If regulators keep on regulating as bad as now, will it really help much to ringfence the banks?

Sir, you write: “By the start of 2019, Britain’s largest lenders will need to put their retail banking units inside a heavily capitalised subsidiary, protecting them in case the group fails.”, “Ringfencing will help in the next banking crisis”, January 10.

Do you really think that as long as government/tax-payers are not exposed to having to pay for a bank crisis, then its effects are smaller? If so, why did you not say so before lending support to governments and central banks, on behalf of unwilling or at least un-consulted taxpayers, with Tarp and QEs and similar paying out so much to alleviate the last crisis?

You refer to the Vickers Commission with admiration I do not share. In June 2015, in one of my thousands of ignored letters to you, when commenting on one of Martin Wolf articles I wrote: “The number one priority for any bank regulator, long before thinking about ring-fencing and similar “safety” devices, is to make sure the allocation of bank credit to the real economy is not distorted. To look for banks to be able to survive in shining armor in the midst of the rubbles of a destroyed economy is just insane.”

Sir, I’ve seen very little rectification coming out from bank regulators. Worse yet, the few correct movements they have done in moving towards simpler leverage ratios, because they kept in place some risk-weighting element, have in fact, on the margin, only increased the distortions in the allocation of bank credit to the real economy.

FT, in this matter of Basel’s bank regulations, you are so behind the curve. As is, I am almost tempted to say: “No ringfencing, let the banks run loose, with no supervision!”

@PerKurowski

To think credit-risk weighted capital requirements for banks are compatible with efficient flow of credit is loony.

Sir, Martin Wolf, in reference to “the financial crises that hit western economies in 2007” writes: “This is the fourth most costly fiscal event of the past 225 years… Mismanaged finance imposes fiscal costs that are not far short of world wars.” “Indispensable banks need a sturdy ringfence” June 26.

Wolf, as most other, is fixated on the “event”, on the explosion of the financial crisis. By doing so he fails to give sufficient attention to the build-up of pressures that caused the explosion, namely the misallocation of bank credit.

What set up the crisis of 2007? Regulatory distortion. Regulators allowed that which was perceived as safe to be financed against less bank equity; thereby permitting banks to obtain higher risk adjusted returns on equity on those assets; therefore causing too large exposures to what was perceived as safe.

From this perspective the “fiscal costs” Wolf refers to, could be seen as the reversal of fiscal income that should never have been earned… e.g. property taxes on properties artificially valued too high.

The number one priority for any bank regulator, long before thinking about ring-fencing and similar “safety” devices, is to make sure the allocation of bank credit to the real economy is not distorted. To look for banks to be able to survive in shining armor in the midst of the rubbles of a destroyed economy is just insane.

The Independent Commission on Banking, of which Wolf was a member, listed among its objectives in its Report (The Vickers Report) to “efficiently channelling savings to productive investments”; and yet it recommended “Ring-fenced banks with a ratio of risk-weighted assets (RWAs) to UK GDP of 3% or more should be required to have an equity-to-RWAs ratio of at least 10%. ”

The members of the ICB, and other regulators too of course, believing that credit risk-weighted capital requirements is in any way compatible with maintaining the efficient flow of credit to the economy, simply evidence they do not know what they are doing.

For the umpteenth time: Banks, primarily by means of risk premiums and size of exposures, already clear for perceived credit risks. To require banks to also adjust for perceived risk in their equity guarantees the system to malfunction. That which is perceived as “safe” will get too much credit at too low rates… that which is perceived as “risky” will get too little credit, or no credit at all, at too high relative rates.

If anything the risks to be considered is the risk of banks being able to manage the credit risks they perceive.

Bank equity requirements should foremost be a buffer against unexpected losses, and unexpected losses has nothing, zilch, zero to do with perceived risks… except perhaps that the higher the perceived risks are… the less room there is for unexpected losses.

Sir, more than anything we need to get regulators who know what they are doing, and who are much humbler about their own capacities.

@PerKurowski

You cannot ring-fence banks to live safe, in a vacuum, independent of the real economy.

Sir, Michael Barr and John Vickers argue that “Banks need far more structural reform to be safe” July 22, but as most navel gazing regulators, they seem to think banks could remain safe, as in a vacuum, effectively ring-fenced, independently of how the real economy is doing. Banks are more than some beautiful fishes to be looked at in an aquarium.

And in that respect, as long as ex-ante perceived risk of assets will allow for different capital requirements for the banks holding different assets, these will earn much different expected risk-adjusted earnings on their equity on different assets; which results in than the banks stand no chance of being able to efficiently allocate resources in the real economy; which results in that the real economy will falter; which will results in that banks, at the end of the day, are made unsafe, in a terminal way.

No way Jose! Don’t come with you being a macho man now FT

Sir, in your “Slow but certain progress on banks”, February 5, you write “Being timid is riskier than being bold”. Frankly for someone who has so stubbornly refused to admit my arguments that the introduction of capital requirements for banks based on perceived risks dangerously exasperated the timidity that has always existed in banks, and taken away much of that boldness in bank lending that the real economy needs in order to thrive, you have no right trying to sell yourself now as a sort of macho man. 

Again, what good does ringfencing our banks do if you persist in applying loony regulatory policies within the rings? The whole basis of current Basel bank regulations is precisely giving the banks incentives to go excessively for what is perceived as safe and to stay away, excessively from what is perceived as risky; like paying Columbus to explore his bathtub instead of go looking for India, and as if staying in your bathtub, all the time, does not also entail serious risks. 

You write “A reset requires changes in attitude as much as rules” Absolutely! The attitude reset which is most needed is that of the regulator’s, and so that they stop favoring with their regulations “The Infallible”, those already favored by bankers and markets, and stop discriminating with their regulations against “The Risky”, those already discriminated against by bankers and markets.

Mr. Bank Regulators “Tear down that wall!” or that electrified ringfence

Sir, Andrew Tyrie, the chairman of the parliamentary commission on banking standards, argues well to “Electrify the ringfence to shock banks into real reform” January 28, and I like his call for “rebuilding trust in the banks and restoring pride among their employees”.

That said the best way forward to rebuild the banks though, is for the regulators to trust banks and immediately stop interfering with what banks do, by means of imposing capital requirements, and now also liquidity requirements, which are based on an ex ante perceived risk, and mostly as perceived by others, the credit rating agencies.

In fact there is a high voltage electrified wall or fence that needs to be taken down. And I refer to the one which imposes on banks much higher capital requirements on exposures to “The Risky” than to exposures to “The Infallible”. That wall has forced the banks to avoid having relations with for example small and medium businesses and entrepreneurs, and instead indulge in relations with “The Infallible”, to such a degree that we can notice evidence of clear degenerative incest, now especially between the banks and the infallible sovereigns.

Tyrie mentions the bank's lobbying strength, and this can indeed be a big problem. But it would be much more useful if he helps those without a voice, those already being correctly discriminated against by the banks, "The Risky", not having also to be discriminated against by bank regulators. As is "The Risky" those actors who on the margin are the most important for the real economy, get much less access to bank credit and have to pay much more interest rates only because of these regulations. Mr. Tyrie help to tear down that wall! 

PS. Anyone building a wall must always be aware of that he might end up on the wrong side of it. In this case, bank regulators ended up on the side of "The Infallible", precisely those who always cause a bank crisis, because as they should have known those perceived as "The Risky" never do.