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.

The Financial Stability Board, like the Basel Committee...is to “minimize disruption”? Fat chance!

Sir, you write “the FSB should not shy away from making markets safer. But it should try to minimise disruption along the way”, “Making repos safe: Financial Stability Board seeks shadow banking rules” September 2.

Fat chance, neither the Financial Stability Board, nor the Basel Committee, care one iota about how they distort. Just look at how they so blithely ignore that their capital requirements for banks, which causes to provide the banks with different risk-adjusted returns on equity for different assets, has distorted all common sense out of the allocation of bank credit in the real economy.

And here, for the repo market, the FSB now wants to impose a minimum .05 percent haircut for corporate debt securities with maturity of less than a year – and a 4 percent haircut on longer term securities. Why the discrimination? In general terms of stability, what is wrong with long term debt?

The Financial Stability Board, one of the Great Distorters, goes at it again

Sir Brooke Master and Tracy Alloway write about how the Financial Stability Board is focusing on securities lending, like the “repo” market. “Shadow banks face fresh limits to trading” August 30.

The FSB wants to impose: “a minimum .05 percent haircut for corporate debt securities with maturity of less than a year – so a $100 security could be used to raise $99.50. Equities and securitizations made up of debt with durations of five years and longer would be hit by a 4 percent haircut” allowing consequentially these latter only to be able to raise $96 for each $100,

Here one of the great distorters goes at it again. Do they not understand that by differentiating between short and long term they are distorting how the markets will allocate financial resources.

Come on FSB, in general terms of stability, what is wrong with long term debt? In terms of needed liquidity... does not long term debt need that perhaps even more than short term debt?

And I sure hope that Mark Carney, the Bank of England governor, and the FSB chairman, was joking when he called the proposal “an essential first step towards… transforming shadow banking into market-based financing” If not… “Houston we’ve got a problem”