Why do bank credit’ surpluses and deficits not attract the same concerns as does trade’s surpluses and deficits?

Sir, Martin Wolf writes: “What is frightening about the trade agenda of the administration is that it manages to be both irrelevant and damaging. A relevant agenda would focus on the imbalances in savings and investment across the world economy” “Dealing with America’s trade follies” April 19.

Of course Wolf, like IMF among others, is right to be concerned with growing trade protectionism. What I can’t understand is why he, and IMF among most others, is not at all concerned with the consequences of financial protectionism?

I ask because the risk weighted capital requirements for banks are just like any other sort of tariff. It benefits some, and hurts other… in all it dangerously distorts the allocation of bank credit to the real economy, for no good purpose at all, as it does not promote financial stability, much the contrary.

In November 2004 FT published a letter titled “Basel just a mutual admiration club of firefighters seeking to avoid crisis” In it I wrote: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Of course there I was referring to the fact that the Basel Committee had decreed that the sovereigns were safer than the private sectors on which usually the sovereign depended.

Could the problem be that Wolf does not understand that allowing banks to leverage their equity (and the societal support they receive) differently for different assets distorts?

Or is it that Wolf, and the IMF, also belong to that admiration club and therefore dare or cannot breakup with its own groupthink?

Here again a link to some questions the members of such special club refuse to even acknowledge

PS. If I am obsessed with the risk weighted capital requirements for banks, which I am, then Martin Wolf must be just as obsessed with his “macroeconomic imbalances”.

@PerKurowski

0% sovereign & 100% SMEs risk weights, implies public bureaucrats use bank credit better than the private sector.

Sir, you write: In 1986, New York’s parks department had failed to rebuild the Central Park ice skating rink, despite spending $13m and six years on it. Mr Trump offered to get the job done for $3m. The mayor accepted. The project was completed in six months and under budget” “Why business cannot make government great” March 29.

So, if the building of the ice-skating rink were financed, the public sector would have needed way over $13m in finance to build the Central Park ice-skating rink, and the private sector perhaps less than $3m.

And yet, regulators, when deciding how much capital banks need to hold, those $13m of the public sector, if financed by banks, would be assigned a 0% risk weight while, if $3m was lent to the not-credit rated private sector, that would have to carry a risk weight of 100%.

That would allow banks to leverage much more their equity with loans to the public sector than with loans to the private sector; which allows banks to earn higher expected risk adjusted returns on equity when lending to the public sector than when lending to the private sector; which translates into banks lending more to the public sector than to the private sector than what would have been the case in the absence of these regulations; which de facto means the regulators must think government bureaucrats are able to use bank credit more efficiently than the private sector.

Sir, since you have decided to keep mum on the extreme statist character of current bank regulations, it seems you opine the same.

You write: “Good government is efficient. It is also equitable and transparent and accountable to the broad electorate”. I ask, are the current discriminatory risk weighted capital requirements for banks that so much favor the sovereign “equitable and transparent and accountable to the broad electorate”? The answer must be a resounding NO!

My questions!

@PerKurowski

“In a world where debt overhang holds growth back for years” what could happen to the safety of “safe assets”?

Sir, David Oakley writes about the possibility that “QE will only properly end when all the bonds purchased mature”. And “For fund managers, it means government bonds may have a more lasting appeal as yields remain lower for longer because of an underlying demand for safe assets in a world where the debt overhang holds growth back for years.” “We are the QE generation, and it is quite a burden” February 1.

But a more relevant question could be: “in a world where the debt overhang holds growth back for years” what could happen to the safety of those “safe assets”?

Here we are with central banks sitting on a great portion of sovereign bonds they cannot retire without affecting the market too much; while at the same time they fix the risk-weight of these bonds, for the purpose of the capital requirements for banks, at zero percent, while that of those who are the only ones who could help growth, the private sector, has a risk weight of 100 percent. Is that not an example of sheer human lunacy that has us begging urgently for some artificial intelligence to bail us out?

@PerKurowski ©

Was the US Office of Strategic Services’ “The Simple Sabotage Field Manual” used by the Basel Committee?

Sir, John Kay refers to “The Simple Sabotage Field Manual — produced in the second world war by the US Office of Strategic Services, a forerunner of the Central Intelligence Agency — was designed to illustrate how, at little risk to themselves, saboteurs in occupied territories could damage organisations.” “Absurd roots of modern regulatory practice” December 23.

When we see how some few bank regulators, apparently with absolutely no risk for themselves have, by means of credit risk weighted capital requirements, managed to distort the allocation of bank credit to the real economy in most of the world, we could ask whether that field manual fell into the hands of the Basel Committee for Banking Supervision, and about that committee’s intentions.

And when Kay refers to FM Cornford’s procedural rules as an instrument to silence any objection and to “obscure troublesome considerations… and relieve the mind of all sense of obligation towards society”, then we might understand better the continuous rule expansion in Basel II, Basel III and those Basel’s still to come.

Frankly, nothing has sabotaged more our economies than Basel Accord's Basel I’s risk weights of zero percent for the sovereign, and 100 percent for the private sector. To me that was an act of statist regulatory terrorism. I am sure most members in the Basel Committee did it unwittingly… but, frankly, all of them?

@PerKurowski ©

FT, be brave, confess, is it not that not so deep down in your heart you all carry a little statist agenda?

Sir, I refer to Elaine Moore’s “Sovereign borrowers fall behind on record sums of debt” September 6. Indeed, and as long as bank regulators insist in their pro-government borrowing bias, it is only going to get so much worse

Anyone who believes that with regulations such as those derived from the Basel Accord in 1988, which assigned a risk weight of zero to the sovereigns of G20 and a risk weight of 100 percent to the citizens of the G20, would not sooner or later result in much excessive sovereign borrowings, is ether blind, dumb, or pushing a statist agenda.

In a letter published by FT in October 2004 I wrote: “We wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

And in a letter published by the Washington Post in December 2009 I wrote: “Your Dec. 20 Outlook compilation of the decade’s worst ideas did not include the one most to blame for the loss of most of the past decade’s growth: regulations that allowed banks to hold absolute minimums of capital as long as they lent to clients or invested in instruments rated AAA, for having no risk. This launched a frantic race to find AAA-rated investments wherever and finally took the markets over the cliff of the subprime mortgages.

The most horrific part is that it seems likely to endure because regulators can’t seem to let go of this utterly faulty regulatory paradigm. Let me remind you that banks are allowed to hold zero capital when lending to sovereign countries rated AAA and that there are already many reasons to think that the credit quality of many sovereign states has been more than a bit overrated.”

Sir, on the subject of the distortions produced by these regulations, since you published my letter in 2004, not only has the Greek tragedy taken place but you have also ignored way over a hundred letters I have written to you on it. Should I guess that is because not so deep down in your FT heart you all carry a little statist agenda?

@PerKurowski

FT, have you envisioned that in the future you might now have to apologize Japanese style for your omissions?

Sir, you write “The FT has thrived, and continues to thrive, in an age of global economic interdependence defined by the free movement of capital, goods and people and instant digital communication”, “A new future for the FT, without fear or favour” July 26.

What free movement of capital? Is not bank credit one of the most important means by which capital moves around? And when bank regulators allow banks to leverage more on some assets than on other, based on perceived credit risks, something which clearly distorts the allocation of bank credit, is that not a capital control?

Let me recap for you what I have been arguing for over a decade, for now with over 1.900 letters to you, and which have basically been ignored. 

Regulators first decided that banks should hold 8 percent in capital against asset… no problems with that. But, in 1988, with the Basel Accord (Basel I), in order to determine how much of that basic capital banks should hold against different assets, regulators set the risk weight for loans to the governments of OECD at zero percent, and the risk weight for loans to the private sector at 100 percent.

That meant banks could lend to governments against no equity of their own (8% x 0%), and had to hold 8 percent (8% x 100%) when lending to the private sector. What did that mean?

That meant banks could leverage their equity and the support they received from tax payers, like with deposit guarantees, unlimited times when lending to governments, and only 12.5 times to 1 when lending to the private sector.

That meant banks could obtain much higher risk adjusted returns on equity when lending to governments than when lending to the private sector, or; that the dollars in net interest margins paid to banks by governments are worth much more than the same dollars paid to banks by the private sector.

And that meant banks lend more and at lower rates to governments, and less at higher rates to the private sector, than what they would relatively have done in the absence of these regulations.

That implies bank regulators believe governments present less credit risk than the private sector… as if governments do not depend on the private sector… as if governments don’t default in so many ways, like for instance by means of inflation, requests for higher taxes or outright haircuts.

And of course that must mean regulators believe government bureaucrats can use bank credit much more efficiently than the private sector.

Now why on earth would regulators believe such crazy things?

They might be communists or statists, or it all might just be some good old hanky-panky scheming going on between bureaucrat and technocrat colleagues.

Whatever, they are surely sinking our economies and we should absolutely not bet our children’s future on such bank regulations.

And why on earth should a newspaper like FT who proclaims itself without fear and favor, keep mum on something extremely important like this? I dare you to answer that.

Sir, have you envisioned that in the near future you might now have to apologize for this omission in Japanese style?

@PerKurowski

Europe hangs on to blissful ignorance about Greece’s tragedy. Its prime cause was not something especially Greek.

Sir, Philip Stephens argues that Greece exiting the euro would be more costly for Europe than helping it to hold “Europe will pay the price for Greece” July 10.

You know my opinion: Europe is unwittingly already paying the price Greece is paying, by holding on to senseless bank regulations that will only guarantee the dangerous overpopulation of safe havens, and the equally dangerous under exploration of risky but more rewarding beaches.

That is what you get when, instead of capital requirements for banks based on something that could be good, like jobs or like sustainability, you just base them on banks avoiding what is ex ante perceived as risky; and this even when you should know that banks would only go where it is perceived as risky, if risk-premiums are high enough and their exposure limited.

And again I can hear you say: “Nonsense, the crisis resulted from banks taking too much risks?”

And again I ask you: Sir, I dare you to identify just one bank asset that significantly contributed to this crisis, and against which banks were not allowed, by the regulators, to hold very little capital (equity), because it was ex ante perceived as safe?

Those regulations, which so dangerously distort the allocation of bank credit, are weakening the economies. Greece’s economy has already defaulted, too much credit to the public sector and too little to the private sector, if it is not housing.

Europe, dare to hear the truth about Greece! It was not the Euro either! 

@PerKurowski

Less trust in the Greek government has a great silver lining we can only hope lasts long enough.

Sir, Peter Spiegel writes: “Trust is so broken several eurozone officials say even if Greeks defy Mr Tsipras and vote Yes tomorrow, they may be unwilling to deal with his government to negotiate a new bailout.” “Trust evaporates after bewildering week” July 4.

Between June 2004 and November 2009, with Basel II, the regulators in the Basel Committee allowed banks to lend to the Government of Greece against only 1.6 percent in capital, which implies an authorized leverage of over 60 to 1 when lending to Greece… and if that is not an outrageously excessive trust what is?

And since banks were required to hold more capital when lending to the Greek private sector that also implied regulators believed Greek government bureaucrats could use bank credit more efficiently than the private sector… and if that is not complete lunacy what is?

The excessive trusting of Greek governments caused the current tragedy… and so less trust in its government cannot really be too bad. Let us hope that distrust lasts long enough for the Greek citizens to have a chance to rebuild their own country.

That said, the citizens of all other countries must also beware when Basel Committee brings gifts to their own government bureaucrats.

Yes Tim Harford, where are the independent bank regulator robots when we really need them?

Sir Tim Harford writes: “bored with blaming bankers, we blame robots too, and not entirely without reasons. Inequality has risen over the past 30 years” “Man versus machine again” March 14.

But Tim Harford ends asking: Where are the robots when we need them?

I agree. Robots would never ever have come up with something like the Basel Accord, which, in 1988, decreed that banks were required to hold 8 percent in equity when lending to the private sector but 0 percent when lending to central governments of OECD countries.

Reasonably designed robots, not preprogrammed by statist or communists, would know that the last thing they could do while regulating banks, was to distort the allocation of bank credit to the real economy.

@PerKurowski

Lord Turner, if a helicopter is to drop money, then drop it on the citizens, who are those who will have to pay for it.

Sir, not only does Bank of England buy huge amounts of government bonds; and banks do not need to hold any equity against these bonds, so they are also big buyers; and new bank liquidity requirements will also favor them holding sovereign instruments.

But now Lord Turner, to top it up, also wants to make a Friedman helicopter drop of money, on the government, on its bureaucrats, to finance a special one shot deficit, “Print money to fund the deficit – that is the fastest way to raise rates” November 11. He really must adore government!

By the way this is not the first time Lord Turner speaks about this drop.

I have no problem with the concept of a helicopter drop (I have a gold hedge) but, if something goes terribly wrong, and run inflation results, it will be the poor who suffer the most. And so I would suggest dropping that money directly on the British citizens.

Lord Turner explains the “current mess” in terms of “excessive private sector credit growth”. Indeed, but let us not forget that, as a bank regulators, by allowing the outright stupid credit-risk-weighted capital/equity requirements for banks, was himself much guilty of that. 

That regulation caused banks to leverage their equity to the skies; completely distorted the allocation of bank credit in the real economy, and, by favoring “the infallible” and discriminating against “the risky” is also a driver of growing inequality. 

And we are to trust them?

PS. If we know that inflation is primarily a tax on the poor, then why is deflation so bad for the poor?

Greece, as any nation, is represented by is the sum of its public and its formal and informal private sector.

Sir, Martin Wolf in “Time for common sense on Greece” June 22 makes a clear case for why common sense should not be delayed more than it already has. Even the argument that he qualifies as “right” namely that there is a “net transfer of resources into the Greek public sector” is doubtful if the Greek public sector does not merit such transfer.

A World Bank report states “it has been reported that Greeks already hold EUR 250bn in Swiss banking accounts and that the private-wealth capital outflow from the country is ongoing.” If we were just to suppose that all that private money is invested in public sector debt of Germany and France, and that the banks of Germany and France hold that same amount in Greek public sector debt… the question of who is better off in the case of a Greek public debt default, becomes a truly debatable one, since a nation is, at the end of the day, the sum of the public and the formal and informal private sector.

I mention this since in my country, Venezuela, I witnessed how foreign banks in the late 70s and early 80s trampled on themselves in order to lend to the Venezuelan government and, what finally saved the nation, was that the private Venezuelans did not believe in such nonsense and kept their money in safer overseas investments.