How naïve were we when regulators told us “We will risk weigh the capital requirements for banks to make these safer for you”?

Sir, Simon Kuper in reference to Brexit writes “It’s hard now to fathom how naive we were in 2016. I thought…you couldn’t just stick a false slogan on your campaign bus, could you? “Trust, lies and videotape” October 20.

Sure you could! Like when or bank regulators told the world that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, and the world, including Simon Kuper, and the Financial Times, believed that to be true.

Kuper holds the popular gold standard of truth being, “I saw it with my own eyes.” Well not in this case! 100% of the assets that caused the 2007-08 crisis were assets that because these were perceived as safe, allowed banks to hold especially little capital, and that has yet to even be formally noticed.

Kuper quotes Umberto Ecco: “The genuine problem . . . does not consist of proving something false but in proving that the authentic object is authentic.”

Yes, like the problem I have had surpassing that seemingly unsormountable barrier of “what is risky is risky”, in order to warn regulators that what is “safe”, is even more dangerous… at least to our bank systems.

@PerKurowski

That banks have strengthened is pure wishful thinking, as most of it is the result of weakening the real economy.

Sir, Brooke Masters’ writes: “Eight years after the financial crisis, we were all getting bored with bank stress tests. Most of the institutions are so much stronger and better capitalised than they were” “UK’s tough stance on banks contrasts with global mood” December 3

That’s not really so. Most of the strengthening is the result of banks shedding “risky” assets in favor of safe, so the other side to that coins is having in the medium and long term run made the real economy weaker.

As I have complained about for years, current stress tests only look at what is on the balance sheets of banks, ignoring completely the aspect of what should have been there.

With respect to “imposing “output floors” on the models. These would effectively raise capital requirements for some banks by pushing up the value of their risk-weighted assets”, the real question is, how could regulators be so naïve so as to think those risk models were not going to be tweaked? Lower risk determination, means lower capital requirements, means higher leverages, means higher expected risk adjusted returns on equity.

With respect to “floors unfairly penalise banks with unusually safe assets, such as those who keep a lot of low-risk mortgages on their books”, the question is when will banks keep on favoring the “safer” construction of basements were the jobless young can live with their parents over the “riskier” lending that could allow the young to find the jobs they need in order to become responsible parents too?

Sir, you want strong banks? Keep them on a tight capital leash without distorting what they do? You want weak banks? Make them operate only in what is safe and help them with their returns on equity by being very accommodative allowing high leverages.

@PerKurowski

Like bank-managed risk based capital models, should children also set the nutrition values that determine their diet?

Sir, James Shotter writes about differences of opinion between American and European bank regulators, with respect to allowing big banks to use their own risk models to help determine how much capital they should hold. “Bank rules benefit only US, says Deutsche chief” November 19.

Sir, knowing that banks have huge incentives to reduce the capital they need to hold, in order to by means of higher leverages obtain the highest returns on equity possible, that is perhaps the greatest, but far from the only display of naiveté by the Basel Committee and the Financial Stability Board.

It is like allowing children to set the nutritional values that will determine their diet like for chocolate cake, ice cream, broccoli and spinach.

In this discussion the relevant question is: “European regulators, do you believe European banks to be genetically or by some other reason more disposed than US bankers to resist the temptation of high returns on equity and bonuses?”

If the answer is “Yes”, so be it, and then the market will evaluate that answer. My bet is that the market will long-term prefer better capitalized banks… as well as trusting more regulating nannies that trust less the children in their care.

“Valdis Dombrovskis, the EU’s financial regulation chief, said… he would not accept changes that significantly increased how much capital European banks had to hold.”

Is that so? Does he really want US banks to become stronger than the European under his watch?

Clearly there is a conflict between wanting the banks to hold more capital with wanting the banks to also serve the credit needs of weak economies. But there are ways to harmonize, like grandfathering any changes in the capital rules meaning leaving them as is for all the current assets of banks, and, for instance, applying a fixed 8 percent capital requirement for all new assets.

@PerKurowski

Can accounting really be allowed to base itself on known fictions?

Sir it is with amazement I read Barney Jopson, Benedict Mander and Miles Johnson reporting on how “Venezuela devaluation dents big companies”, February 12.

I understand the locals are prohibited from even thinking in terms of a different foreign exchange rate than what the current oilygarchs in power allows them to, though even so, most of them do, at least in the shadows.

But that grown-up foreign companies hang on to a rate that drives only a part of the economy, and have not created reserves to cover for this and other adjustments of the fx fiction to come, is astonishing. It sort of falls in the same category of naiveté as bank regulators believing that an AAA to AA rating has so little implicit risk so that they can allow banks to leverage over 60 times to 1 on such exposures.

Honestly, something is terribly wrong if auditors can ok balance sheets based on a known Bs. fiction.