If banks want to keep the society’s support, they must again become efficient allocators of credit to the real economy.

Sir, Simon Samuels, a banking consultant, writes that “the priority of regulators and policymakers in Europe…should be developing financing solutions other than banks from which customers can borrow” and one way he suggests is “to give borrowers an incentive to shun banks and so deepen Europe’s capital markets.” That sure does not sound like a consultant working for the long term interest of his clients. Does Samuels really believe banks will keep the huge taxpayer support they now have, if they abandon lending to all in the real economy? “Bank regulators, be careful what you wish for” July 25.

But then Samuels dutifully defends the profitability of banks by warning against increased capital requirements. He writes: “If the return on equity from mortgage lending or corporate lending falls by more than half — as has been widely estimated under the proposals as drafted — then banks will either ration lending in these areas or try to raise prices.”

But Samuels also keeps mum about the fact that, for the purpose of the capital requirements for banks, the risk-weight for mortgage lending is 35%, while the risk weight for any corporate rated BBB+ or below is 100% or more. Which means that banks already earn much higher risk-adjusted returns on equity when financing houses, or investing in other perceived, decreed or concocted safe assets, than when financing those “risky” SMEs and entrepreneurs, those that could create the jobs needed for house owners to service mortgages and pay the utilities.

Of course, as someone interested in the well-being of the real economy, I would also tell the regulators to go very easy on the increase in any capital requirements for banks. But, much more than that, as I have done for soon two decades, I would beg regulators to eliminate that regulatory risk-aversion that has stopped banks from financing the risky future and now have these only refinancing the safer past.

If the banks and bankers forget that their role is to allocate credit efficiently to the economy, and that that is the only reason why society supports them, they will very soon be out of business… and out of bonuses.

PS. I dare you all to have a look at some of the mind-blowing mistakes of current bank regulations.

PS. I have had some other occasions to opine on Simon Samuels opinions.

@PerKurowski ©

Fairness to debt burden countries and taxpayers, starts by getting rid of risk weighted capital requirements for banks

Sir, Charles Goodhart writes: “But how can one… be fair to … countries with debt burdens enlarged by the global financial crisis; and fair also to the taxpayers in creditor countries…? There is, I believe, a way to do so… real gross domestic product bonds” “Restructure all or most of Greek debt into real GDP bonds” August 6.

That might be but, writing “debt burdens enlarged by the global financial crisis”, is unfair to both debtors and taxpayers. What first needs to be done, so that these tragedies are not repeated, is to acknowledge the role the distorting portfolio invariant capital requirements based on credit risk played in causing the crisis. And then to rid the world of these that doom the safe havens to become dangerously overpopulated, and the risky but more interesting bays from being sufficiently explored.

@PerKurowski

All Europeans, one way or another, will pay dearly for The Greatest Pushing The Can Down the Road.

Sir, Martin Wolf writes: “the vast bulk of the official loans to Greece were not made for its benefit at all, but for that of its feckless private creditors. Creditors, too, have a duty to take care. If they are careless, they risk big losses. If governments want to save them, their own taxpayers should be told to pay up.”, “Divorce Greece in haste, repent at leisure”, June 17.

That is partially true. The sad fact though is that if governments, with or without consultations, decide to save private investors, its taxpayers and its citizens in general, will have to “pay up”, one way or another, whether they like it or not. By the way, by not having cleared the deck of the rubbles, so as to allow for a fresh-start, they have for some years already been paying.

Once Europe (and US) gets to understand the full implications of this The Greatest Pushing The Can Down the Road carried out by feeble technocrats during the last years, many are bound to get extremely upset… especially the young.

PS. Again Martin Wolf assigns the fecklessness in this whole Greece affair only to private creditors… leaving his friends the bank regulators out of it. These regulators, by allowing banks to lend to the Greek government against much less capital than what they needed to hold when lending to for instance Greek or German SMEs, were the prime promoters of this crisis.

@PerKurowski

Why do so many care so much more about the risks banks should avoid, than about the risks they should take?

Sir, Martin Arnold in reference to Mark Carney’s, the head of the Financial Stability Board proposal for systemically important banks to hold more equity writes “Carney’s ‘too big to fail’ buffer represents clear progress despite doubt”, December 9.

And therein Arnold describes the proposed total-loss-absorbing capacity (TLAC) to be worth between a fifth and a quarter of risk-weighted assets.

That could mean that a bank would need to hold 25 percent in loss absorbing capacity against assets risk-weighted 100%, like loans to small businesses and entrepreneurs, while at the same time only be required to hold between 0 and 5 percent of that same sort of TLAC back up, against assets risk-weighted 0 to 20 percent, like the infallible sovereigns and the AAAristocracy.

Does Arnold really think that increased distortion in the allocation of bank credit signifies any sort of progress? He’s got to be joking... or he signs up wholeheartedly on the après nous le deluge that spoils the future of our children.

Arnold also concludes in that “it is only when the next financial crisis hits that we will find out whether Carney really has consigned taxpayer bailouts of banks to history books.” Is he aware that the taxpayers who are most going to pay for the current crisis will be our children and not we the parents... and they will have to pay those taxes mostly for nothing?

The worse insults need not to include foul language.

Sir, Peter Cunningham, in “A dark, cruel comedy at the expense of the Irish taxpayer”, June 27, writes “It is in September 2008 and Ireland´s hapless government, faced with an unprecedented flight of capital from the country´s banking system and acting on the facts given to it, has decided to guarantee the obligations of all banks”.

The Tier 1 Capital Ratio of Anglo Irish Bank was reported as 8.3% in 2007 and 8.4% in 2008, and its Total Capital ratio, for the same years, 11.6% and 12% respectively, and they all seem healthy. But that of course is based on risk-weighted assets, and so, if the weights are wrong, these figures don´t say much. Sir, I wonder if the Irish authorities would have acted differently had they known, what used to be known, namely the un-weighted total assets to equity.

But Cunningham also writes “The almost total absence of effective banking regulation would be laughable had it not been so serious” and he´s wrong, because with a total absence of banking regulations, another type of crisis might have happened, but none as big and as systemic as the current.

And now the Basel Committee has decided that a small but not risk weighted leverage ratio shall also be imposed on the banks, but, read this! “Implementation of the leverage ratio requirement has begun with bank-level reporting to supervisors of the leverage ratio and its components from 1 January 2013, and will proceed with public disclosure starting 1 January 2015.”

“with public disclosure starting 1 January 2015.” You see big insults do not necessarily need to be expressed with vulgarities or foul language, they can also come dressed up in very elegant word and formulas.

And talking about cruel insults,  now they announce that “Rules to force losses on creditors in failed banks were agreed by EU finance ministers” Anyone knows of any rules that prevented creditors from suffering losses in failed banks?

The Torturer and the Haircut

Sir, your “Europe must use borrowed time well” April 21, reminds us of how scary it is when we see someone calculating with complex formulas a sustainable debt level of a sovereign; just like a refined torturer calculating the pain tolerance of the tortured, to keep the poor bastard from passing out.

Also, who are the least hard for politicians to order a haircut? The sovereigns, their creditors the banks, the current voting tax payers, or the future generation of voting tax payers? Is it so hard to guess?

As always, the race is between postponement and realities-catching-up. As always, we are looking on with masochistic fascination, praying and biting our nails.

The safe-haven must recycle its waters.

Sir you write of the need to “Reopen the taps of global finance” May 1, but that must surely be the responsibility of the current borrower of last resort, the USA.

Ricardo Hausmann, during the spring meetings of the World Bank, at a conference titled “Latin America and the Global Crisis: Towards a Rapid Regional Recovery” argued that the US should take on debt and relend to the world. Hausmann, coming from an oil rich country must have remembered that this was exactly what the oil countries did during the 1974-79 oil bonanza when foreign bankers virtually forced credits on them… and the oil exporting countries recycled and imported and recycled and imported... until.

But is this politically viable? Perhaps not, but even so there are major troubles brewing down the line.

First the US, as the safe-haven par excellence, cannot expect to crowd out the rest of the world from the financial markets, for a lengthier period, without its own waters becoming stale or even having the rest of the world starting to think in terms of sabotaging that safe-haven.

Second if the US, in order to reflate its own economy and which might also help to stop the world from deflating too much, for a while, does so by investing only in its own back-yard, then the returns from those overcrowded back-yards will not be sufficient to repay what will be owed, and so the US taxpayer will start to seriously object having to become the taxpayer of last resort…and with that, again, waive bye, bye to the sweet dollar safe-haven.

Let us not forget that in truth the dollar bill should have imprinted on it “In the American Tax Payer We Trust” but that the US Mint, more pragmatic, more marketing minded and much wiser preferred the much more fundamental “In God We Trust”.

Will the world trust the American taxpayer?

Sir Mohamed El-Erian in respect to the Federal Reserve being “prepared” to buy Treasury bonds asks “Will the world be comfortable with two US public agencies offsetting operations that ultimately must be supported by someone else?”, “Era of policy activism opens door to global co-ordination” February 17.

That is either a slightly coward or a too kind way to phrase the issue since that “someone else”, when push comes to shove, is no one else but the American taxpayer.

The US dollar instead of “In God we Trust” should state “In the American taxpayer we trust and thereafter in God’s will”. What will the markets do when they realize the real picking order?

Do not worry it looks like they are just staging it! Help!

Sir Sir Samuel Brittan clearly rapped all of us who dare to ask “how we are going to pay for it?” over our knuckles, “A framework for economic stability” December 5. We do not deserve it. In a world where the British Pound should have imprinted “In the British Taxpayer We Trust”, since that is all it has backing it, not asking the question could frighten away all economic stability. The quoted Harold Macmillan “Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost” might have benefited from having much less darkness around him than what exists now.

Having said that, Sir Brittan needs not to be overly concerned with any excessive prudence. In the US, all similar discussions on how to pay for it, and the screaming about the implications for the taxpayers, anyhow all end up with new tax-rebates being given.

Finally on Brittan’s quoting Friedman’s recipes for fiscal stability, how strange he did not comment on the absence in them of the regressive VAT.

Can we trust the taxpayer?

Sir, Martin Wolf in “Governments have at last thrown the world a lifeline”, October 15, though duly acknowledging all the many risks still has the rose-tinted glasses on, especially when comparing the size of the estimates of how much the financial systems needs to be helped with that of the overall size of the economies. Nothing wrong with that, in fact, a good citizen-journalist has a responsibility to keep on smiling even when it is with a stiff upper lip.

But thinking about the growth of other fiscal demands; the decrease in fiscal offerings that the current crisis will create; and being less optimistic than Martin Wolf about the government’s capacity to claw back the fiscal assistance they now provide, without the help of “creative” fiscal accounting, it is also time to responsibly talk about the lifeline to governments, namely the taxes.
The dollar bills, for which value the US is responsible, have printed on them the brief prayer of “In God We Trust”. A more substantial version would be “In God We Trust to see that the politicians and the bureaucrats do not print and circulate more dollars that what the economy could back or, otherwise, that the American taxpayer finds it in him the capacity and the willingness to pay taxes so as to make up any shortfalls.”

Can we trust the taxpayer? I am not at all sure of that. I have the impression that the various “bubbles” have also helped to disguise that our tax systems have lost much of their credibility, and the world seem to be screaming for more progressiveness of taxes, at least so as to take care of the fat-cats.

In this respect we need to find new equitable taxes that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy. Thought there has been some loose talk of flat-tax, carbon-taxes and financial transaction taxes we have not really seen much of tax-development for many decades now.

Don’t even dare to paint a rose garden!

Sir one think is to minimize the costs for taxpayers of the financial crisis but to say that “Taxpayers should benefit from any upside as a result of a recapitalization” points to a whole different ballpark, “Bold moves to fight fire” October 8.

Creating illusions of profits for the tax-payer sounds like a good natured Ponzi promise but that, if really believed possible, will most certainly end up making it all even more costly to the taxpayer.