Stress tests for banks, performed by mighty regulators, signify dangerous systemic risks, as well as useless predictors

Sir, Caroline Binham reports on how “Andrea Enria, the outgoing head of the European Banking Authority, who is set to become the Eurozone’s top banking regulator, has questioned the value of its stress tests of lenders’ balance sheets, arguing that elements of them are no longer ‘tenable’ and need a redesign” “European regulator questions value of stress tests” November 16.

I could not agree more for two reasons:

First: Stress tests introduce a systemic risk. The fact that banker know their banks will be the object of stress tests causes them to distract their attention from what they might think to be more dangerous, in order to concentrate more on what they think regulators might think more dangerous.

Second: The stress tests are useless since they avoid stress testing many real stresses. In 2003 the United States General Accounting Office (GAO), in its study of the IMF’s capacity to predict crisis concluded, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Much of that has to be a consequence of that if IMF forecasts a crisis; it could quite possibly be blamed for detonating that crisis. Similarly, regulators will avoid to stress test the risks they might be blamed for having produced. For instance when will they stress test the banks on the possibility that their risk weight of 0% to sovereign would have to be increased, and the market reactions to that news. Never! They have painted themselves into a corner.

Sir, when it comes to banks, and their regulations, worry much more about what might be perceived as safe than about what is perceived as risky. In that respect, if I were to perform stress tests on banks, I would look to stress test the risks that seemingly would least need to be stress tested.

@PerKurowski

Current bank regulations express much more than Brexit, a dangerous payday-loan mood.

Sir, Tim Harford refers to “the payday-loan mood it is displaying in its Brexit negotiations. No gain is too small, no price too great, as long as the bill comes later.” “Want to solve a problem? Just wait” May 26.

Current risk weighted capital requirements cause banks to give much more credit to fairly unproductive but “safe” sectors, like housing, and less credit to potentially much more productive but “risky” ends, like loans to entrepreneurs. I would hold that follows a payday loan mood put on steroids… one that in complete violation of that holy intergenerational social contract Edmund Burke spoke about, places a reverse mortgage on our current economy.

Sir, just reflect on that the regulators assigned a 0% risk weight to sovereigns. That can only be justified arguing that the sovereign can only print money to pay back debt expressed in its own currency. Indeed but that spurious argument blithely ignores that printing money to pay back its own debts, is precisely one of the worst misbehaviors of a sovereign, like when Venezuela’ government prints loads of money, among other to serve its own internal debt.

And Harford reminds us: “The world is full of risks. Can anyone guarantee that over the next 300 years both the UK trust fund and country will survive asteroid strikes, thermonuclear war or a deliberately engineered pandemic?”

Indeed, that’s true, but how come then when regulators imposed their risk weighted capital requirements on banks, we decided to naively believe them, instead of asking: Who are you to know what the risks in banking are? And if you do, why are you not then the bankers?

@PerKurowski

We humans search for risk-adjusted yields. So did banks, but they now search for risk-adjusted yields adjusted to allowed leverage

Sir, let me comment on three paragraphs in John Plender’s “The global economy looks solid but there are worrying signs” February 7.

First: “there are grounds for concern about a credit cycle in which risk is clearly being mispriced. This is partly a product of the enduring search for yield. When almost every asset class looks expensive, investors tend to respond by taking on more risk”

Ever since risk weighted capital requirements were introduced, banks do not more search for yield, but instead search for yield adjusted by allowed leverage, and so risk has been mispriced.

Second: “A further hint of a return to normality is the reappearance of volatility after a long period in which it has been conspicuously absent — helpful if you worry that low volatility encourages complacency and makes the financial system more vulnerable to crises.”

And why should we not there worry, in precisely the same way, that what is perceived as safe encourages complacency and makes the financial system more vulnerable to crises?

Third: “Applying a higher discount rate to the liabilities while enjoying an uplift in the value of the assets is the answer in today’s low interest world to the pension fund manager’s prayer.”

The so many times repeated opinion that all pension funds should be able to obtain a real return of 5 to 7% annually, is one of the most harmful financial misinformation ever.

@PerKurowski

Low interest rates cause buy-backs, meaning less equity controlling assets and higher leverages. How will it play out?

Sir, you write: “the relationship between rates and the valuations of assets such as stocks is not simple. Ironically, if there is a bubble in stocks right now, excessive faith in and misunderstanding of the power of low rates might be a contributing factor. Central bankers keen to avoid crashes might explain this more clearly.” “Central bankers cannot blow bubbles alone” May 6.

In a sort of veiled way, IMF in its Global Financial Stability Report’s, “Where Are the U.S. Corporate Sector’s Vulnerabilities?” reports on this, when it states:

“The corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010. Bank lending to the corporate sector has continued to recover and could well rise further in response to more favorable market valuations. In contrast, equity finance has traditionally been outstripped by share buybacks and has recently leveled off. A drop in the cost of equity capital may stimulate equity financing, but it could coincide with higher corporate debt—particularly if additional share buybacks are financed through debt.”

That begs three questions:

First: How much of the recent increase in the stock markets is the result of buybacks; that which helps earnings per share to get a sort of artificial boost; that which results in less equity controlling the corporations?

Second: Do the recent stock-market prices increases duly reflect the increase riskiness derived from much higher corporate debts? 

Third: Have Central Banks therefore, with their low interests rate policies, dangerously lowered the capital (equity) requirements of corporations?

On the first two questions I have no answers, though just having to ask them should suffice to at least raise some eyebrows.

On the third the IMF seems to clearly respond, “Yes!” when on that same page, under the subtitle “High Leverage Combined with Tighter Borrowing Conditions Could Affect Financial Stability” it writes:

“As leverage has risen, so too has the proportion of income devoted to debt servicing, notwithstanding low benchmark borrowing costs. Although the absolute level of debt servicing as a proportion of income is low relative to what it was during the global financial crisis, the 4 percentage point rise has brought it to its highest level since 2010, which leaves firms vulnerable to tighter borrowing conditions. The average interest coverage ratio—a measure of the ability for current earnings to cover interest expenses— has fallen sharply over the past two years. Earnings have dropped to less than six times interest expense, close to the weakest multiple since the onset of the global financial crisis.”

Holy Moly! And interest rates have not yet returned to something more "normal"; and the Fed's balance sheet is still so huge it leaves little space for any future QE assistance...and not to speak of the already too large public debts. 

How will this all play out? I don’t know. Perhaps I’d better, like most, stick my head in the sand.

@PerKurowski

Regulators should not focus on those risks (weather prognosis) bankers already consider, but on the uncertainties

Sir, several prominent names write: “Last week Andy Haldane… admitted that economists had failed to predict the financial crisis, and compared the situation with that of ill-informed weather forecasting in 1987 — the “Michael Fish moment”. And the experts argue: “At the heart of the crisis would appear to sit faulty accounts and unreliable audits” and as a consequence they request more reliable accounting rules. “Clearer picture of banks’ capital is required to help avert crises” January 12.

Sir, no one can argue against better accounting rules, but please, that is not what created the financial crisis.

In terms of weather forecasting what happened (and what is still happening) was that not only did the banks follow the credit forecasts to set their exposures and interest rates, but so did the regulators, when they set their risk weighted capital requirements. That meant that “weather forecasts” got to be excessively considered. The regulators role on the contrary was and is, not the management of perceived risks, but to consider the uncertainties, like weather prognosis being utterly wrong.

PS. De facto, absurdly, it meant regulators believed bankers were going to go out, especially, when the weatherman was announcing a storm. 

@PerKurowski

Risk weighted capital requirements for banks caused the animal spirits of hyenas to substitute for those of lions.

Sir. We had a crisis, which resulted directly from the distorted incentives for the allocation of credit to the real economy that the risk weighted capital requirements for banks caused. If anyone doubts that, just consider that Basel II, of 2004, allowed banks to leverage equity a mindboggling 62.5 to 1 with private sector assets, as long as these assets had an AAA to AA rating. If they did not posses a credit rating then a 12.5 to 1 leverage was the max.

True, FDIC and the Fed did not allow USA’s commercial banks to follow these Basel II rules initially, but the SEC did allow the investment banks to do so, as were European banks allowed to do. That set off the most voracious appetite ever for AAA rated assets, and the markets, understandably, set out to satisfy that demand, in any which way it could, even if by means of fraudulent behavior. Because that is what markets do!

To top it up, with Basel I of 1988, the regulators had risk-weighted Sovereigns with zero percent, and consequentially banks were allowed to build up huge exposures against little capital for sovereigns such like Greece.

And then we had Central Banks, Fed, by means of QEs, injecting the mother of all liquidity in the markets, and again, by foremost buying up sovereign debt, mostly benefitting governments, and indirectly those who already owned assets like stocks.

Sir, the can of the crisis was simply kicked down the road; and the regulations that make banks earn higher risk adjusted returns on equity when financing the “safer” past and present than when financing the “riskier” future kept in place. Our grandchildren will hold us accountable for this.

Martin Wolf nonetheless gives a very positive review of Obama’s eight years of economic policy, “How Obama rebuilt the economy” January 11. How come?

The truth is that Wolf does not get it yet! Here he writes of “a broader post-crisis loss of animal spirits” without being able to understand that those risk weighted capital requirements for banks that I referred to, pre and post crisis, what they have done is to substitute the spirits of hyenas for the spirits of lions.

@PerKurowski

Draghi, the more confidence we have in risk weighted capital requirements for banks, the dumber and more fooled we are

Sir, Caroline Binham and Emma Dunkley quote Michael Lever, head of prudential regulation at AFME, which represents the biggest banks and other markets participants, with: “It is important to take the time to create a framework that is capable of accurately measuring the risks that banks are assuming” “Banks win Basel reforms reprieve” January 4.

Hold it there! The problem is not only in measuring risks. The problem is also in assigning the relative importance to the risks measured.

The current capital requirements for banks are based on ex ante perceived risks that should be cleared for by bankers, by means of interest rates and size of exposures. The result is that ex ante perceived risks are excessively considered. Therefore that causes a wrong allocation of bank credit; and this even if the perceived risks are perfectly accurately measured.

This regulation now causes that what is perceived as “safe”, like AAA rated or Sovereigns, get too much credit at too low rates, which is dangerous for the banks; and that what is perceived as “risky”, like SMEs and entrepreneurs, receive too little or too expensive credit, which is very dangerous for the real economy

Mario Draghi, president of the European Central Bank, who chairs the Basel committee supervisory board, is here quoted with: “Completing Basel III is an important step towards restoring confidence in banks’ risk-weighted capital ratios, and we remain committed to that goal.”

To that my only one answer, for the umpteenth time, is “No!” The more confidence in something that is so rotten to its core the worse.

PS. FT, why do you not do all of us a favor and dare ask bank regulators some very basic questions

@PerKurowski

It is only the bankers’ responsibility to clear for risks. The regulators should only prepare banks for uncertainty.

Gillian Tett writes that Axel Weber, the chairman of UBS, “suggests investors urgently need to think about the difference between ‘risk’ and ‘uncertainty’: the former refers to events that can be predicted with a certain probability; the latter refers to unknown future shocks.” “Emerging markets offer clues for investors in 2017: Extraordinary political events have upended western assumptions about risk and uncertainty” January 1.

Let us see if this distinction helps Ms Tett to see that with risk weighted capital requirements for banks, both bankers and regulators are clearing for risk. The result is that “risk” is excessively considered while “uncertainty” plays a secondary role. Seemingly it is too hard for regulators and anthropologists to understand the simple truth that any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

To subject banks to this double counting of risk means banks will lend too much to what is ex ante perceived, decreed or concocted as “safe” like AAA rated securities and sovereigns like Greece, and too little to what is perceived “risky” like SMEs and entrepreneurs.

Only the exclusive use of a leverage ratio, which represents a capital requirement that has nothing to do with perceived risk, is what could help banks prepare for uncertainty, without distorting the allocation of bank credit to the real economy.

@PerKurowski

Tim Harford explains why a kakocracy, like that of the Basel Committee on Banking Supervision, is likely to endure

Sir, Tim Harford writes about “Kakonomics – the economics of rottenness. There are corners of the economy where poor work is the norm, not the exception.”, “The hazards of a world where mediocrity rules” September 10.

Harford argues “a true kakonomy is collusive, a tacit agreement to be mediocre at someone else’s expense …Once a kakocracy has been established, it is likely to endure: recruiters will be careful not to hire anyone who might not only rock the boat but also repair the leaks and fix the outboard motor.” 

If as a regulator, at the huge cost of distorting the allocation of credit to the real economy, you introduced risk weighted capital requirements for banks to make these safe, one could assume you would be able to answer the following question: When and where did the last bank crisis resulting from excessive exposures to something believed ex ante as risky occur?

So, if the Basel Committee the Financial Stability Board and all those other involved with bank regulations like the Fed, BoE, ECB, IMF, FDIC and similar can’t answer that question, would it be wrong of me Sir to suspect they all constitute a regulatory kakocracy?

Sir, if you yourself have steadfastly refused to listen and voice my arguments on this issue, perhaps so as not wanted to be seen as rocking the boat, would it also be wrong of me to believe you could belong to that same kakocracy?

Is a bank regulation kakocracy dangerous? You bet!

PS. Of course I do not base my suspicions on just one unanswered question.

PS. How resilient is the bank regulation kakocracy? If it is as willing to go to any extreme measures to defend its kakonomics, as the current Venezuela Chavez/Maduro government does, then we’re in serious trouble.

@PerKurowski ©

Might economists have spent too much time at their desks and too little on Main-Street to understand risks?

Sir, Tim Harford discusses how economists could have presented their case against Brexit more effectively. In doing so Harford refers to Dan Kahan, a Yale law professor, when arguing that “Giving people evidence that threatens deep beliefs is often counterproductive, because we start with our emotions and trim the facts to fit them”, “Economists face up to Brexit fail” July 9.

Interesting because that is very similar to what I have been asking myself:

How can I get my fellows economist colleagues to understand that, in banking, what is ex-post more dangerous, is what has ex ante been perceived as safe, and which therefore signifies that bank regulators are basically 180 degrees off the charts with their current risks weighted capital requirements for banks?

And how can I get my fellows economist colleagues to understand that if you allow banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived risky, the banks will dangerously overpopulate the safe havens and, equally dangerously, under-explore the risky bays our real economy needs to be explored in order to move forward, so as to not stall and fall?

What deep beliefs do economists hold that block them from understanding risks? Might it only be they have spent too much time at their desks and too little on main street?

@PerKurowski ©

Pity the Basel Committee’s small leverage ratio; it sure has to carry a lot of risks on its back.

Sir, with interest rates and size of exposure the expected credit risk is the risk most cleared for by banks. Yet bank regulators also wanted to clear for it, and imposed their expected credit-risk weighted capital requirements. That left out of consideration, at least until Basel III, all other risks, like for instance that of cyber attacks to which Gillian Tett refers to in “Hackers target the weakest links in the financial chain”. May 20.

I say “until Basel III”, because now banks are by force of a leverage ratio, to hold at least 3% of capital against all exposures to cover for any risk.

But the Financial Stability Board has also “Task Force on Climate-related Financial Disclosures” which reminds us of risks from climate change.

And then there are the risks of demographic changes; the risk that the economies do not react to stimulus; the risks that credit risks have not been correctly perceived; the risk of war; the risk of epidemics, negative interest rates, deflation… and a never-ending list of risks of expected or unexpected losses. 

And you know I have repeatedly called for banks to also hold some capital against the risk regulators have no idea about what they’re doing, a risk that has morphed into a frightening reality.

But what’s the enticement for banks to cover for these types of risks when they can leverage as much as they currently do? Very little… in the same vein that the bonuses you can pay out to bank managers, when little bank capital is required, can be very big.

What do I propose? The abandonment of all dumb credit risk weighted capital requirements, and move towards a leverage ratio of 8 to 12%. That should increase the importance of the shareholders vis-à-vis management. And that should help to generate more interest among shareholders into making sure better risk avoidance or risk preparedness takes place.

The process of implementing those changes must though be very carefully designed, so as not to worsen the current capital scarcity driven bank credit austerity.

PS. The fact Basel Committee argued that “a simple leverage ratio framework is critical and complementary to the risk-based capital framework” was already a confession of not knowing what they were doing, but that notitia criminis was foolishly ignored. 

@PerKurowski ©

The “risk” appetite that caused the 2007-08 crisis was for AAA-rated securities, residential mortgages and sovereigns.

Sir, Laura Noonan quotes Bank of England’s Andrew Haldane with: “I think the risk culture, not just from the regulator but from financial firms, is much different [than before the crisis], the risk appetite is much diminished.” “WEF group issues urgent call for fintech forum” April 19.

What risk appetite before the crisis? Was there any excessive exposure to something that was not perceived, decreed or concocted as safe? No, of course not!

In Basel II regulators assigned a 35 percent risk weight to residential mortgages; AAA-rated securities backed with mortgages to the subprime sector carried a 20 percent risk weight; and the risk weight for sovereigns rated like Greece, hovered between 0 and 20 percent.

Now, soon a decade later, regulators seemingly still think that ex post realities and ex ante perceptions are the equivalent. They keep on thinking that the expected is a good basis for estimating directly the unexpected.

The worse risk to a banking system derives from excessive exposures; and those excessive exposures are always built up with something ex ante perceived as safe… but which ex post could perhaps be risky. And that is currently made much worse, by the fact that those “safe exposures” require the banks to hold the least capital.

So NO, in terms of dangerous excessive exposures to “the safe” I would, contrary to Haldane, hold that the real appetite for real bank risk has not stopped growing for a second, it has even accelerated. 

Sir, again, for the umpteenth time, in Basel II the regulators set a 150 percent risk weight for assets rated below BB-. How on earth can anyone justify that assets that when booked carry a below BB- rating, are riskier for the banks than all other 100 percent and below risk weighted assets?

And how is it that, even after the evidence of the 2007-08 crisis, they still believe so? It is mind-boggling to me… and it should be to you too Sir.

Something is truly rotten in that mutual admiration club we know as the Basel Committee for Banking Supervision.

@PerKurowski ©

There is risky bank lending and then there is "risky" bank lending

Martin Arnold and Laura Noonan quote Gonzalo Gortázar, chief executive at Spain’s Caixabank with “In a world of low or negative interest rates, that is a possible consequence. You could see banks taking more risk” “Europe bank chiefs fear risky lending from ultra-loose policy” March 22

Of course I cannot be absolutely sure but, when “banks taking more risk” is said, it most probably refers to larger exposures to something that because it is perceived, deemed or sold as safe, carries lower capital requirements.

What is perceived by regulators as risky, like loans to unrated corporations, SMEs or entrepreneurs, and which is risk weighted 100 percent or more, and so require banks to hold more capital, well that’s not the risks banks are taking, unfortunately for the economy.

It would be nice to see reporters digging up a little bit more about what risks is being referred to. In fact, I start any risk assessment by identifying what risk one cannot afford not to take... because that would be too risky.

PS. Another interesting detail is whether it is the ex-ante perceived risk or ex-post resulting risk that is being considered.

@PerKurowski ©

Beware of excessive information. (Blissful) ignorance is a potent driver of financial markets and of human activities.

Sir, Tracy Alloway describes the possibility of adding on, as you go along, new pieces of information that will enhance the knowledge of the risks, for instance in securities backed with residential mortgages, “New mutations beckon for system that shares DNA of each loan’s risk” January 3.

And Alloway quotes David Walker of Marketcore saying “This could be very disruptive, because not everybody is for transparency and accountability. Even if they say they are publicly, they may not be privately.”

It is worse than that! If risks were perfectly known, the price of the securities would reflect this and so there would be little profits to be made trading these, and so perhaps there would be no Wall Street. It is imperfect information that has prices zigzagging, which induces market participant to get out of bed in order to sell the not-too-well-perceived risks and buy the not-so-real-safeties.

In other words, ignorance is one of the most potent drivers of financial markets and human activities; and is therefore quite often characterized as quite blissful… at least by the winners.

But the worst that can happen with excessive information, that is when we, because of it, become convinced that we know it all. Like when bank regulators caused our banks to follow excessively the credit risk perceptions issued by some few human fallible credit rating agencies. Clearly some more information (and humility) about our ignorance would have come in handy.

What the World Bank most needs to do in order to end poverty.

Sir, I refer to Robin Harding´s article on the restructuring program of the World Bank that is currently being executed by its president Jim Yong Kim, “Man on a mission”, April 8.

I do not know much of the program but, as a former Executive Director of the World Bank, 2002-2004, I do know that whatever it contains, much more important for the bank’s quest of ending poverty, would be for it to speak out loud and clear against the risk based capital requirements for banks that have invaded current regulations.

The net effect of those capital requirements is to allow banks to earn much more risk-adjusted return on their equity on exposures deemed as “absolutely safe”, than on exposures deemed as “risky”. And as you can understand this is something which dramatically distorts the allocation of bank credit in the real economy.

By in that way favoring the access to bank credit of the “infallible”, these capital requirements add a new layer of discrimination against “the risky” poor developing countries, the World Bank´s most important constituency… and, within all countries alike, against “the risky” medium and small businesses, entrepreneurs and start-ups.

In short the world´s premier development bank needs to remind regulators of the fact that risk-taking is the oxygen of any development… and that there is in fact no chance whatsoever to fight poverty, or even to sustain an economy, in a risk free way.

And the World Bank, in its quest, should also be able to enlist the help of their neighbor the IMF, by reminding the world´s premier financial stability watchdog of the fact that major bank crises never result because of excessive bank exposures to what is perceived as “risky”, these always result, no exceptions, from excessive exposures to assets which were ex ante perceived as “absolutely safe”, but turned out not to be.

PS. This is not new. In April 2003, as an Executive Director, in a formal written comment on the World Bank‘s strategic framework 2004-06 I stated:

"Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. Once again, the World Bank seems to be the only suitable existing organization to assume such a role."

PS. Also, though I am not a banker or a regulator, the following which I formally stated at the Board in October 2004, should serve as evidence that I might know something of what I am talking about:

“Phrases such as “absolute risk-free arbitrage income opportunities” should be banned in our Knowledge Bank. I believe that much of the world’s financial markets are currently being dangerously overstretched though an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

Excessive risk allergy is much more dangerous for the society than the risk addiction of some bank trader gamblers

Risk-taking is not something easy to comprehend. A serious family man can make a million one quid bets on flipping a coin and nothing happens, though if he makes a single one million quid flipping a coin bet, and it goes wrong, all hell breaks loose. But, is the society better served by one million family men making a million one quid bets on flipping a coin, than by one who is capable of gambling one million quid on one single flip of a coin? Who is to tell? 

Sir, Lucy Kellaway in “The risk addicts” February 2, quotes a repentant trader gambler being in favor of zero tolerance with respect to recreational gambling in the City. I just don’t know if that is so. With a policy like that, would one not risk eliminating part of the biodiversity of a financial center that makes it thrive? I believe I would favor the imposition of more effective gambling limits instead. 

And by Lucy Kellaway placing “risk-taking” in the perspective of our banks, as many do these days, she is further feeding the false notion that the current bank crisis was the result of excessive risk taking. Let me say it loud and clear, much more dangerous for banks than overconfident addicted gambler traders, are bank regulators with a “superiority complex” who think themselves able to expulse risks from banks in a safe way. 

The Basel Committee bank regulators, thinking they were very smart, allowed the banks to hold much less capital to what was perceived as “absolutely safe” than for what was considered “risky”. And with that they gave the banks the incentives to bet excessively on what was, ex ante, perceived as “absolutely safe”, precisely what has caused all other bank crises in history. Their risk allergy did not cost billions, it cost us trillions, and that without including the opportunity costs for the society of its banks betting less and less on “The Risky”, like the small businesses and entrepreneurs. 

I firmly believe that the last thing a society can afford to do is to undervalue the worth of its willingness to take risks. The Western World was build upon risk-taking, and a lot of it plain crazy risk-taking… and which is why in our churches we can hear psalms begging “God make us daring!”

Let us then hope Mary Jo White really knows how to discriminate between what is right and what is wrong.

Sir, Kara Scannell and Shannon Bond quote David Keller saying about Mary Jo White, recently nominated by Obama to the Securities and Exchange Commission that “She is driven by her sense of what’s right”, "White nominated to lead Wall St watchdog” January 25.

I just hope then that Mary Jo White understands that regulatory discrimination in favor of “The Infallible” those already favored by markets and banks, and against “The Risky” those already discriminated against by markets and banks is, besides stupid, utterly wrong, I would even say truly odious.

I say this because on April 28, 2004, the SEC had no idea about what it was doing.

Yes we need young who understand that “risk” is the Yin of the Yang “safe”.

Sir, Luke Johnson writes “Europe cannot afford to become a theme park for ageing baby boomers obsessed with nostalgia dreaming of glory day… ruled by cadres of old men who cling to power and wealth like grim death” and “We all need an infusion of youthful vigour” December 5. 

Absolutely! And where we should start is by removing those completely senile regulators in the Basel Committee who believe you can make our banks safer by avoiding what is perceived as risky, failing to understand that “risk” is the Yin of the Yang “safe”, and that for banks, what has always been most dangerous, is almost exclusively what is perceived as absolutely safe. If you really wanted to inject some vigour into Europe, think more in terms of capital requirements for banks that are higher for “The Infallible” and lower for “The Risky”. 

On what I totally disagree with Luke Johnson is on wanting “the Rolling Stones… greedy sexagenarians, to leave the stage”. In their case they are not there, except for us wanting them to be there, just like we love our well worn old warm slippers. 

PS. By the way there are some real rusted oldies in FT too, blocking ideas, and it could benefit all of us if they were to sit down and have a chat with Luke Johnson about this topic.

A 62 years old male

FT, are you afraid of the Basel Committee on Banking Supervision curia excommunicating you?

Sir, you loudly preach from your very high pulpit, that the “non-partisan Congressional Budget Office’s updated [fiscal] forecast… should shock Congress out of its complacency…so as to put American’s wellbeing ahead of its differences…[though] even if they do find a solution; the outlook is hardly rosy”, “Vertigo atop the US fiscal cliff” August 24. 

And again I find myself wondering why you do not include in your sermon, some words on the fact that when bank regulations like the current are so much biased in favor of bank lending to those perceived as “not-risky”, and against those perceived as “risky”, this dooms the economy to dangerous obesity and simultaneous muscular dystrophy. Could it be that though you declare yourselves “without fear”, you are scared of what the high priests of the Basel Committee on Banking Supervision curia would have to say? FT excommunicated? 

Well, in the best protestant traditions, I at least am nailing up, wherever I can, my protest against that silly-nanny belief that economic prosperity can be reached, or even maintained, by avoiding, or even punishing, risk-taking and risk-takers, such as the small businesses and entrepreneurs. 

I also wonder what the US congress would have to say, if they understood that current regulations are making their bankers, in “the Home of the Brave”, to lend the umbrella when the sun is out much more than what Mark Twain ever thought possible, and to, similarly, take it away much faster than what Mark Twain could ever have imagined?

Current bank regulations cause less new growth and more inequality

Sir, John Plender in “Corporate cash power is holding the state hostage”, August 17, discusses the excessive savings of corporation produced “by investing less than the sum of its retained profits… well into an upturn”… and which forces governments “to accommodate these surpluses by running large fiscal deficits”. 

As a possible explanation Plender cites Andrew Smithers of Smithers & Co., who advances that this “has been driven by the dramatic growth of the bonus culture” which creates a bias in favor of short term profits and which are maximized by refraining from investing. 

That plays a role but it is small when compared to that that utter nonsense of allowing, like it is done now, bank regulation bureaucrats to decide what should be considered “not-risky” and be favored, and what should be considered “risky” and be discriminated against, and all that without any consideration given to the purpose of banks. 

The perceived as “not-risky” are normally related to past successes and current wealth, and the “risky”, like small businesses and entrepreneurs, harbor more often the possible future successes and those in need of bank credit. Favor the “not-risky” and discriminate the “risky” and you will get less new economic growth and more inequality. It is as simple as that! 

Regulators have no problems when bankers and market understands... their role is not so much understanding what is happening but preparing for when no one understands. A regulator that accepts being dumb, is immensely better than a regulator who believes himself to be smart.