Abandon Basel III, as fast as you can, and concentrate on how to get from here to there.

Sir, your US Banking Editor, Tom Braithwaite, holds that “Regulators need to focus on enforcing Basel III rules”, October 2. As an argument he presents “We´re now two years into Basel III, which imposes tougher capital requirements on banks around the world” and that abandon those efforts would in his opinion be sort of a shame. 

What Mr, Braithwaite fails to understand is that the tougher the bank capital requirements are, the relatively scarcer bank capital becomes, and the more do the risk-weights which determine the final capital requirements, distort and discriminate in favor of the “not risky” and against what is officially perceived as risky, like lending to small businesses and entrepreneurs. 

And so, quite the opposite, I would argue in favor of abandoning completely Basel´s risk based approach for setting capital requirements, as soon as possible, and setting one simple future maximum leverage ratio for any assets, and thereafter start navigating the very difficult trajectory from here to there. 

For starters, I would begin by halving the current capital requirements for what is perceived as “risky”, and slowly starting to move up the requirements for what is seen as “not­-risky”, until both segments reach the same level, and then move up all to the target over a couple of years. 

Alternatively, or in parallel, I would offer tremendous tax incentives on all new capital subscribed by banks which commit to reaching the final leverage target for all, in one year.

If only the Fed had heeded its dual mandate

Sir, Bob Corker, in “Bernanke should show some humility at the Fed” August 29, writes “A big part of the problem is that the US Congress has given the Fed an overly broad “dual mandate” of price stability and full employment… this approach…undermines the free market system” 

Although I agree that the free market has been undermined, in this case it happens to be precisely because the Fed ignored its mandate on full employment. Had it not done so, it could never ever have approved bank regulations that so overly discriminate against job creators, like small businesses and entrepreneurs, only on account of these being perceived as “risky”… and all that, in “the Home of the bBave” 

Frankly... what are the thickheaded bank regulators smoking?

Simpler and equitable across the board bank rules, are safer because these distort less… it is as easy as that!

Sir, Nicholas Brady is absolutely right in that “We need much simpler rules to rein in the banks”, August 27. In fact he is much more right about this than what he realizes. Most, perhaps all current discussions on bank regulations relate to their effectiveness or not, from the perspective of making our banks safer. Very few, almost none, absolutely not FT, analyses these regulations from the perspective of how these so fatally distort the real economy, primarily by making the banks oversensitive to how risks are officially perceived. 

For instance, small unrated businesses and entrepreneur are normally considered much riskier than an AAA rated client, and so they have naturally to pay higher interests and get smaller loans. But on top of that, small businesses and entrepreneurs are additionally slapped by the consequences of the regulatory discrimination which occurs when bank regulators force bank to hold more capital when lending to them than when lending to an AAA rated, and therefore end up having to pay even higher interest and getting even smaller loans. 

Simpler and equitable across the board rules, are safer because these distort less… it is as easy as that! 

FT, please don't be so thick-headed and take notice!

The center should transfer to the periphery their almost ill-gotten regulatory interest rate savings

Sir, Wolfgang Münchau in “The ECB must still do its bit to help solve the crisis” August 27, reminds us of that “There is a law against monetary financing of sovereign debt”. Should there not also be a law that prohibits doing so using the backdoor of banks and bank regulations? 

The fact that banks all over Europe could lend to Greece against only 1.6 percent in capital seems to me a very close relative of “monetary financing of sovereign debt”. These regulations, when something goes wrong, as it is almost doomed to go, because of the distortions these produce, create its own set of problems. 

When Münchau, with respect to any official explicit target for interest rate spread writes “The market would test any published target” we might therefore have to add, for precision, “market and regulators”, I explain: 

There are havens perceived as very safe, Germany, and those perceived as not so safe, Spain, and that would, without any regulatory intervention, reflect itself in the interest rates. But, the way current bank regulations are set up, with bank lending to the officially safe havens requiring much less capital than when lending to those “not-safe”, the natural market cleared interest rate differentials based on risk, become so much larger.

Anyone who is really sincere about solving the European problem, or even about not making it worse, must either eliminate the discriminatory effect of these regulations, or make sure that the safe-havens transfer some of their almost ill-gotten interest rate savings, to those less safe havens that have had to pay higher than natural free market rates.

Yes, ease the rules on small business loans, by eliminating the regulatory discrimination against these.

Sir, Patrick Jenkins and Brooke Masters on November 12report that Andrew Haldane, the Bank of England’s executive director of financial stability opines that “regulations that potentially constrain lending to small businesses should be eased [made less capital intensive] when the economy is suffering”. That is a marvelous opening for someone like me who has been for more than a decade clamoring to eliminate the regulatory discrimination against small businesses, though I would of course want that to happen at all times and not only when the economy is suffering. 

Andrew Haldane, with much honesty also says “At present [the risk-weights] are calibrated to the risk of a bank. In future they need to reflect returns to society”. Yes Mr. Haldane that is what they should have done all the time. 

What is really sad though is to read a senior regulatory specialist at a global bank saying “You can’t just change risk weightings at whim because what really matters is that risk is priced correctly”… this specialist, as most other specialists, has still not been able to figure out that you cannot price risk correctly when different risk-weights are imposed on different assets… and that is what have us all now drowning in the ocean of the ex-ante perceived as not at all risky assets.

Don’t forget the non-AAAs

Sir Peter Spiegel, David Oakley and Ralph Atkins report that “EU rescue fund rated triple A” September 21. Do they really know what that means?

It means that the banks when at some point in the future they are asked to acquire bonds or otherwise lend to European Financial Stability Facility they be able to do so without the need of capital. It will mean that it will be cheaper to fill the hole of the past than to build the mountain of the future. Good or bad? If I owned Greek bonds and wanted to get bailed out I would find that great but, if what I wanted was a bank loan to set up a new venture it would surely be bad, because I would have to pay for the cost of the discrimination in favor of the EU.

Since Basel III kept intact all the risk-weight discriminations in favor of the AAAs and the Jean-Claude Trichet bureaucrats of this world, we should never forget the non-AAAs and private borrowers who are and will have to pay for it all.