FT, you are so utterly blind to the systemic risks intrusive bank regulations create.

Sir, with respect to the “US Treasury’s report on financial regulation reform” of June 14 you write: “The report does not propose doing away with any part of the regulatory regime wholesale. Capital and liquidity standards, stress testing, living wills, prudential regulation and the Volcker rule are all accepted in principle. In practice, though, the report urges that they be applied with less vigour, more discrimination and greater consultation with the industry”

Well that is bad! The report should take away most of it because “Capital and liquidity standards, stress testing, living wills, prudential regulation [and credit ratings]” is nothing but dangerous sources of systemic risks, introduced by regulators wanting to play bankers instead of acting like regulators.

For instance what do you think is gained by having all banks focusing on the same risk a la mode in a stress test, while ignoring if the real economy is getting the access to credit it needs in order to remain vibrant?

What would I propose instead of all that? Perhaps 3% capital requirements on all assets to cover for bankers’ ineptitude, and 7% capital requirements on all assets to cover for unexpected events, which comes up to the 10% proposed by the Financial Choice Act for smaller banks, but that I would love to see applied to all banks.

@PerKurowski

To manage risks our bankers are always better free, in God’s hands, than in hands of some hubristic sophisticated besserwissers

Sir, Martin Wolf writes: “Market liquidity is likely to disappear when one needs it most. Building our hopes on its durability is risky. That is correct, but when he argues: “the absence of regulation exacerbated the liquidity boom and subsequent bust”, his implicit message is… that regulators should do something about it. “Beware the liquidity delusion” October 7.

I on the other hand have always worried about that bank regulators, when they act on their own perceptions of credit and liquidity risk, in any sort of complex form, introduce distortions, systemic risks, which can make everything so much worse. 

What feeds our credulity to believe something is more safe just because we perceive that something to be more safe? Is it not so that the safer an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby make that asset really risky?

What feeds our credulity to believe something is more liquid just because we perceive that something to be more liquid? Is it not so that the more liquid an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby at one point make that asset absolutely illiquid… at absolutely the worst moment?

Wolf suggests: “It would be better if investors appreciated the risks of a freeze in market liquidity in riskier financial assets”. Yes, but one must also argue the importance for regulators to appreciate the risks of a freeze in market liquidity for “safe” financial assets. A freeze of those assets would obviously hurt much more. (Like what happened with the AAA rated securities collateralized with mortgages to the subprime sector)

Wolf suggests: “markets characterized more by longer-term commitments, and less by hopes of finding ‘greater fools’ willing to buy at all times, might be better for most of us. This will not be true for all assets — notably government bonds. But it will be true for many private instruments”. Indeed, more long-term commitments could be good, but why does Martin Wolf believe that government bonds could never become a dangerously overpopulated safe haven in which we all got stuck gasping for oxygen? Is it ideology?

Of course dangers surround us, our financial markets and our banks, all the times; many more than credit and lack of liquidity risks. To manage those risks I am convinced we are better of being free, in God’s hands, than in the hands of some sophisticated besserwissers suffering immense hubris. But that’s just me.

Does this mean I don’t want any regulations? Of course not! But keeping those simple, and essentially considering the unexpected instead of the expected, would go a long way. The expected always finds a way to take care of itself… though I must admit that sometimes that takes strangers going strange ways and using strange tools.

@PerKurowski ©  J

Technocrats, pouring QEs over clogged financial transmission mechanisms, set us up for the mother of all hangovers.

Sir, Henny Sender puts her finger on what should be of utmost concern for most delegates to discuss during IMF and World Bank meetings next week, namely that “Weak growth suggests QE might not have been worth the costs” April 11.

And Sender is so right remarking on how “odd… is the absence of a vigorous debate about the costs of these experiments, whether in the US, in Japan or now in Europe.”

With their QEs, unelected technocrats are pushing our economies higher and higher up a mountain of risks, for absolutely no purpose. As I’ve written to you Sir, at least a hundred times, if the liquidity provided by these schemes, are not allocated efficiently to the real economy, then absolutely nothing good can come out of it.

But the same unelected technocrats, simultaneously, by means of credit-risk-weighted equity requirements, have clogged the financial transmission mechanism, hindering bank credit to reach where it is most needed, the SMEs and the entrepreneurs. In other words, we are being set up for the mother of all hangovers. Damn those technocrat clowns!

According to the report by Swiss Re that Sender quotes, “US savers alone have lost $470bn in interest rate income, net of lower debt costs”. That is only one of the first symptoms.

@PerKurowski

Europe, having ECB injecting liquidity instead of banks, is indeed a real recipe for disaster or waste.

Sir I refer to Claire Jones’ “Draghi’s go-it-alone style off the menu” November 7.

ECB “has announced that four private sector asset managers will begin buying asset backed securities on its behalf starting this month.”

Why does ECB trust more that will inject liquidity better in Europe’s economy than banks allowed to do so freely without regulatory distortions?

That question reveals the real dilemma. The credit-risk-weighted capital/equity requirements for banks, impede these to allocate credit efficiently and so bureaucrats, whether outsourced or not, who put absolutely no money at risk, have to step in and do the lending.

Europe, that is indeed a real recipe for disaster. In this case it is better for you that ECB sends a small check to each European, for a loan at .1% interest, payable in 20-30 years. Who knows, ECB might even recover more of its money doing so… at least in nominal terms.

PS. Mario Draghi still does what he can to evade his responsibility.

Mario Draghi… you are personally responsible for any ECB liquidity injections in Europe being just wasted away.

Sir, I refer to Stefan Wagstyl’s “ECB presses on with securities plan” September 10.

Mario Draghi, as the former chairman of the Financial Stability Board must be aware that, because of the risk-weighted capital requirements, all those borrowers who have the misfortune of ex ante being perceived as risky from a credit point of view, independently of how important they could be for the European economy, and for European job generation, will not have fair access to bank credit.

And so therefore banks will by means of their credits not be able to allocate any ECB (or fiscal deficit) liquidity injections efficiently to the European economy.

And one of the reasons for why this distortive regulatory lunacy introduced 10 years ago with Basel II survives, is the quite natural but still highly irresponsible reluctance of regulators to admit their mistake.

And that is why, I at least, hold Mario Draghi personally responsible if any ECB liquidity injection in Europe is just wasted away… and this even though he might not care one iota about it, as he sure must be surrounded by so many other who support his ego by daily reaffirming his magnificence.

Though aspirin might temporarily lessen the pain, we need a cure

Sir, Martin Wolf believes that it is gentler for the society to have artificial low rates and illusory asset values than adjusting to higher interest rates and more real asset values “Why we have to live with low interest rates”, December 10. He is right inasmuch as the sacrifices are spread out over a longer period, but not necessarily in that the accumulated sacrifices will be less… for instance if the sovereign bubble that pays for the lower interest rates bursts, and takes the currencies down.

What we need to be doing is finding ways to really grow out of the mess and that will just not happen while we insist on using capital requirements for banks that, on top of the risk-premiums already charged by the market, add an arbitrary layer of discrimination against perceived risk of default.

For instance at this particular moment hundreds of billions of bank liquidity are painted into the corner of the bank balances which does not require capital, namely the lending to high rated governments, and no matter how much everyone wants it to happen, that liquidity cannot be translated into loans to small businesses or entrepreneurs, because that would require bank capital for which there is currently no real appetite.

It is truly sad to see that though small businesses and entrepreneurs could help us to get out of the doldrums, there are many influential persons who seemingly prefer that to be a task for government bureaucrats alone.

The originally “risky” are being diabolically squeezed

Sir Gillian Tett in “Pipes remain clogged even as liquidity is pumped in” August 7, writes that “now most banks seem unwilling to use spare liquidity to engage in activity that regulators or shareholders might deem risky”. This is not surprising, anything risky requires more regulatory capital, and the banks have more than enough with all their currently outstanding loan and investments that require more capital when they are downgraded, and so even though the banks have liquidity they cannot afford more risky business.

This is placing an excruciating squeeze on the weak and more risky clients of the banks, because even if these are performing much better than the originally “risk-free” banks might choose to liberate capital by getting rid of these exposures without booking losses so as to be able to keep on the books AAAs turned into junk and that if sold would hit the banks harder.

Also let us not forget that the capital requirement for any investment in an AAA rated public instrument is 0%. In all, with their minimum capital requirements for banks based on risk, the regulators have created a monster.

The one and only focus of Basel is risk-adverseness

Sir John Plender in “Let’s not forget to mention liquidity risk at the Basel round” October 10, though having good intentions gets it wrong, when he says that “the focus of banking supervision has become biased towards capital at the expense of liquidity” as he confuses goals with instruments. The one and only focus of the Basel banking regulations has been to drive out the risks from the banks and for which purpose they decided to use the minimum capital requirements instead of what Plender now seems to suggest some Basel ordered minimum liquidity requirements. The sooner we accept the truth that what Basel has managed to do is to have the risks hide out in the undergrounds, such as Special Purpose Vehicles, or in other dimensions, such as sophisticated instruments impossible to value, the better chance we have of coming to grips with reality. We need also to remember that any nation that decides making risk-adverseness the primary goal of their banking system will place itself voluntarily on the way down. The saddest part is that even developing countries fell in the trap of calling it quits.