The most stressful banks to me are those who least help the future of our real economy.

Sir, Laura Noonan, Rachel Sanderson and James Shotter present EU’s bank stress test results. “Bank stress tests single out the usual suspects” August 1.

And it ranks the banks based on their 2018 fully loaded common equity tier one ratio, which is CRD IV Common Equity Tier 1 capital divided by CRD IV Risk Weighted Assets. And so let us be very clear, if the risk weights used are wrong, the results are absolutely meaningless.

Sir, how long will you all play along with the current regulators as if they were geniuses setting risk weights, as if they had any idea of what they are doing? Are you totally deprived of intellectual honesty?

If you go to EBA’s stress result you will read “The EU banking sector has significant shored up its capital base in recent years leading to a starting point capital position for the stress test sample of 13.2 % CET1 ratio at the end 2015… 2% higher than the sample of 2014 and 4% higher than the sample in 2011”. 

That’s great!... sort of… because it also states that “the aggregate leverage ratio decreases from 5.2% to 4.2% in the adverse scenario”. In terms of real leverage what does from 5.2% to 4.2% leverage ratio mean? It means that in their “adverse scenario” the bank leverage of equity has increased from 19.2 to 23.8 to 1… and that’s just the average!

How is it possible, an increase of the CET1 ratio, at the same time the leverage increases? Easy, banks take on more of those assets perceived, decreed or concocted as safe that carry low risk weights, and less of those assets perceived by bankers and regulators alike like more risky that carry higher risk weights, such as loans to SMEs and entrepreneurs. The real economy will suffer the impacts of this stupid and short-sighted regulatory risk aversion.

We should of course be concerned with the safety of our deposits in our banks… but, should we not concerned with that these banks take the risks needed to offer our children and grandchildren a future at least as good as that one our parents offered us? I sincerely think so.

PS. And it not only about the young. The welfare of future pensioners depend very much too on the health of the economy.

@PerKurowski ©

The Federal Reserve’s stress tests of banks are dangerously incomplete.

Sir, Ben McLannahan and Gillian Tett write that the US Federal Reserve reported that “Every one of the 33 US banks that took the first part of the annual “stress test” passed it” “US lenders face higher stress test hurdle”, June 25.

That is good news. But the bad news though is that, as I have said time after time, those stress tests are incomplete. They only include what is on the balance sheets of banks, and not what these should include but perhaps do not include. And that means that the all-important social role of banks of allocating credit efficiently to the real economy is completely ignored.

If banks run into problems because of allocating credit in accordance to the needs of the real economy, that is a much lesser problem than if the real economy does not have adequate access to bank credit.

What do I suggest? Analyze for example the evolution of how many credits, not guaranteed with house mortgages, have been given over the years to “risky” SMEs and entrepreneurs, and I am sure you will be shocked with how the credit risk weighted capital requirements for banks have distorted.

@PerKurowski ©

Why is IMF silent about the fact that bank regulators, slowly but surely, are causing the economies to stagnate?

Sir, Shawn Donnan, Chris Giles and Gabriel Wildau report that “IMF calls for global action to lift demand as China exports fall” March 9.

With the credit risk weighted capital requirements for banks that allow banks to leverage more their equity with what is ex ante perceived as safe than with was is perceived as risky, banks earn higher expected risk adjusted returns on equity on what is “safe” than on what is “risky”. And as a consequence “risky” SMEs and entreprenuers do not have adequate access to bank credit. And that, slowly but surely, must cause the economy to stagnate. There’s no doubt about that.

When you stress test banks, the most important issue could be what is not on banks’ balance sheets.

IMF’s David Lipton warns the global economy is “clearly at a delicate juncture” and that “Now is the time to decisively support economic activity and put the global economy on a sounder footing,”.

And so I ask again: Why does IMF insist on keeping silence on the odious regulatory distortion of the allocation of bank credit to the real economy?

Mme Christine Lagarde: Ask!

@PerKurowski ©

When you stress test lenders, why aren’t there any stress tests scenarios for borrowers?

Sir, Caroline Binham writes that “EBA outlines stress test scenarios for lenders” February 25.

And my immediate reaction is to remind you of that those stress tests do not include, in any way shape or form, an analysis about how banks could be stressing the real economy, with an inefficient allocation of bank credit.

Again, for umpteenth time, I have always argued that the number one social function of banks is not necessarily that of repaying whatever it owes, but allocating their credit as efficiently as possible to the real economy.

But the credit risk weighted capital requirements have made it impossible for banks to fulfill that social duty.

Dare ask: How many millions of small bank loans to SMEs and entrepreneurs, has the Basel Committee’s regulations impeded worldwide?

And so any sensible stress test of banks should not only consider what is on banks’ balance sheets but also what is absent.

And those comprehensive tests would evidence that banks are no longer finance the risky future, but only refinance the safer past.

Though I admit that conclusion might be to stressful for the great distorters, the bank regulators, to bear. 

@PerKurowski ©

The most important risk with banks will most probably be totally ignored again in the stress tests

Sir, Ben McLannahan reports on the Federal Reserve stress tests of the biggest US banks “designed to assess whether banks have enough loss-absorbing capital to keep trading through a shock to the system similar to the collapse of investment bank Lehman Brothers in 2008.” “US banks face tougher stress tests” February 22.

Again those tests will probably totally ignore the biggest risk with banks, that of these not allocating credit efficiently to the real economy.

In Yuval Noah Harari’s “Sapiens: A brief history of humankind” we read:

Over the last few years, [central]-banks and governments have been frenziedly printing money. Everybody is terrified that the current economic crisis may stop the growth of the economy. So they are creating trillions of dollars, euros and yens out of thin air, pumping cheap credit into the system, and hoping that the scientists, technicians and engineers will manage to come up with something really big, before the bubble bursts…

Everything depends on the people in the labs. New discoveries in fields such as biotechnology and nanotechnology could create entire new industries, whose profits could back the trillions of make believe money that the banks and governments have created since 2008. If the labs do not fulfill these expectations before the bubble bursts, we are heading towards very rough times.

And substitute there “the real economy with its SMEs and entrepreneurs” for “the labs”. 

Since banks are allowed to leverage their equity, and the support they receive from the society, many times more with assets perceived as safe than with assets perceived as risky; and banks therefore earn higher expected risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky, banks have no incentives to lend to “risky” SMEs and entrepreneurs. And much less so when most banks suffer a scarcity of capital.

And central bankers should dare to ask themselves: How many millions of small bank loans to SMEs and entrepreneurs, has the Basel Committee’s regulations impeded?

And so any sensible stress test of banks should not only consider what is on banks’ balance sheets but also what is absent.

And regulators should opine on whether banks are fulfilling their number one social purpose, which is that of allocating credit efficiently to the real economy.

But because banks no longer finance the risky future, and only refinance the safer past, that might be just to stressful for the great distorters.

@PerKurowski ©

Europe’s economists and politicians fail to see the risk of economies growing with carbohydrates and without proteins

Sir, Stephanie Flanders writes “Growth is not nearly strong enough in the eurozone at the moment and it is unlikely to be a lot faster in the coming year. With consumption and consumer confidence picking up and unemployment continuing to fall, however, the recovery does now have its own momentum.” “There is no pressing economic crisis confronting the continent in 2016, thank goodness” “Risks to Europe that economists fail to see” December 30.

Not so, there is a huge crisis in the making. While the risk adverse credit risk weighted capital requirements for banks remain in force, Europe’s economy will grow obese from an excessive intake of safe carbohydrates. In order to grow muscular and sustainable it needs a lot of proteins and exercise.

Ask ECB to perform a new stress test of the banks, and this time not about what is on their balance sheets but about what should be there. I am sure ECB would find that new loans to those who on the margin provides the economy with the real strength to move forward, like SMEs and entrepreneurs, are highly insufficient. 

And those loans to "the risky" they could find, will probably have interest rates that are larger than what the transaction cost and risk premiums merit... as the risky need to compensate for the fact that banks are not allowed to leverage as much with them as what they can leverage with "the safe". 

When you finance the purchase of houses more than the creation of the jobs that will allow buyers to pay utilities and service mortgages that will not end well.

@PerKurowski ©

To engage in ‘bank bashing’ while leaving the regulators unaccountable for their own mistakes is dangerously wrong.

Sir, I refer to Doyne Farmer’s, Alissa Kleinnijenhuis’ and Thom Wetzer’s letter “Prudent policymaking is not ‘bank bashing’” in which they discuss stress testing of banks. December 9.

They conclude: “As long as a “clean bill of health” for the financial sector remains a mirage, resilience should be further improved and stress tests should be made more credible. This is not bank bashing, but prudent policymaking.”

Right so, the problem though is that current stress testing does not test whether the banks are performing adequately their vital function of allocating credit efficiently to the real economy. And from that perspective what is not on a bank’s balance sheet could be more important that what is on in order to give it a “clean bill of health”.

And the reason that part is not included in the stress test, is that it would show that the credit risk weighted capital requirements for banks utterly distort credit allocation, and regulators would not like that to be known.

@PerKurowski ©

Until regulators also worry about what’s not on banks’ balance sheets, banks will not serve the economy well.

Sir, Tony Barber writes: Greece’s “economy also cries out for liquidity, bank credit for businesses and investment that will generate jobs, promote growth and alleviate the social crisis.” “Love and hate between Greece and the west” July 20.

And I have to ask: How is that supposed to happen with bank regulations that gives banks incentives based exclusively on avoiding credit risks? Just look at current stress tests concerned solely with the risk of what’s on balance sheets while ignoring all the loans that should be there, had the regulators not distorted everything.

Getting rid of the credit risk based capital requirements for banks is important for Greece… and for the whole western world. But how difficult it is to do that when there are so many vested interest in ignoring the distortions these cause in the allocation of bank credit to the real economy.

@PerKurowski

Bank regulators have not even begun to learn from their mistakes

Sir, I refer to Brooke Master’s “Banks are still struggling to learn from their mistakes” March 14.

Master writes: “bankers say that the real problem with the US stress tests is that they are too complicated, opaque and difficult to predict. Regulators counter that financial meltdowns can come from unexpected sources and banks need to be ready”.

But I would ask the regulators: “If you think that financial meltdowns can come from unexpected sources, and banks need to be ready… then please explain the rationale behind the current risk weighted equity requirements for banks.”

Sir, bank regulators have not even begun to learn from their mistakes… just look at Basel III digging our banks and our economies even deeper into the hole they made.

Just look at how central banks are launching QEs, without even noticing how blocked the channels of bank finance are.

@PerKurowski

The Federal Reserve failed by submitting banks to an incomplete stress test.

Sir I refer to Tom Braithwaite, Ben McLannahan and Barney Jopson’s report on the recent stress tests performed by the Federal Reserve ad that that have given the US banks a clean bill of health, “European banks fail US stress tests”, March 12.

It is the Federal Reserve who has really failed the test by only testing for the assets banks have on their balance sheet, and not for the assets that should have been there. In other words, one thing is for banks to have sufficient equity for what they are doing, and another quite different sufficient equity for what they should be doing, if complying with their societal purpose of efficient credit allocation.

Banks have been made dysfunctional by the introduction of distorting credit-risk weighted equity requirements which favors assets perceived as “safe” As a result of this, banks in America (and in Europe) are not giving “risky” SMEs and entrepreneurs a fair and sufficient access to bank credit. For the banks to become functional again all differences in equity requirements against assets need to be eliminated. And to make room for such a leveling, basically all banks must increase their equity.

Our young, in order to have jobs and a decent future, need banks to take risks on “risky” small businesses and entrepreneurs. How many of these borrowers will now not be able to get credit, only because of the dividends and the buy-backs of shares the Federal Reserve’s incomplete stress tests stimulate?

@PerKurowski

The Fed, surprising banks with visits is ok, but surprising them with surprise regulatory criteria, sounds illegal

Sir, amazed I read Ben McLannahan reporting that “Fed officials say that they want to preserve some mystery in their methods, so that banks stay on their toes”, “Tougher US stress test challenge looms for lenders in round two”, March 9.

Amazing, the Fed is becoming truly Kafkaesque. Who on earth does it believe it is to preserve some mystery in their method which when released might affect all us who invest in bank shares?

If it springs a surprise on the bank I have invested in, and as a result I suffer losses, should I not be able to sue the Fed?

Real stress tests on banks are not performed, since these would evidence the failure of regulations.

Sir, Gillian Tett writes “One reason the banks got into such trouble before 2007 was that they had all learnt to game the regulatory system in a similar way”, “Stress tests are predictable act of public theatre” Marc 6.

That’s not so. There was no reason to game regulations that explicitly allowed banks to hold little or no equity against exposures to sovereigns (like Greece), exposures to AAA rated (like the securities collateralized with mortgages to the subprime sector) or to real estate (Spain).

But the current stress tests are indeed useless spectacles.

Societies give their banks a lot of supports. And obviously that is not only so that banks will repay deposits, since for that a storage center for matrasses containing cash would be more efficient. We support banks because, one way or another, we expect banks to support our economies. And so in this respect any real stress test would have to analyze whether banks were performing and under stress would be able to perform with what is expected of them… like continuously giving small businesses and entrepreneurs, reasonable fair access to bank credit.

Those real stress tests are not performed because they simply would put in evidence the total failure of current bank regulations. If banks are not performing now... how on earth will they perform if subjected to stress?

PS. Gillian Tett mentions that “the same consultants, now offering advice about stress tests”, aided banks gaming before 2007. If so, those consultants, who should be named, do represent a systemic risk, the Systemic Important Consulting Groups. Those SICGs and might be even more part of the Systemic Important Financial Institutions, the SIFIs than anyone of the Too-Big-To-Fail banks.

Stress testing of banks should foremost test whether these serve the real needs of the real economy.

Sir, I refer to your “Stress testing should not just apply to the banks” December 31.

In it you argue that “Regulators need a holistic approach to risk in the financial system” and therefore they should also include “the non-banks that are playing an increasingly important role in supporting the economy” so that “the world can be confident that the process of making banks safer is not simply shifting risk elsewhere”.

And again Sir, you totally ignore what is the biggest risk with a financial system, namely that it does not allocate bank credit adequately for the needs of the real economy. Again you seem to imply there is a possibility of having save banks standing there in shiny armor in the midst of the rubbles of the real economy… and of that being a worthy goal to pursue.

No Sir! The stress testing of banks we most need now, starts with ascertaining whether our risky small businesses and entrepreneurs are having fair access to bank credit. The stress testing of banks we most need now, should foremost test whether banks are serving the real needs of the real economy.

PS. As I have told you more than a hundred times, banks are not doing that, thanks to our stupid bank regulators... so perhaps they do not dare to stress-test their own mistakes. 

Bank nannies decided banks should avoid risk and solely play it safe, and thought nothing bad would come of that

Sir, I refer to John Stroughair’s letter “Stress test assumptions were not particularly stressful” November 4. In it he writes:

“The current weights enshrined in the Basel formula, which give preferential treatment to sovereign debt and residential mortgages [to which I would add the AAAristocracy], may make sense at the individual bank level. But at the level of the banking system they lead to a gross misallocation of credit, in particular to the excessive holdings by banks of supposed risk-free sovereign debt and to the fact that less than 10 per cent of the loans made by UK banks support productive businesses.

What is needed is a genuine debate regarding how we can move forward to regulation that will mitigate systemic risk and possibly even nudge the industry to support gross domestic product growth rather than house price bubbles.”

As you understand from my more than 1.000 letters to you about precisely this issue and this concern, I wholeheartedly agree with Stroughair.

One day it is going to be clear for all what our bank regulators, with their risk aversion did to our economies and to our society

In real terms they acted similar to as if educators decided to evaluate children better for dedicating themselves to playing piano, only because they think that is safe, than for engaging in sports they perceive as risky… and thinking that our society would be better for that.

Martin Wolf, it is not Europe’s banks which are too feeble to spur growth. It is their regulators who are.

Sir, I refer to Martin Wolf’s “Europe’s banks are too feeble to spur growth” October 29.

Wolf writes: “High leverage impairs the ability to finance growth. A responsibly managed yet highly leveraged institutions would seek to… hold highly rated assets. This is likely to militate against the productive investments the Eurozone needs”.

Indeed… but why is it so Mr. Wolf? Could it possibly be (as I have so mono-thematically explained to you for soon a decade) because feeble bank regulators decided, for no good reason at all, banks needed to hold more capital/equity against highly rated assets than against more “risky” productive assets?

Mr. Wolf, tell us, what responsibly managed bank should not responsibly look to obtain the largest risk adjusted returns on its equity?

Of course some bankers might have lobbied strongly for some ultra-low capital requirements, but it was the regulators who approved these… and so stop blaming the banks so much, and join me in blaming those who are most to be blamed.

Of course Europe’s banks have “too little capital”, and that is mostly because too little capital was required of them when lending to what was officially perceived as safe. But it is not the too little capital that mostly hinders banks from helping the real economy… it is the distortion produced by the credit-risk-weighted equity requirements.

If Europe does not rid itself of those feeble bank regulators, very fast, it could soon be game over for Europe.

All Europe’s banks would fail a test of whether they allocate bank credit efficiently.

Sir, Gavyn Davies writes “Stress tests will not themselves bring the Eurozone back to health” October 28.

He is absolutely right, because for that to occur it would all have to start with a test of how European banks are helping the Eurozone, and since the credit-risk-weighted capital requirements that caused the current deep economic malaise are still in place, banks would clearly fail that test.

Davies also correctly holds that “not all of the problems of a diverse banking system can be fixed at once”, but, unfortunately, all the banks can be made to have problems, by means of just one systemically faulty bank regulation.

And so when Davies writes “banks need to restore their risk appetite, having spent several years preferring to build their capital buffers rather than lending to risky small businesses” I must ask where has he been. Does he not know that banks, because of credit-risk-weighing are primarily building up their capital buffers, precisely by not lending to anything that requires them to have more capital?

Davies, concludes with “The best that can now be said is that a dysfunctional banking system should no longer be a fatal impediment to growth, on the optimistic assumption that the [fiscal, monetary, structural] and other measures that Mario Draghi has promised – including a sizeable monetary stimulus - come on stream.”

No way! Doubling down on a still so dysfunctional banking system would just waste away a sizable monetary stimulus- making it all so much more dangerous for Europe.

Europe, it is your bank regulators who most must be stress-tested!

Sir, I refer to all the writings in FT on October 27 about the stress tests of European banks in order to ask you:

If all banks that failed had only given loans to infallible sovereigns, then they would have classified as the safest. Do you really think that would have helped investors to have confidence in Europe?

Frankly, regulators who can come up with something like The Basel Committee’s Bank Stability Decree, have no moral right to test any bank.

Sir, even a hedge fund founder is quoted stating: “We now know that we can have a 5 per cent contraction in the eurozone economy and the banks will still have more than 8 per cent capital – that is very positive for the sector.”

What? If lucky, it might be more than 8 per cent of capital of the-risk-weighted assets… and that, as you should know by now, can be extremely faraway from meaning the same thing.

And, why after spending so many million dollars on consultants, did they not even give us the so easy calculated leverage ratio?

And talking about the consultants, we should have their names, so as to know who to hold accountable, as paid collaborators of what seems more to be a farce concocted by regulators to save face.

PS. Sir, you who have been so mum on this issue, show me anything perceived or officially stated as "risky" that caused the turmoils in the European banking sector. 

Europe, it is not bank’s balance sheets, but bank regulations, which most need a cleansing.

Sir, Huw van Steenis writes that stress tests “have the potential to accelerate the process of cleansing banks’ balance sheets to support economic recovery” "Bank stress tests need to be a catalyst for policy shifts in Europe” October 22.

Van Steenis also holds: We also need to address blockages to the flow of funding to companies… modestly recalibrating overlapping rules if they are holding back good lending”.

Forget about “modestly recalibrating” rules, that won’t cut it.

Unless that dangerously distorting risk aversion present in credit-risk-capital (equity) requirements for banks is not completely uprooted, Europe stands no chance of a sturdy economy… worse, it will only stall and fall.

Absolutely nothing is gained by cleaning up the balance sheets of banks, if these are still given the incentives to go to where, credit-wise, it is perceived to be “absolutely safe”, and to stay away from what is deemed “risky”… like lending to SMEs and entreprenuers.

Europe is about to throw away €489m to obtain fairly insignificant new information about its banks.

Sir, Claire Jones, Sam Fleming and Alice Ross report “Consultants to reap €490m from Europe’s banking audit” August 21.

First, we should not ignore that money, if bank capital, and if leveraged at the 3% leverage ratio allowed for banks in Europe, would permit bank credits to the tune of €16.3bn.

But we should also think about what that money can buy, and in that respect I believe it will buy regulators preciously little.

And I say that because we should not have to take a too close look at the balance sheets of banks to know that, because of the risk-weighted capital requirements they have:

Too little equity as a result of being allowed to have too little equity for much of those exposures that gort into real problems, like AAA-rated securities, sovereign like Greece, and real estate in general; and

Too much dangerously large exposures to what is perceived as absolutely safe, like the “infallible sovereigns, because those are the exposures that require the banks to have the least capital of that scarce capital; and

Perhaps even more dangerous because its implications too little exposures to what being perceived as risky requires banks to hold more capital, like loans to medium and small businesses, entrepreneurs and start ups.

What could the fees for that type of consultancy analysis be? Tops €1m? If so Europe will really be throwing away €489m in order to obtain information that on the margin seems to be quite insignificant.

And that does not even consider the fact that quite often, especially in the case of banks, the bliss of ignorance, is a quite valuable commodity.

EAB regulators should be fired; they don’t care one iota about the real economy, as long as banks don’t go under during their watch.

Sir, Sam Fleming reports that in order to “limit inconsistencies between the practices of different supervisors” EBA will deploy “a regulatory scoring system” of banks dependant on: “business model analysis, assessments of internal governance, risks to capital and risks to liquidity”, “EU to score lenders in push for regulatory unity” July 8.

As you see not a word about whether banks allocate credit adequately to the real economy. These regulators do not care one iota about that. All they care for is for banks not to fall under their watch… until they retire, and if the real economy has to go under in order for that to happen, so be it.

They should be fired!