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

In terms of creating systemic risks for our banking system, current regulators are the undisputable champions

Sir, former banker and banking lawyer Martin Lowy writes: “Dodd-Frank and Basel III capital rules have made banks and their holding companies stronger.” “How the next financial crisis won’t happen”, June 10

Well I sure know that the next financial crisis will absolutely not be the result of excessive bank exposures to something perceived as risky, as to what is rated below BB-, that to which regulators assigned a risk weight of 150%. Much more likely it will be from excessive exposures to something rated as safe as AAA, that to which regulators only assigned a meager 20% risk weight.

Really big bank crises, except from really extraordinary unexpected events, are the result of the introduction of something that can grow into a systemic risk.

What systemic risk do I see?

I see credit ratings, like when in 2003 in a letter published by FT I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is”

I see risk weighted capital requirements, like those that allow banks to leverage more with what is “safe” than with what is “risky”., and therefore distorts, for no good reason, the allocation of bank credit to the real economy.

I see standardized risk weights that impose a single set of weights on too many.

I see regulators wanting to assure that banks all apply similar approved risk models, thereby again ignoring the benefits of diversification.

I see stress tests by which regulators make banks test against the some few same stresses, as if real stresses could be so easily identified.

I see living wills, as perfectly capable to create systemic risks that at this moment are hard to see.

In all, in terms of creating dangerous systemic risks, hubris filled bank regulators aee the undisputable champions.

The main cause for that is that our bank regulators find it more glamorous to concern themselves with trying to be better bankers, than with being better regulators.

Regulators, let the banks be banks, perceive the risks and manage the risks. The faster a bank fails if its bankers cannot be good bankers, the better for all.

Your responsibility is solely related to what to do when banks fail to be good banks.

And always remember these two rules of thumb:

1. The safer something is perceived to be, the more dangerous to the system it gets; and the riskier it is perceived, the less dangerous for the system it becomes.

2. All good risk management must begin by clearly identifying what risk can we not afford not to take. In banking the risk banks take when allocating credit to the real economy is precisely that kind of risks we cannot afford them not to take.

As in 1997 I wrote in my very first Op-Ed. “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, but presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

@PerKurowski

Fed needs to make up its mind fast, because now it is really creating confusion about the banks.

Sir, I refer to Gina Chon’s and Tom Braithwaite’s “US and European lenders raise fears over ‘living will’ cash reserve demands” November 4.

In it is reported that banks that face a liquidity crunch can currently tap the discount window as part of the Federal Reserve’s lender of last resort programs, but, that in the process of preparing their ‘living-wills’, they have been told not to assume continued access to it.

What? The Fed now allows banks a 5% leverage ratio, which implies a mind-boggling 20 to 1 authorized leverage of equity… and yet now they want to retire their lender of last resort support? It better makes up its mind fast… because now all we others are becoming really confused. If we are not able to count on big strong Fed to help out, then there is no way we small weaklings can allow banks to leverage that much.

SEC, FDIC Worry less about bank´s living wills and more about how banks live!

Sir, Lex reports on the Fed and FDIC wanting “Bank’s living wills”, August 9.

Not only do I find bank living wills somewhat preposterous, as it would be up to the inheritors to decide what to do, not to those administrators of a bank that when a collapse might occur might have de facto been proven very bad.

And, what if the SEC and FDIC do not like the wills… will they pressure the banks so much that they might collapse because of that?

No, much more important than what happens to banks when they are gone is what they do when they are alive and kicking… and now, thanks in much to the distortions created by the regulators with their risk-based capital requirements, the banks are not allocating credit efficiently. And… excuse me, that´s a far more serious problem.

Are not living wills for banks’ just a nonsensical show to show off that something is being done?

Sir, Gina Chon and Tom Braithwaite report that Fed and FDIC demand better unwinding plans and are split over possible penalties “US rejects bank’s living wills” August 6.

And FT defines on its site those living wills as “Detailed plans that would enable banks to stipulate in advance how they would raise funds in a crisis and how their operations could be dismantled after a collapse”.

Frankly is not the whole concept of living wills for banks’ designed by the bankers themselves after a collapse just a show to show that the regulators are doing something?

I mean if I was a regulator, and wanted to go down that route, I would at least have a third party to look into what could be done in the case a bank passed away, and now and again confront the managers of the bank with those plans, in order to hear their opinions.

For instance there is a world of difference between a living will where the dead are going to be the own executors of the will, and one in which the dead will be dead and others will take care of the embalming.

And talking about that is it not the Fed or the FDIC that should state what contingent plan they really want… one where the bank is placed on artificial survival mode, and for how long, or one where it is sold in one piece, by pieces or even cremated?

To me it would seem that the Fed and FDIC need to give much clearer instructions about what they want those bankers currently working under the premise the bank will live on forever to do… as I can very much understand them being utterly confused.

Is it not more important to make sure we would want to send our banks flowers?

John Gapper in “Where there’s a will there’s a way” September 24 discusses the issue of having banks draw up their testaments, a will, so as to make their possible disappearance a more orderly affair.

Of course all that sounds so very neat and tidy and reasonable but frankly, before discussing their funeral arrangements should we not give a little bit more thought on how the banks are supposed to live their lives? I mention this since in all the 347 pages of the bank regulations known as Basel II there is not one single phrase, much less a paragraph that has anything to do with establishing a purpose for our banks.

http://www.bis.org/publ/bcbs128.pdf

Madame Guillotine could be better than assisted euthanasia

Sir, Martin Wolf is absolutely right when in “Do not learn the wrong lessons from Lehman’s fall” September 16 he writes that “No normal profit-seeking business can operate without a credible threat of bankruptcy”. But then he goes into some mumbling about living-wills and assisted euthanasia and though it sounds kind and gentle both these alternatives start when it might already be too late, and so we should not forget that what we could really require is for Madame Guillotine to enter swifter into action.