Compared to more than three decades ago, what is the current leverage ratio of our banks?

Sir, Martin Wolf, in FT on July 12, 2012, in “Seven ways to clean up our banking ‘cesspit’” opined: “Banks need far more equity: In setting these equity requirements, it is essential to recognize that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters. It needs to be far lower.”Soon a decade since, are bank capital requirements much higher and really sufficient?

No! Though bank capital requirements are mostly needed as a buffer against the certainty of misperceived credit risks & unexpected events, in this uncertain world, these are by far, still mostly based on the certainty of the perceived credit risks.

Consequently, when times are rosy, regulators allow banks: to lend dangerously much to what’s perceived as very safe; to hold much less capital; to do more stock buybacks and to pay more dividends & bonuses. Therefore, banks will stand there naked, when most needed. 

The leverage ratio is also important because it includes as assets, loans to governments at face value, and thereby makes it harder for excessive public bank borrowers to hide behind Basel I’s risk weights of 0% government, 100% citizens. No matter how safe the government might be, those weights de facto imply bureaucrats know better what to do with credit they’re not personally responsible for than e.g., small businesses and entrepreneurs.

November 19, 2004, in a letter you published I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?” That this factor, in the face of huge government indebtedness, is not even discussed, as I see it can only be explained by too much inbred statism.

Before the Basel Committee Accord became operative in 1988, Basel I, banks were generally required to hold about 10 percent of capital against all assets, meaning a leverage ratio of 10.

Where do banks find themselves now? I know well it’s hard, and extremely time consuming, to make tails and heads out of current bank statements, but I’m absolutely sure most financial media, if they only dared and wanted, have the capacity to extract that information.

Should not such basic/vital data be readily available and perhaps even appear on front pages? It’s not! Why? Has media been silenced by capital minimizing/leverage maximizing dangerously creative financial engineers?

Sir, I’m not picking especially on financial journalists, the silence of the Academia, especially the tenured one, is so much worse.

@PerKurowski

A new monetary order requires the old regulatory order.

I refer to Chris Watling’s “Now is the time to devise a new monetary order” March 19.

Sir, it is hard for me to understand how Watling, correctly pointing out so many distortions in the allocation credit and liquidity, can do so without specifically referencing the role of the risk weighted bank capital requirements.

For “the world economy [to] move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation is based on perceived fundamentals”, getting rid of Basel Committee’s regulations is a must.

For such thing to happen, discussing and understanding how distorted these are, is where it must start.

E.g., Paul Volcker, in his 2018 “Keeping at it” penned together with Christine Harper valiantly confessed: “The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”.

Sir, why is that opinion of Volcker rarely or perhaps even never quoted? Could it be because in a mutual admiration club it’s not comme-il-faut for a member to remark “We’re not wearing any clothes?

Volcker mentions “The US practice had been to assess capital adequacy by using a simple ‘leverage ratio’- capital available to absorb losses on the bank’s total assets”

Going back there, would return banks to loan officers; and send all those dangerously capital minimizing/leverage maximizing creative financial engineers packing.

My 2019 letter to the Financial Stability Board

My 2019 letter to the IMF

@PerKurowski

 

Europe, if you spoil your kids too much they will not grow strong. That goes for banks too.

Sir, Patrick Jenkins analyzes several concerns expressed about European banks when policymakers gathered to mark the retirement of Danièle Nouy from ECB’s Single Supervisory Mechanism (SSM); who is to be succeeded by Andrea Enria as the Eurozone’s chief banking regulator. “As European banks regulator retires, six big challenges remain” December 11.

The former Grand-Chair of the Federal Reserve, Paul Volcker, in his recent book “Keeping at it”, co-written with Christine Harper, recounts the following when, in 1986, the G10 central banking group tried to establish an international consensus on bank regulations and capital requirements:

“The US practice had been to asses capital adequacy by using a simple “leverage ratio”-in other words, the bank’s total assets based compared with the margin of capital available to absorb any losses on those assets. (Historically, before, the 1931 banking collapse, a ten percent ratio was considered normal)

The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be.”

Sir, even though the Basel Accord was signed in 1988 and further developed in 2004 with Basel II, and with which the European risk weighting was adopted, I am sure we can trace the differences between US and Europe banks to these original differences on capital requirements. The US has been much more strict on capital than Europe. In fact the problems with American banks during the 2008 crisis were mostly restricted to those investment banks, which supervised by the SEC, had been allowed in 2004 to adopt Basel II criteria.

In Europe meanwhile banks could do with much less capital, which meant that much more was left over for bankers’ bonuses. In essence, Europe’s banks were dangerously spoiled. The challenge these now faces is having to substitute their equity minimizing financial engineers with good old time loan officers; and convince the capital markets of that. Good luck!

@PerKurowski

What do we all have left to counter any major new round of debt-failures with?

Sir, Jonathan Wheatley reports that according to the Institute of International Finance “Total debt owed by households, governments, and financial and non-financial corporations were $247.2 tn at the end of March 2018 and, relative to gross domestic product, exceeded 318 per cent” “EM exposure Surging debt puts pressure on global financial system” July 12.

Emerging markets? What about all of us?

Households count on their income and worth of assets, basically houses, to pay back their debt… and their increased debt, anticipated demand, means they cannot help each other as much as they used to.

Non-financial corporates, which have become much more leveraged, count on business remaining healthy, though indebted households and governments will find it harder to keep up the demand they need.

Governments depend mostly on tax revenues, and these will depend on how it goes for households and non-financial corporations.

Financial corporates depend on deriving some profitability intermediating for the other three sectors, and on In God We Trust 

Looking at the harrowing figures three questions come to my mind.

The first, where would we all be if we in 2007-2008 had gone for the hard landing I suggested in 2006, instead of pushing the crisis can forward?

The second, where would our banks and all our debts be if banks had needed to hold for instance 10% in capital against all assets?

The third, WTF do we all have left to counter any major new round of debt-failures with?

@PerKurowski

Martin Wolf. When the Basel Committee introduced irresponsible financial miss-de-regulation, why did you keep mum?

Sir, Martin Wolf writes of the risks… of “irresponsible financial deregulation... closely linked to the agenda of the Republicans” and argues: “The short-term effects of taking the brakes off an unstable financial system might also be positive. The longer-term ones might include a more devastating crisis even than the one of a decade ago.” “An upswing is not sustained growth” April 26.

Indeed! The short term effects of the Basel Committee favoring what was perceived as safe with much lower capital requirements for banks, had positive short term effects, but also caused the crisis a decade ago, by pushing too much investments in what was AAA rated and lending to sovereigns like Greece.

But I don’t remember reading Mr. Wolf warning about that miss-de-regulation.

The current (republican) proposals we now hear about, like the Financial Choice Act, that suggests a 10% leverage ratio instead of the Basel risk-based capital standards, seems to head in the right direction of eliminating the distortions in the allocation of bank credit to the real economy caused by Basel’s risk weighted capital requirements.

Of course, that is as long as exposures to sovereigns are not calculated differently from other exposures.

As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course totally false and absolutely unsustainable.

@PerKurowski

Because of risk-weighted capital requirements, banks can turn out riskier when engaging in regulatory “risk-shedding”

Sir, with respect to British banks you write: “risk-shedding would decrease the cost of capital, if the markets could be made to believe in it” “British banks’ capital is only half of the problem” December 1.

Why is it so hard for you to understand the differences between ex ante perceived risks and ex post real risks?

Currently, the lower the ex-ante perceived risk is, the lower capital banks are required to hold, so the more they can leverage their equity, so in reality the higher can the ex post real risk be.

When banks got rid of loans to SMEs and acquired AAA rated securities, they were just shedding risks following their regulators instructions.

So why on earth should markets believe that risk shedding for regulatory purposes would make banks safer? Have markets not been recently very much deceived by the regulators? One of these days a small shareholder might sue the regulators for having willfully deceived him, by promoting the use of capital to risk weighted asset ratios instead of the usual capital to asset ratios.

PS. And of course British banks' capital is even less than half of the problem. The real problem is that bank credit, because of the risk weighting, is not allocated efficiently to the real economy.

@PerKurowski

FT, how can you with a straight face hold that bank capital buffers in EU are more ample than they were five years ago?

Sir, you write “True, banks’ capital buffers are more ample than they were five years ago”, “EU bank regulators need to do more to foster faith”, August 1.

More ample? That is just if you believe the regulators’ risk weights are correct… something which was evidenced in 2007-08 they were not.

Because, if you read EBA’s stress result, you should have read that “the aggregate leverage ratio decreases from 5.2% to 4.2% in the adverse scenario”.

And in terms of real leverage that means that in their “adverse scenario” the bank leverage of equity increased from 19.2 to 23.8 to 1… and that’s just the average!... Which means the real capital buffers, those of real unadulterated life, are just smaller.

@PerKurowski ©

The most stressful banks to me are those who least help the future of our real economy.

Sir, Laura Noonan, Rachel Sanderson and James Shotter present EU’s bank stress test results. “Bank stress tests single out the usual suspects” August 1.

And it ranks the banks based on their 2018 fully loaded common equity tier one ratio, which is CRD IV Common Equity Tier 1 capital divided by CRD IV Risk Weighted Assets. And so let us be very clear, if the risk weights used are wrong, the results are absolutely meaningless.

Sir, how long will you all play along with the current regulators as if they were geniuses setting risk weights, as if they had any idea of what they are doing? Are you totally deprived of intellectual honesty?

If you go to EBA’s stress result you will read “The EU banking sector has significant shored up its capital base in recent years leading to a starting point capital position for the stress test sample of 13.2 % CET1 ratio at the end 2015… 2% higher than the sample of 2014 and 4% higher than the sample in 2011”. 

That’s great!... sort of… because it also states that “the aggregate leverage ratio decreases from 5.2% to 4.2% in the adverse scenario”. In terms of real leverage what does from 5.2% to 4.2% leverage ratio mean? It means that in their “adverse scenario” the bank leverage of equity has increased from 19.2 to 23.8 to 1… and that’s just the average!

How is it possible, an increase of the CET1 ratio, at the same time the leverage increases? Easy, banks take on more of those assets perceived, decreed or concocted as safe that carry low risk weights, and less of those assets perceived by bankers and regulators alike like more risky that carry higher risk weights, such as loans to SMEs and entrepreneurs. The real economy will suffer the impacts of this stupid and short-sighted regulatory risk aversion.

We should of course be concerned with the safety of our deposits in our banks… but, should we not concerned with that these banks take the risks needed to offer our children and grandchildren a future at least as good as that one our parents offered us? I sincerely think so.

PS. And it not only about the young. The welfare of future pensioners depend very much too on the health of the economy.

@PerKurowski ©

Pity the Basel Committee’s small leverage ratio; it sure has to carry a lot of risks on its back.

Sir, with interest rates and size of exposure the expected credit risk is the risk most cleared for by banks. Yet bank regulators also wanted to clear for it, and imposed their expected credit-risk weighted capital requirements. That left out of consideration, at least until Basel III, all other risks, like for instance that of cyber attacks to which Gillian Tett refers to in “Hackers target the weakest links in the financial chain”. May 20.

I say “until Basel III”, because now banks are by force of a leverage ratio, to hold at least 3% of capital against all exposures to cover for any risk.

But the Financial Stability Board has also “Task Force on Climate-related Financial Disclosures” which reminds us of risks from climate change.

And then there are the risks of demographic changes; the risk that the economies do not react to stimulus; the risks that credit risks have not been correctly perceived; the risk of war; the risk of epidemics, negative interest rates, deflation… and a never-ending list of risks of expected or unexpected losses. 

And you know I have repeatedly called for banks to also hold some capital against the risk regulators have no idea about what they’re doing, a risk that has morphed into a frightening reality.

But what’s the enticement for banks to cover for these types of risks when they can leverage as much as they currently do? Very little… in the same vein that the bonuses you can pay out to bank managers, when little bank capital is required, can be very big.

What do I propose? The abandonment of all dumb credit risk weighted capital requirements, and move towards a leverage ratio of 8 to 12%. That should increase the importance of the shareholders vis-à-vis management. And that should help to generate more interest among shareholders into making sure better risk avoidance or risk preparedness takes place.

The process of implementing those changes must though be very carefully designed, so as not to worsen the current capital scarcity driven bank credit austerity.

PS. The fact Basel Committee argued that “a simple leverage ratio framework is critical and complementary to the risk-based capital framework” was already a confession of not knowing what they were doing, but that notitia criminis was foolishly ignored. 

@PerKurowski ©

The CET1 (common equity tier 1) divided by the leverage ratio, gives you a Gross Risk Hiding Ratio

Sir, James Shotter and Laura Noonan, while admitting that “the absolute level of the CET1 (common equity tier 1) is only part of the equation, they do compare Deutsche Bank’s CET1 with that of other banks. “Deutsche focus turns to towering task ahead.” February 10.

The common equity tier 1 ratio is calculated with the bank’s core equity in the numerator and with in the denominator the risk weighted assets, calculated with risk weights not assigned by me. So the safer the assets are perceived or deemed to be, the higher the CET1.

And the Leverage Ratio uses in the denominator the gross value (of most) assets.

As FT should know by now, I have always felt much more nervous about the assets a bank (or regulators) could perceive as very safe than with assets perceived as risky. And so I do give more importance to the leverage ratio than, for instance, to the CET1 ratio.

But the regulators would not allow us data on the leverage ratio, because, in their opinion, that would not reveal the real leverage to us and it would therefore only confuse us. And so they decided to credit-risk weigh the assets, and came up with the CET1 ratio or the slightly more generous Tier 1 Common Capital Ratio.

And of course that made many in the market feel much more comfortable with that the banks were quite adequately capitalized.

But one needs to adapt, and so I felt that new interesting ratios would be found in the market whenever the leverage ratio was published. And among these the CET1 ratio to the leverage ratio-ratio, because that ratio could be said to represent, the Gross Hiding Risk Ratio.

Though I admit I could be using wrong data, I found the following leverage ratios at end of 4th quarter 2015: Deutsche Bank 3.9; Goldman Sachs 5.9; Wells Fargo 8.0; and Morgan Stanley 8.3.

And if we take the CET1 ratios reported in the article and divide these by the leverage ratios we obtain the following Gross Risk Hiding Ratios: Deutsche Bank 2.85; Goldman Sachs 2.19; Wells Fargo 1.34 and Morgan Stanley 1.70

So if these calculations are correct then no wonder why Wells Fargo “is often described as the US’s safest banks [and] there are no [current] calls for a capital raising”… and no wonder Deutsche Bank faces quite bigger challenges.

@PerKurowski ©

A Leverage Ratio makes banks hold equity on all exposures, to cover specially for unexpected losses, like cyber attacks

Sir, I refer to the letter signed by financial sector representatives: “Leverage ratio threat to the cleared derivatives ecosystem” August 27.

What is argued, that segregated cash margins, held to guarantee the commitments of clients, should be deducted from a bank’s actual exposure, sounds quite reasonable since the current construct of the leverage ratio “fails to consider existing market regulations that mitigate…losses”.

But when it is said that: “The leverage ratio is designed to require banks to hold capital against actual exposures to loss”, that is wrong. The leverage ratio is there to cover for any exposures to losses, most importantly any unexpected losses.

It would for instance be easier for regulators to just state that the leverage ratio is to cover against cyber-attacks… so as to clear the air, while moving towards a completely different Basel IV.

@PerKurowski

Getting rid of regulatory distortions also hurts, and also creates risks, but is something that must be done.

Sir, I refer to Henny Sender´s “Reasons to disbelieve the Federal Reserve’s cheery message” February 3.

It states that “Basel-prescribed leverage ratios have changed the economics of funding, raising the cost of finance for dealers” which is affecting the liquidity they provided the market; “one Fed survey suggests that in the past 18 months the [repo] market has contracted by 25 per cent”.

And Sender argues that though that makes the system safer… it also means that the fall can be much greater when [market] sentiment turns negative.

But the question that also needs to be made is… what good is it to assist the repo market by means of allowing banks to hold less equity, compared to for instance assisting in the same way, the access to bank credit of small businesses and entrepreneurs?

Of course taking away distortions always create risks, but keeping the distortions, like the credit risk weighted bank equity requirements are still kept, will in the log run end up being the most costly alternative.

Take away all the financing of shares repurchase and surely the financing of private enterprise has also dropped dramatically… and that financing, being much lower on the food chain than financing the repo market, is therefore much more important to the real economy.

PS. Something does not read right. It is higher leverages, not lower ones, which are more often associated with greater falls when market sentiment changes.

While regulators think they’ve done theirs with banks, the regulatory distortion of credit allocation is in crescendo.

Sir, according to Steve Johnson “Mark Carney, suggest that global regulators have now cleaned up the banks, with their notoriously high levels of leverage, and had a new target in their sights”, “The big elephant in a small pond effect” February 2.

That is very serious coming from the Chair of the Financial Stability Board because when it comes to regulators, they have definitely not cleaned up their act.

As I have told you many times lately, as a result of regulators increasing the floor level of bank equity requirements, primarily with the leverage ratio, the effective squeeze on those borrowers being discriminated against by means of the credit risk weighted equity requirements, like small businesses, has only gotten worse. If in need you should see the film “The Drowning Pool” to understand visually what is going on.

And in that respect it is clear that the regulatory distortion is in crescendo while it is still being ignored. Sir I wonder how long will it take FT get it? That an AAA rated client cannot get access to bank credit because the bank only has sufficient required equity so as to be able to lend to an “infallible sovereign”?

Martin Wolf: How risky to the banking system can a borrower perceived as risky really be?

Sir, I refer to Martin Wolf’s “Chronic economic and political ills defy easy cure” January 21.

Of course! It is impossible to cure current problems if you are not even able to acknowledge, how the current credit risk weighted equity requirements for banks distort the allocation of credit to the real economy.

Wolf writes: “The leverage — ratio of assets to equity — of many large global banks is about 25 to 1, which is bound to make them vulnerable…  Moreover the lack of transparency of [bank’s] balance sheets remains daunting. In a complex global financial system, the ability of participants to understand balance sheets is limited. This tends to generate cycles of overwhelming risk-affection followed by panic-induced aversion. The low real returns on safe assets tend to exacerbate the intensity of the affection and so the extent of the aversion.”

But, if you know that 25 to 1 leveraged equity strapped banks must hold much more equity against assets perceived as risky, than against assets perceived as “absolutely safe”, like sovereigns and the AAArisktocracy, then it should not be hard to understand that instead, it is the following which happens: 

Overwhelming exposures to what is perceived, or made to be perceived as absolutely not risky, are created; followed by panic-induced realizations that something of what was perceived ex ante as absolutely safe turned out to be not so safe, and ate up what little bank equity there was; which causes a rush to add more exposure to what is perceived as absolutely safe. And round and round we go, until all our banks end up holding the last remaining “absolutely safe” asset… whichever that happens to be.

If Martin Wolf wants to makes really good use of his stay in Davos, and is not afraid to ruffle some feathers, including his own, he should walk around and ask as many he can: How risky to the banking system can a borrower perceived as risky really be?

http://subprimeregulations.blogspot.se/2015/01/you-in-davos-anyone-tell-us-how-risky.html

ECB’s Draghi’s “whatever it takes”, should be the subscription of hundred’s of billions in new European bank equity.

Sir, I refer to Wolfgang Münchau’s “Why the ECB should not water down a QE program” January 19.

But why would you pour QE on the Eurozone if, as Münchau says, it “is sick”? Should you not first figure out what it is that Europe needs? 

And it foremost needs, first to get rid of bank regulations that distort the allocation of bank credit in the economy; and then of course its banks would need immense amounts of fresh equity in order to be able to lend.

And so, let the Basel Committee decree, effective almost immediately, that banks need to hold for instance 8 percent in equity against any assets, including against loans to all infallible sovereigns, including against loans to the AAArisktocracy, and then have the ECB to be willing to subscribe all bank equity it takes.

ECB should, during some years, refrain from using any voting rights of that equity; and begin selling it to the market some years from now… unless of course banks offer to repurchase their own shares earlier. 

Is that legally or politically possible? I have no idea but that is what most would help Europe... as is pure QE cannot really be watered down, since to begin with it already basically is water.

The regulators, who foolishly gave in to bank-children’s equity pleas, must as responsible parents now help them out.

Sir, Tom Braithwaite and Martin Arnold write: “Together with regulatory and investor pressure for higher returns, universal banks have lost their luster around the world”, “Regulators test the universal banking model”, January 16.

Of course the minimum minimorum equity banks were required to hold against some assets, 1.6 percent of the AAArisktocracy, and even zero in the case of “infallible” sovereigns, served as a potent growth hormone for the too big to fail banks. No doubt about it.

But, the problem is not that imposing, for instance an 8 percent equity requirement against all assets, would fatally wound big banks, or in this case the universal banking model. The real problem is that the journey from here to there would be extremely difficult. But since it really was the regulator, the supposedly responsible parent, who so foolishly gave in to what the children, the banks screamingly wanted, it really should be the regulator who now must assume his responsibilities to help the banks, the children, to adapt to the new much firmer rules of the house.

If only enough of the QE’s had been invested in bank equity, to make up completely for the equity shortfall caused by new requirements, central banks would probably now be reselling those shares to an avid market. That because, for a bank’s shareholders, it is also the journey from here to there that most frightens them. To have less risky bank shares producing lower returns is no problem whatsoever for any normal shareholder.

To sell such bank equity assistance scheme, could indeed be politically nightmarish… but if we want to put some decent order back in the system, in order to avoid our kids and grandchildren becoming a lost generation,  someone has to do it.

FT, what about at least daring to talk about it?

If I could decide, this is what I would tell ECB to do with all Europe’s banks… I think

Sir, Tom Braithwaite writes: “Banks have been forced to become safer and more boring. By closing down the casino, regulators have reduced the chances of disasters”, “Investors might yet long for the days of Dimon’s swagger” January 13.

How on earth does Braithwaite know that? Why are we to believe that regulators, who allowed banks to leverage over 60 times to 1 on exposures to the AAArisktocracy, or even more to exposures to infallible sovereigns like Greece, know anything about reducing the chances of disasters?

Let me just start by reminding him that when playing roulette if you bet pennies more on a safe colors than on risky numbers… you are guaranteed to lose more, in the long run.

How does Braithwaite know that disaster is not happening at this very moment, because that small business or that entrepreneur who could save the economy of tomorrows Europe, is denied fair access to credit because these banks are given incentives to play it safe, to play on colors and avoid the numbers?

Braithwaite quotes Stefan Ingves the Chairman of the Basel Committee on Banking Supervision saying “Leverage is an inherent and essential part of modern banking system” and yet Ingves and his regulatory buddies do not understand that by allowing different leverages for different assets they are de facto imposing capital controls which re-directs the flows of credit to the real economy in many dangerous ways.

Sir, the more I see the urgency of correcting for the regulatory distortion imposed by the Basel Committee, and the risk and difficulties of travelling from here to there in terms of required bank equity, the more I believe we need to:

Impose a 10 percent equity requirement on all assets, and then have the ECB offer to subscribe all equity needed to meet those new requirements. ECB should commit not to use the voting rights of that bank equity and to resell 10 percent of it per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Any ECB-QEs before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

Europe, get rid of risk-weights, impose a 10% leverage ratio, and have ECB's helicopter drop equity on your banks

Sir, Wolfgang Münchau, as a tool to avert deflation in Europe, mentions the possibilities of a sizable QE helicopter drop in Europe, like €10.000 per citizen; and, sort of shamelessly using the tragic recent Paris as an excuse, argues for more fiscal stimulus, “Eurozone needs to act before deflation takes hold” January 12.

And I have to wonder, again, what goes on in his and other columnist minds, when they make suggestions like these, while at the same time they do not seem bothered by that Europe’s banks are ordered not to lend to those perceived as risky, like to small businesses and entrepreneurs. Because that is what de facto happens when regulators allow banks to hold less equity against exposures perceived as safe than against exposures perceived as risky.

What would I do? Perhaps order a 10 percent not risk weighted leverage ratio imposed on all European banks to substitute for all credit risk discriminating equity requirements; and then have the ECB to subscribe and pay in what new bank equity might be needed on a case by case basis, all with a firm-commitment to resell those shares to the market within a given period.

That would not only help to fight deflation, but, much more importantly, it would allow those tough risk-taking agents that the economy needs in order to grow when the going gets tough, to get going again.

We are in the midst of a slow-motion deep financial crisis that no one dares to speak of.

Sir, Martin Wolf gives a generally positive outlook for 2015 in “An economist’s advice to astrologers” January 7.

That is because he keeps on turning a blind eye to the very dangerous slow motion financial crisis that is occurring, at this very moment, but that for reasons I can’t comprehend seemingly no one dares to name.

And I refer to that primarily as a result of growing general bank capital (equity) requirements, like that derived from Basel III’s leverage ratio, those banks borrowers who because they are perceived as “risky” generate larger regulatory imposed capital requirements on the banks… are getting more and more excluded from having fair access to bank credit.

I do not know if that is going to reflect itself in 2015 but one thing is sure, all the credit negated, or offered in too expensive terms, to small businesses and entrepreneurs during 2015, is going to turn out to be extremely expensive for the economy… and for the job prospects of our youth. 

Wolf’s “chronic demand deficiency syndrome”, created mostly through the anticipation of demand financed with debt, a preempting of future demand, is going to hang over the economy, no doubt about that.

But it is silly risk aversion, expressed in allowing banks to earn higher risk adjusted returns on equity on what is perceived as “safe”, which is the major obstacle for any sturdy economic growth to reassume.

$56bn in bank fines equals $1.1tn less in bank lending…minimum

If you take that 5% capital (equity) leverage ratio they want to impose on banks in the US (in Europe only 3%) that signifies an allowed leverage of 20 to 1.

In this respect when Martin Arnold reports on December 27 “Penalties for lenders leap to record $56bn”, and as these penalties go against equity, I read $1.1tn less in bank lending… minimum... and this 2014 only... judicial masochism!

With all the QEs and other stimulus efforts going on; and all the increase of capital requirements for banks going on, the question remains: why on earth were these fines not forced to be paid out in fully paid in voting shares to be resold to the market?