Regulators frightened by innocuous credit risks are concerned with banks worrying about dealing with money launderers.

Sir, Martin Arnold reports on “growing concern among regulators and politicians about increased risk aversion by banks, which have reacted to a regulatory crackdown and a string of big fines for misconduct by severing links with riskier clients”, “Financial task force warns on banks’ approach to de-risking”, November 14.

Sounds like a cruel joke. Regulators who demonstrate huge risk-adverseness based solely on credit risk perceptions, are now expressing concerns with that banks might be to risk adverse when dealings with clients who could fit the profile of money launderers and terrorist financiers.

Europe, it doesn’t matter whether you’re Eurozone or not, EU or individual countries… risk aversion will take you down

Sir, Wolfgang Münchau writes: “Eurozone policy makers face three choices. First, they can transform the eurozone into a political union… Second, they can accept secular stagnation. The final choice is a break-up of the eurozone. As the political union is firmly off the table, this leaves us with a choice between depression and failure–or both in succession”, “Eurozone stagnation is a greater threat than debt”, October 20.

How depressing. But, whether to survive as the Eurozone, or as individual countries, one thing is sure. Europe, or at least some of its nations, must get rid of that risk-aversion which has infiltrated them by means of the credit-risk-weighted capital (equity) requirements for banks. Those are keeping Europe’s banks from financing the future, having them only refinancing a day by day less sturdy past.

I am writing the script for an exhibition at a European history museum… in order to try to change the course of history. It is loosely titled: “When Europe had enough, did not want to chance it more, called it quits, and began to stall and fall”. If the exhibition comes to fruition, articles like this, and many others of FT, will be part of it.

Dumb bank regulatory nannies… talk about a real hazard!

Sir, James Mackintosh in “ECB bazooka faces peripheral tests” writes about ECB’s recent “grand plan to save the euro” and of the moral hazard “that Spain or another beneficiary fritters away the savings from cheaper financing in order to please voters”. 

The hazard of that moral hazard is relatively small when compared to the hazard of having banks regulated by nannies who do not understand what they are doing. 

When a regulator allows a bank to have less capital, only because a borrower is perceived as “not-risky”, he is effectively, de facto, discriminating against those perceived as “risky”, like the small business and entrepreneurs. And, discriminating against the access to bank credit of these so needed “risky” risk-takers is, more or less, a death sentence to our economies.

How to protect EU’s economy against failed bank regulators

Sir, Wolfgang Schäuble’s “How to protect EU taxpayers against bank failures”, August 31, much provokes a “How to protect EU’s economy against failed bank regulators” 

If we are going to have “a truly effective banking supervisor to enforce a robust single rule book on the [banking] sector” then there are some minimum things that need to happen. 

First and foremost, the supervisor needs to be held accountable for what he does, and must always be willing to explain what he considers to be the purpose of the banks, and publicly answer any questions about how his regulations are intend to support the banks achieving it. 

I say this because if the earnings of EU taxpayers are decreased more by bank regulations, than the costs of paying for bank failures, the offered protection would seem somewhat lacking, to say the least. 

And though Schäuble admits that a “supervisor can only be as good as the rules it enforces, he, as most of his colleagues, still shies away from discussing their “light-touch” rules. 

Capital requirements for banks based on perceived risk, and which among others allowed banks to leverage their equity 62.5 to 1 when lending to Greece, but only 12 to 1 when lending to an unrated small business and entrepreneur… is that supposed to be “light-touch”? No, of course not, and it was really the regulators, playing risk-managers for the world, who, as I see it, caused the current crisis. 

Schäuble also writes “Four years and much regulatory work later, financial markets have become a safer place”… What? Is he running for any election? As far as I can see they have not even begun the needed reforms, to make the banks and the economy safer and more functional, as that requires first, of course, to understand and to acknowledge the mistakes they did. 

Amazingly it seems the regulators still believe it was all mostly the fault of lousy credit rating agencies and banker’s bonuses. And so sadly, their ingrained faulty risk-aversion, is still guaranteeing the dangerous overpopulation of any safe-haven, and that our banks will still keep away from lending to the “risky”, like to our small businesses and entrepreneurs.

How can bank regulators think we are going to be safer by overpopulating safe havens?

Sir, Sir Samuel Brittan, August 31, from his desk, urges, “Come on Bernanke, fire up the helicopter engines”, and drop some money on the economy, without it having to go through the banking system. 

What a lovely idea, but, unfortunately, that money would too soon get trapped in the banks, and where current regulations would only make it available, as carbs to those perceived as not risky to grow more obese on, and not to those considered “risky”, like our small businesses and entrepreneurs, as proteins for muscle growth. 

And so, No! Before you do anything, be it QEs, fiscal deficits, or helicopter droppings, make sure you get rid of that silly regulatory discrimination against “risk”, and which is present in the current capital requirements for banks. That discrimination is placed on top of all other discriminations based on risk, and those we know, are not that few, especially in these uncertain times. 

Come on Bernanke, and all you other regulators, we are not going to be safer by overpopulating the currently safe havens… and if there are to be any helicopter droppings, please, be enablers, and make sure these happen over what is perceived as risky land.

Here is when I started, got hooked, on the subject of bank regulations 

My 2019 letter to the Financial Stability Board

Risk-adverseness is also the subject of fashion.

Sir, John Kay asked “Why do we need to pay billions of pounds for big projects” August 21 and I suddenly remembered an anecdote, from some decades ago, which might illustrate one of the causes. 

In Venezuela, after a devaluation of its currency, the Bolivar, I witnessed amazed a CFO of a big multinational covering his company’s Bolivar positions by buying a swap at an absolutely absurd high price, and which de facto guaranteed a much larger loss that anything that could happen leaving that position un-hedged. I asked him why, and this is what he answered: 

“Per I know this is utterly silly, but you have to understand me, if I spend millions of dollars covering this exposure, and that would result in a huge waste of resources, nothing will happen to me, but, if I lose one single dollar, because of a non-hedged FX position, I am out!” 

In a similar way, if a bureaucrat spends millions of dollars more in order to have a reputable name carry out the works nothing happens, but one dollar of loss suffered in the hands of an unknown, that can bring him down… and the “reputable” make it of course their business for this to be well known. 

So you see, not all same risks are equal, even when measured in dollars, or pounds. Risk-adverseness is also the subject of fashion. 

Look at bank regulators, if banks go down, they feel responsible, but, if the economy tanks because of how they try to avoid bank failures, that doesn’t seem to bother them.

Martin Wolf, it is the risk-taking austerity we’ve really got to be scared of

Sir, Martin Wolf writes that “Europe is stuck on life support” February 1, and concludes that only shifts in competitiveness between the members will give the latter the opportunity to survive disconnected. Who would not agree, the issue is how to achieve that. It starts by better understanding what caused this mess we’re in and, in that debate, much more important than discussing the dangers of fiscal austerity, is realizing the dangers of risk-taking austerity.

The banks, courtesy of the Basel regulations and the capital requirements based on perceived risk, have now all been painted into the corner of what is officially perceived as not-risky, and where of course any real shifts in competitiveness do not normally reside.

Take for instance Italy, in many ways it has survived in spite of its governments, and, nonetheless any European bank is currently required to have much more capital when lending to an Italian small businesses or entrepreneur than when lending to the Sovereign Italy.

Mr. Wolf, at this moment, much more than a Heinrich Brüning, who we really must fear, are the sissies in the Basel Committee, in the Financial Stability Board and in the UK’s own FSA.

For fixing finance, start by getting rid of the official risk-weights

Sir, when on markets´ and bankers´ natural risk adverseness, you stack on regulators´ risk adverseness, applying Basel risk-weights, you get too much risk adverseness, which naturally results in excessive exposures to what is perceived as not risky and equally dangerous underexposures to what is perceived as risky… precisely what has caused the current crisis. This is what unfortunately Mr. Martin Wolf cannot or does not want to understand.

When in “Seven ways to fix the system´s flaws”, January 23, Mr. Wolf calls for more bank capital, suggesting a leverage of ten to 1, he just ignores the fact that the higher the capital requirements, the larger will be the distortions produced by the perceived risk discrimination that result from the use of official risk-weights.

US, and the Western World, is becoming “the home of the risk-adverse”.

Sir, I, as most humans, am extremely risk-adverse, and that is why I have always appreciated the role of designated risk-takers that the banks perform for the society. We cowards were used to worry our bankers were too cowards to, with their lending of the umbrella while the sun shines and taking it away when it rains. But then came the bank regulators and with their capital requirements that discriminate fiercely based on perceived risks made it all so much worse. 

Martin Wolf comments on the “Great Stagnation” by Tyler Cowen of George Mason University, December 21. What they both fail to identify is that requiring banks to have a lot of capital when the perceived risks are high, and allowing them to hold minuscule capital when the perceived risks are low, stacks the returns on bank equity against what is perceived as risky. And that has nothing whatsoever to do with what made “the Home of the brave” big. The US is now, as is most of the Western World, becoming the Home of the risk-adverse. 

Not taking risks is about the most dangerous things a society can do… as the only thing that can result from that is the overcrowding of the ex-ante safe-havens

In the name of Europe, America and the Western World, you of the Basel Committee go!

Yes, you wrote to Berlusconi “In the name of God and Italy go!” November 5 and I do not object to even one comma.

But, in the same vein, I would tell all bank regulators even loosely associated with the Basel Committee “In the name of Europe, America and the Western World go! Their treacherous risk avoidance gospel they preach to our banks, if allowed to continue, is going to take Europe, America and the Western World down.

Risk-avoiders can huff and puff but they depend on risk-takers.

Sir, Martin Wolf’s “Creditors can huff and puff but they depend on debtors” November 2, is a great expose on the Janus-faced realities of deficits and surpluses, and also of the too-much-lending and the too much borrowings. 

I just wish Mr. Wolf, and so many with him, could get to understand that precisely the same relation exists between safety-and risk-taking. If the world does not take risks it will not be safe. On the contrary by interfering with their risk-weights based on what they perceived as not-risky they pushed the world into one of the greatest economic crisis ever. 

There is something fundamentally wrong when, for instance a UK bank, is required to have 8 percent in capital when lending to a UK small businesses or entrepreneur, but is (or at least was) allowed to have only 1.6 percent when lending to a sovereign rated like Greece was, which has absolutely nothing to do with the credit rating of Greece being correct or not. 

It really amazes me that Mr. Wolf does not see that risk-avoiders can huff and puff but they depend on risk-takers.

Alan Greenspan, silently fade away, please

Sir, Alan Greenspan writes “Had banks and other financial entities maintained adequate equity capital-to-asset ratios before the 2008 crash, then by definition no defaults or contagion would have occurred as the housing bubble deflated…. Bank management, currently repairing their flawed risk management paradigm…”, “Regulators must risk more to push growth” July 27. What on earth is Greenspan talking about? 

If the regulators, like Greenspan, had not decided that the capital requirements for the banks were to be set in accordance to the perceived risk of default of each individual asset, then those triple-A rated securities backed with lousily awarded mortgages to the subprime sector, and which in essence became to coffin of the housing bubble, would not even have existed. 

Of course any safety buffer comes at a cost, but also, if that cost is not shared equally, the final real cost could go up exponentially. In this case the regulators, by discriminating against those perceived as “risky”, like the small businesses and entrepreneurs, have, just like the Lilliputians tied up Gulliver, effectively tied up the Western World in an arbitrary and defeatist risk-adverseness, and that we must urgently break away from. 

Greenspan, as the other regulators, after what they´ve done and in much are still doing, have no right to sermon anyone about the need of risk-taking. He, for his own good, should just do as old soldier are said to do… silently fade away, instead of hanging around trying to impose on history their version of their Basel-Waterloo. I hold this because in order to understand the real need for risks, you have to be able to understand the real dangers of risk-aversion.

PS. Our loony malfunctioning bank regulations explained in an apolitical red and blue!

The mother of all boundless optimists must be the bank regulator

Sir, John Plender asks “How long before we confront a new financial crisis? Usually a severe shock to the financial system damps risk appetite for some considerable time”, “There are still too many latent triggers of the next crisis”, May 18.  Plender considers that “boundless optimism, excessive leverage and overpriced assets” already places us in “dangerous territory”.

I agree with the conclusion but not with the analysis.  The current crisis was not caused by risk appetite but by regulatory risk-adverseness that stimulated banks to invest excessively in sovereign and triple-A rated securities, and so, a dampened risk appetite, when layered on top of that kind of regulations, can make it all so much worse, so rapidly.

Sincerely if we are to speak about boundless optimists, then the mother of all of them have to be the bank regulators who still arrogantly believe they can manage the risks, by means of imposing their own risk weights on the market… followed closely by those who believe these regulators capable of solving the problems they themselves created. Without any doubt the regulators remain firmly in place as the greatest source of systemic risk

If you account for perfect information twice, you are valuing it imperfectly

Sir, suppose you have perfect credit information… what should you use it for? To set the interest rates you will charge, or to set the capital reserve you should have? If you use that perfect information twice you are valuing it imperfectly. That is the fundamental flaw with the main pillar of the Basel Committee regulations. Because it makes for the same risk information to be accounted for twice, it introduced a totally unwarranted bias in favor of what is officially perceived as “not risky” against what is officially perceived as “risky”.

Unless someone orders that the same interest rate should apply to all borrowers, which I am of course not proposing, then the only valid conclusion is that we must have one sole capital requirement for all lending.

By the way this does not exclude the possibility that the banks need to report what exposure they have to the different official credit risk categories, so as to provide the market a better way to gauge the risk taking of the bank. What happened now, with risk-weighted capital ratios, was that the banks could take on much more risk than what the market (and the regulators) really saw.

If only the Basel Committee had known more about behaviouralism

Sir, Ken Fisher writes: “Humans hate losses more than twice as much as they love gains – a 10 percent loss feels as bad as a 25 percent gain feels good. That´s proven behaviouralism”, “Gridlocked governments are good news for equity”, November 18.

Of course he is right. How sad the bank regulators in the Basel Committee did not consider this when they designed their capital requirements which require higher capital for lending when the perceived risk of default are high, and allows for much lower capital for lending when the perceived risks of default are low. Of course, those regulations, only lent further impetus to the creation of a bank crisis, those which always result from excessive lending to what is perceived as having a low risk, and never result from excessive lending to what is perceived as having no risk.

Start by controlling the blind runaway fear shown by the bank regulators

Sir, Alan Greenspan is absolutely right in that “Fear undermines America’s recovery” October 7. But instead of complaining about market fear and market risk-premiums, he should attack what really caused the crisis and so much stand against us getting out of it, namely that stupidly blind fear that bank regulators showed, when they ordered banks to have 5 times as much capital when lending to small businesses and entrepreneurs, than when lending or investing to anything related to a triple-A rating.

That is the blind runaway fear that first must be controlled.

It was the financial regulator who upset the delicate balance between grasshoppers and ants.

Sir Martin Wolf ends “The grasshoppers and the ants – a contemporary fable” May 26, as all fables should end, namely with a moral, in this case being “If you want to accumulate enduring wealth, do not lend to grasshoppers”. Now since that moral cannot in any way classify as a new moral, the question that begs an answer is how come it was so utterly ignored. Let me explain why.

Our financial regulators, fed up with so many bank failures, got together in something they named the Basel Committee and there, in an incestuous petit committee, decided that it did not any longer really matter whether the banks were lending to grasshoppers or ants, as long as they were lending to those who were most certain to repay. And, in order to make sure that their new regulations were duly carried out they empowered some few human fallible credit rating agencies to decide who were most likely to repay… and created monstrously huge incentives for the banks, in terms of ridiculously low capital requirements, to lend to those deemed absolutely safe by the risk-commissars.

And the risk-commissars, grateful for the opportunity to perform a very profitable service, set out by rating their masters, the most reputable sovereigns, as having no risks… crowning them with their AAAs. And then all sort of crazy things started to happen and which brought total confusion to the markets.

The banks began leveraging up lending to sovereigns and other “risk-free” client, and though this should have resulted in the credit ratings of the banks being cut, the risk commissars measured the willingness of sovereigns to assist the banks if need be, and deeming it to be good kept the ratings of the banks; which then could further lend to super-safe-grasshoppers and super-safe-ants alike. But, unfortunately, since there is a natural scarcity of super-safes, as a good regulator should have known, and there was such an extraordinarily demand for these, the market, being what it is, began supplying some fake subprime super-safes... until the forgery was discovered, much too late.

But, meanwhile, since the lending to all of the small ants, those who in their beginnings of course pose higher risk of default were kept under the thumb of much more conservative capital requirements, it also upset the very delicate world balance between grasshoppers and ants, ending in the current disaster of having too many grasshoppers per ant.

Obama heads in the absolute wrong direction!

Sir Tom Braithwaite reports “Obama to renew call for stricter capital levels” February 19. This is just what the US, and the world, least need now.

Allowing the private banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats do the lending or decide on fiscal spending.

A dollar spent by a bureaucrat is a tax dollar spent but a dollar lent by a banker does not necessarily mean a future tax dollar spent and this is what anyone concerned with a fiscal deficit should know by now.

What is ‘socially desirable’ to regulators can be very ‘socially undesirable’ to us

Sir, Sir Martin Jacomb holds that “views on what activities are ‘socially desirable’ should play no part in the regulatory structure” but fails to see that this is exactly what happens when regulators discriminate bank capital requirements based on what is socially desirable to them as regulators, namely that of reducing the risk of bank default, “Hurried reforms will not get banks lending” February 11.

I ask again, for the umpteenth time, what is socially desirable about banks not defaulting if banks do not perform as society should have reasons to expect? Personally I have always argued that the lack of bank failures points to a lack of needed risk-taking, and to anyone who counters with pointing at the many bank defaults in this crisis I tell them these were not the result of bank failures but of regulatory failures.

If bank regulators had not favoured with some truly minuscule capital requirements those operations that they found ‘socially desirable’ having triple-A ratings; or empowered the credit rating agencies way too much, this very ‘socially undesirable’ crisis would not have happened.

But of course, with Sir Martin Jacomb’s general point on the importance of getting the banks to lend, I totally agree. To me it is truly surrealistic to observe how much leeway we are willing to give government bureaucrats to spend our children’s future taxes, when compared to how much we demand the regulators to rein in the banks.

Why should our regulators favour our banks to lend to AAA rated clients? Senseless discrimination?

Sir Martin Jacomb in “Regulators and bankers must share the blame” September 3 is so close to the truth that it hurts. He pinpoints exactly “the singular regulatory error: the failure of the Basle international rules to impose weighty capital requirements on the super senior tranche of securitized mortgage obligations” but then he describes it more as a mistake made and does not question the capital requirement for banks method itself; and this is wrong.

The really hard truth we need to understand and really grapple with is that even if the credit rating agencies had been absolutely right the end results for the economy would be wrong; because the method subsidizes risk adverseness and taxes risk-taking, and that is something that only a society that has had enough and wants to lie down and die does.

No, give me one single economic reason why we should favour banks lending to clients rated AAA? That, to me, is pure senseless discrimination.