The gran coalition of the Basel Committee is a very dangerous bank regulatory populist.

Sir, I refer to Niall Ferguson’s “Scotland’s No echoes Europe’s Yes to gran coalitions” September 22. Ferguson concludes it with a: “From now on, I no longer need to deny my allegiance to the extreme center.

Well I have not done that for years, blogging from “The radical of the middle”, or “The extremist of the center”. And so I have no problem with that, except I have never done that in pursuit of a coalition, but more in pursuit of the “truths” which have been captured by the extremes. And it is not easy to swim in the middle of the river, being thrown rocks at from both shores.

And so when Ferguson writes “Populism has been popping up all over Europe since the financial crisis” I have to stand up and explain, again, for the umpteenth time, that in the field of bank regulations, there has never ever been something so populist, as the “risk-weighted capital requirements”.

The regulators of the Basel Committee for Banking Supervision fooled the world (and probably themselves too) into believing that all would be fine and dandy, if only we distorted banks to lend to what credit wise seemed, ex ante, to be “absolutely safe”; and stopped the banks from lending to “the risky”; no matter how useless the lending to the first, and how useful the lending to the latter could be.

And the world hailed, “Now our banks are safe”. But excessive lending to what was ex ante officially perceived as absolutely safe, like to infallible Greece, real estate in Spain and investing in AAA rated securities, against little or no capital, caused a crisis, and proved the regulators wrong, in record time.

Unfortunately that populism survives, now again, with Basel III, regulators insist in that with banks will be safer with credit-risk weighing… and this even though they must be aware of that banks are not lending to the risky SMEs and entrepreneurs, those who our economies most need to get going in order not to stall and fall.

Ferguson praises, “grand coalitions, [which] have turned out to bring stability”, as a great weapon against populism. Let us beware that grand coalitions, like that of the Basel Committee, is also capable of producing some extremely de-stabilizing populism.

Is Europe going from being unintentionally murdered, to suicide, and now to euthanasia?

Sir, Paul de Grauwe writes that if financial stability is to be maintained, a central bank needs to be the lender of last resort to banks and government “because the sovereigns and the banks hold each other in a deadly embrace”, “Stop this guerilla campaign against ECB policy” October 23. 

Yes, but, what if the financial instability was also caused by that same “embrace”? 

I know, and I trust de Grauwe by now also knows (he should) that, had not bank regulators imposed capital requirements which allowed banks to hold very little sometimes even zero capital when lending to European sovereigns, members of “The Infallible”, while at the same time requiring these to hold 8 percent in capital when lending to European small businesses and entrepreneurs, members of “The Risky”, the current eurozone crisis would not have been close as severe as it is. 

And so I wonder whether this regulatory absolute failure needs not to be discussed first, and a plan how to remedy it designed, before ECB assists. Otherwise it just seems to present the characteristics of an unintentional murder, by regulators, muting into a suicide, by sovereigns, kicking the can down the road, and now then muting into a case of euthanasia, by the ECB 

PS. Don´t worry, I am not giving up on making the bank regulatory establishment (and FT) understand… and confess.

Too much longing for stability creates the perfect storm conditions for instability

Sir, Samuel Brittan refers to “artificial suppression of volatilities in the name of stability” “The follies and fallacies of our forecasters” May 27. That is precisely what as an Executive Director of the World Bank I was referring to when, in May 2003, in pre-Basel II days, I told a large group of regulators gathered for a risk-management workshop at the World Bank, the following: 

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later. 

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

The regulators did not understand what I was talking about… mostly because they wanted so much to believe in forever stable banks.

PS. As you can see here, the link to Brittan’s article is gone.

Free the banks from the chaperones and get the party going!

Sir Charles Goodhart´s and Avinash Persaud´s “A party popper’s guide to financial stability” June 5 reads like the desperation of a garage fixer to fix something with whatever epoxy he can lay his hand on.

I have myself often proposed a progressive tax on banks, based on the-bigger-you-are-the-more-it-will-hurt-if-you-fall-on-me principle but, what on earth do they mean by taxing the growth rate of bank assets, which is what raising capital requirements mean? That slow growing banks can just sit back and trade growth allotments, like if bank assets were carbon type contaminants?

No instead of worrying so much about the possible hangovers why do they not worry more about making the party better. The current risk adverseness implied in the minimum capital requirements based on risk and as measured by the credit rating agencies, have the markets playing boring and unproductive minuets, like consumer finance dressed up as “risk free” securitizations.

The world is clamouring for decent jobs, and if the banks are to help us create them, they need to be given more freedom and responsibility. In that sense, set the capital requirements for banks at a fixed percentage of assets and get the chaperones out of their hair, so that we can get more of that risky salsa that when if times comes for a hangover, makes it at least more bearable... since the party was great!