within the financial sector) are to individuals secured on property. The financial system is now totally addicted to high house prices”, “Bribes and evasions on housing and the deficit” May 1.

Why does not Martin Wolf ask one of his many banker friends how much equity regulators require his bank to hold when financing secured with property as compared to when financing a SME?

And then Wolf should call one of his finance professors friends and ask what those different equity requirements do for the risk-adjusted returns on bank equity when lending for the purchase of a somebody’s home, as compared to with the lending for the creation of a job, so that someone could pay his mortgage and the utilities of his home.

Wolf keeps mentioning “distortions”, but no matter how much I remind him, he refuses to refer to that really monstrous distortion produced by different bank equity requirements based on perceived credit risks. What journalistic distortion causes his silence?

Again, for the umpteenth time, regulators have based their bank equity requirements, those that are to cover for unexpected losses, on the perceived possibilities of any expected losses… now how loony is not that?

@PerKurowski

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With no ​​jobs to pay mortgages or utilities, at least we are living in great houses. Thank you bank regulators!

Sir, I refer to Tim Harford’s “Why a house-price bubble means trouble” November 22.

In it Harford writes “Booming housing markets attract bankers like jam attracts flies, sucking money away from commercial and industrial loans. Why back a company when you can lend someone half a million to buy a house that is rapidly appreciating in value?”

That is far from being the whole story.

Regulators, because they thought or wanted to think about the financing of houses as something absolutely safe, also allowed the banks to do it against very little bank capital, meaning very little equity… especially if someone managed to dress up the mortgages in AAA ratings.

And that allowed banks to earn much higher expected risk-adjusted returns on equity when financing houses than when financing the “risky” small businesses and entrepreneurs, those who could create jobs, and for which their regulators required them to hold much more equity.

And so here we now find ourselves… living in expensive houses with too few good jobs to allow us to pay the mortgages and the utilities. Is that not sort of bad planning?

We care too much about financing houses when compared with financing the jobs needed to the pay the mortgages and the utilities.

Sir, I refer to Martin Wolf’s “Deeper reform of housing finance is vital for stability” September 19.

Wolf writes: “Collectively, we have made a huge bet on leveraging up property. This has gone bad”.

And Wolf is indeed correct. But, while mentioning some important subsidies to house financing, why does he ignore the role that the so much lower risk weights assigned to it by regulators when calculating the capital requirements for banks play?

At this moment a bank that finances the purchase of a house is allowed to hold much much less equity, and can therefore earn much much higher risk adjusted returns on equity than when financing a small business.

That, considering the fact that lending to a small business could help to create the jobs by which house owners could service the mortgage and pay the utilities does not seem so very intelligent to me.

On risk-weights for banks when financing houses vs. jobs, regulators do not answer, though stiff upper lips starts to wobble.

Sir, Stefan Ingves and Per Jansson, of Sveriges Riksbank, respond quite strongly against some criticism made by Wolfgang Münchau of the monetary policy in Sweden, “Monetary policy has had positive results in Sweden” July 24. 

In their letter they mention that Sweden has been doing relatively fine in terms of reducing unemployment but that household debt and house prices have increased and “create risks of financial instability with serious macroeconomic consequences”.

Although my mother is from Sweden and lives there, I know little about its monetary policy but, since Stefan Ingves is the current chairman of the Basel Committee, and Münchau now has him on the line, would it not be great to ask him the following?

Mr. Ingves the risk-weights for defining the capital requirements for banks for house mortgages is 15% (I have heard some rumors about an increase to 25%) and the risk-weight for lending to an SME is 100%. Does it really make sense allowing banks to leverage 667% more times when financing houses than when financing the creation of the next generations of jobs… meaning banks can obtain a 667% higher risk adjusted return on their equity when financing houses than when financing the creation of the next generations of jobs? Do you not think this distorts the allocation of bank credit in the economy? 

Since jobs seem more important than houses, and SME’s have never caused a bank crisis, which house financing has certainly done, why not the other way round?

Sir, when I have asked bank regulators from many countries a similar question their usually stiff upper lips have begun to wobble… but I have not been able to extract an answer from them. Perhaps Wolfgang Münchau could have more luck.

PS. Remind them of a Swedish psalm... "God make us daring!"

With respect to the UK housing boom FT has not earned the right to criticize much.

Sir, you express a lot of concern over excessive financing of houses, like the Help to Buy scheme, “Carney and the UK housing boom” May 15.

But you never express concern about the sad fact that if a bank lends to a small business or an entrepreneur, those who could help create the jobs by which house owners could pay their bills, then it needs to hold much more equity than when financing the purchase of a house.

And this of course means banks make much higher risk-adjusted returns financing houses than financing jobs… which is pure lunacy… and that of course means immensely more subsidizing of houses than the Help to Buy could ever aspire to signify.

And so with respect to this I consider that FT has not really earned the right to criticize that much.

Bank of England´s and Financial Stability Board´s Mark Carney, is nothing but a housing dove

Sir, John Plender writes that “UK must be more alert to housing bubbles risks” December 4, and comments that “to his credit, Mark Carney, the governor of the Bank of England, has been making suitable hawkish noises about housing.

But let me remind Plender that Mark Carney is also the Chairman of the Financial Stability Board. And as such Carney approves of risk-weights which allow banks to earn much higher risk-adjusted returns on equity when financing houses than when financing, for instance the entrepreneurs and start-ups, those that could get the house owners the job incomes with which pay their utility bills.

So please do not tell us that Mark Carney is nothing but a housing dove.

For a starter Carney does not even understand this

The Help to Buy scheme, has also something of a Help to Sell Expensively flair about it.

Sir, Janan Ganesh opines that “Britain’s flawed Help to Buy scheme is smart politics”, November 12. And this because it allows the Tories, to “connect with the many young to middle age voters priced out of the housing market”.

Yeah, yeah, that is as long as no one informs those many young to middle age voters that they are priced out of the housing market, precisely because of this type of assistance.

Was the government not helping or hindering with permits the housing market in any way, houses could actually be quite affordable. As is, it looks more like a diabolical design to help aging baby boomers get rid of assets, at great prices, sticking those to the generations after them.