What the $150bn in US fines paid by banks has caused the real economy, can best be described as financial sadism

Sir, Kara Scannell writes: “Demands for accountability ushered in an era where the US government was willing to penalise financial institutions severely, yet most crisis-related actions were civil rather than criminal and few bankers went to prison” “Banks rack up $150bn in US fines since start of the financial crisis” July 7.

If we use Basel II’s basic capital requirement of 8%, that represents an authorized leverage of 12.5 to 1. If we multiply that number times the $150bn in fines paid by banks, we can see that the real economy might have obtained $1.9tn less access to credit.

And of course, punishing the shareholders of banks that way, must cause the cost of bank capital to increase and, as a result, borrowers having to pay more for loans.

And of course, banks tight on capital, will not lend to what requires them to hold more capital, which currently means those perceived as risky, like entrepreneurs and SMEs, something that can only reduce the dynamism of the economy.

Sir, that is pure and unabridged financial sadism. That amount of killed bank credit potential represents about 50% of the Fed’s current QE balance. Need we say more?

PS. I remember having written a similar comment about 3 years ago.

@PerKurowski

Make sure Greek banks can lend to the risky private sector, in reasonable amounts, against low capital requirements

Sir, Martin Wolf, from his perspective, “the latest debt sustainability analysis from the International Monetary Fund [that shows] the programme agreed in 2010 was wildly unrealistic”, correctly discusses Greece’s future in “Painful choices still hang over Greece” June 8.

Big public debt haircuts, whether transparent or disguised, are needed in Greece. But that won’t suffice. I look at Greece from a complete different angle.

First I am convinced that what did Greece in, was the absurdity of allowing banks to lend to it against very little, even zero, capital. That produced expected risk adjusted returns on equity that were just impossible for banks to resist; that produced offers of credit that were just impossible for Greek governments to resist, and the crisis ensued. And this mistake needs to be admitted by the IMF and by the Eurozone governments.

And second, the risk-weighted capital requirements for banks discriminate against the access to bank credit of those perceived as risky, like SMEs and entrepreneurs; and that makes it impossible for the real economy in Greece to reach the dynamism needed to pull it out of its misery.

Anyone thinking that a recovery commandeered by the Greek government or just those who are perceived as safe from a credit point of view is possible, is simply cuckoo.

And so first things first, what is required is to make sure capital scarce Greek banks can lend to the “risky” private sector, in reasonable amounts of course, but against quite low capital requirements.

@PerKurowski ©

Capital requirements, non-performing loans, down-ratings and fines are causing severe bank credit austerity.

Sir, Henny Sender writes: “A world awash with dollars is rapidly being replaced by a dollar-scarce world” “Pain for those most in debt looks certain to become more severe” August 26.

Yes, and that dollar scarcity will, as is, primarily generate a contraction of bank credit. Consider what is happening:

Regulators are increasing capital requirements, which put banks lending capacity under pressure.

More non-performing loans and credit down-ratings of borrowers put additional strain on the banks.

And to top it up there are the fines. The recently reported fines of $260bn for the largest 25 banks, when calculated for a leverage of 15 to 1 results in about 4 trillions less bank-credit availability.

But when Sender writes: “It is still not sure how the pain will be distributed though”, I would tend do disagree.

If bank regulations keep the risk-weighted capital requirement component, there is no doubt of who are going to suffer the most; that will be those who generate the highest needs of capital, namely “the risky”, like SMEs, entrepreneurs and the downgraded.

Since those risky already are perceived to generate much expected losses, they will generate much less “unexpected losses”, and so we should lower the capital requirements for banks when holding these assets.

Sir, if austerity has to be imposed, I much prefer that to be government spending austerity than bank credit austerity. Banks have to put up at least some capital (equity) while government bureaucrats need not to risk a dime of their own.

@PerKurowski

Mr. Draghi, Europe’s problem is not the demand for business loans but the supply of it.

Sir, Claire Jones reports “Draghi defends strategy after weak take-up of cheap loans” September 23. And therein she writes that Mr. Draghi acknowledged Europe had “a problem of lack of demand” for business loans.

How gracious of him… why does he not report the truth? That because of the risk-weighted capital requirements for banks, and the scarcity of bank capital, and what he admits the ECB’s Comprehensive Assessment that has banks running scared about coming out among the worse, Europe has a big problem with the lack of supply of bank credit to all those tough “risky” risk-takers it needs to get going when the times are tough.

Ah! Draghi might resort to quantitative easing buying sovereign bonds? How typical, helping those who are already awash in bank credit, and ignoring the clamor on the streets. Shame on him… and all because he refuses to admit to the fundamental mistake with the so distortive risk-weighted bank capital regulations, for which he is in large part responsible.

And Sir, and what amazes me the most is why we do not hear reporters asking Draghi about this… are there no real reporters left? Have these also been risk-weighted and weeded out?

England, what a shame!

Sir, what a shame to read that old brave England thinks it too risky to row a boat up the Thames… what is this wimpy England now to do, for instance when the International Monetary Fund (so surrealistically) announces a scarcity of safe assets?

In a world with reduced lebensraum it might be time for the Dollar II

Sir Jeffrey Gartner tells us “We must get ready for a weak-dollar world” November 30. It sounds like wishful thinking since what we need to get ready for is for a weak world, since it looks like the business model of most countries is out of synch with so many realities, among others the diminishing lebensraum that energy scarcity and environmental threats are signalling.

Also, when Gartner writes about a multi-currency framework as an alternative to the dollar, but says that”this regime will take time to devise” this is just another way of ignoring that, if we do not want to use gold, the only alternative to the dollar, for the time being, is the dollar II, to which the old baby-boomer dollars can be converted at a rate of ??? The dollar II would be a more transparent and perhaps even less socially traumatic than that of “camouflage a slow-motion default” by means of inflation.

What a world! A citizen admonishing monetary authorities “to meet secretly”, “perhaps between Christmas and New Year, to start discussions... (to avoid spooking the markets)” Has Gartner not heard about gate-crashers, twitter and facebook?