Are bankers stopping their regulators from boarding a ‘listening bus’, scared these might wake up and then wake them up?

Sir, Gillian Tett asks: “can lofty chief executives ever find a way to get out of the C-suite and view life from a completely different perspective?” “Jamie Dimon’s ‘listening’ bus? Get on board”

Sir, of course it is good that Jamie Dimon, or anyone else for that matter, tries to listen to different opinions, though a bus is not really needed for that. 

But much more important than Jamie Dimon doing so it would be for the lofty besserwisser bank regulators to walk down Main street in order to learn more about banking, and life.

Then they might begin to understand that it is not what bankers perceive as risky which is dangerous to the bank system, it is what they perceive as safe.

But, being able to hold assets perceived as safe against so little of bank equity, meaning obtaining the highest returns on equity with what’s “safe” and not having therefore to venture into riskier terrains, sounds like a banker’s wet dream come true. Therefore perhaps it is bankers, like Dimon, whom all block regulators from leaving their desks, except for some controlled visits to Davos and Jackson Hole.

PS. As the less equity that needs to be compensated the more room there is for big banker bonuses, I am really not referring to an insignificant wet dream

@PerKurowski

Europe, if you do not remove current risk weighted capital requirements for banks, no stimulus will really help.

Sir, Reza Moghadam from Morgan Stanley writes: ECB should switch from buying sovereign bonds to funding the removal of troubled assets from European banks…[that] would do more to alleviate the constraints on economic recovery than sovereign bond purchases ever could. “How to redirect easy money and encourage banks to lend”, December 6.

Of course that would help, but only for a while. If you do not remove the risk weighted capital requirements for banks, those which distort the allocation of bank credit to the real economy, and which therefore impede any stimulus like QE or a European type Tarp to reach were it can do the most good, you’ll soon be back on the cliff, albeit higher up.

Sir, the lower the capital requirement, the higher the leverage of equity, the higher the expected risk adjusted return on bank equity be. Therefore you cannot be so naïve as to expect a banker like Moghadam to say one world that would imply higher capital requirements for anything. In fact, by allowing banks to earn the highest risk adjusted returns on what is perceived as safe, the Basel Committee has made the bankers’ wet dreams come true.

When will you invite someone, like me, who speaks out for the access to bank credit of the “risky” SMEs and entrepreneurs? Or are these beggars for opportunities, those who could help open new gateways to the future, just not glamorous enough for you?

@PerKurowski

The Main-Street understanding world’s MPCs most need, is that of the discriminated against bank borrowers, like SMEs

Sir, Huw van Steenis writes: “The private sector’s demand for loans, banks’ profitability, capital adequacy and risk aversion — all these affect not only financial aggregates but also financial wealth and the real economy through a variety of channels. Overlooking how banks function means the models that central bankers have relied upon are, by construction, overly simplistic fair-weather versions only.” “Time to put financial frictions at the heart of central bank models” November 1.

Of course, central banks must wake up to the frictions and distortions caused by the risk weighted capital requirements for banks. Though that is probably not what van Sttenis refers to, because, if he did, he should be very careful. He might wake up bankers, his bosses, from their realized wet dreams of earning the highest risk adjusted rates of return on equity, when financing what’s perceived as the “safest”

But Van Steenis also writes: “Every MPC should have members who have a real-world understanding of the plumbing of financial intermediaries. It’s time to put financial frictions into macroeconomic models.”. And Sir No! Careful there! “Huw van Steenis is the global head of strategy at Schroders”; and the Main-Street understanding Monetary Policy Committees around the world most need, is that of discriminated against bank borrowers, like SMEs and entrepreneurs.

@PerKurowski ©

Why do regulators insist in realizing bankers and insurers wet dreams? It costs the real economy too much!

Solvency II does to the insurance industry what Basel regulations did to banks. It introduces what is known as the “risk-based approach” to capital and regulation.

In essence it means more ex ante perceived risk more capital, less ex ante perceived risk less capital.

That translate into the lesser the ex ante risk is perceived, the more you will be able to leverage your capital.

And the more you are allowed to leverage capital, the higher are the expected risk adjusted returns on equity.

And so, just like it realized the banker's wet dreams (more elegant "nocturnal emissions") Solvency II should now realize those of the insurers… namely that of being allowed to earn the highest risk adjusted returns on equity on what is perceived as the safest.

Evidence of the existing enthusiasm we find when Oliver Ralph quotes Omar Ripon, partner at accountants Moore Stephens with “Risk-based capital is a great thing. The best firms are looking at using it to improve their returns. If you only look at it from the compliance angle, you won’t get the benefits.” “Insurance divides over shared rules” March 14.

Unfortunately allowing bankers and insurers to realize their wet dreams has a very high cost for all the rest of us.

First it obviously distort a lot in the financial markets in terms of how credit, investments and capital is allocated.

When the European Commission explains why Solvency II is needed they hold that Solvency I “does not entail an optimal allocation of capital, i.e. an allocation which is efficient in terms of risk and return for shareholders”

But that is certainly what the risk based capital approach cannot do.

That is because all risks that are considered by the capital requirements are risks that have already been perceived and cleared for in other ways, by means of risk premiums, amounts of exposure and other.

And any risk, even if perfectly perceived, if it is excessively considered, causes the wrong action.

And then of course “hiding risks” or production of Potemkin ratings, which allows for higher leverages, becomes a competitive tool.

“Any risk you hide I can hide better, I can hide better the risks than you can… No, you can't - Yes, I can - No, you can't Yes, I can! Yes, I can!”

And if the distortions in capital allocation to banks and insurance are bad, the distortion it produces among those who access bank credit or insurance investment funds from the insurance companies is much worse. It will mean the “safe” will get too much, much more than what they already get (making them risky) and that the “risky” will get too little, much less than what they already get… and as a consequence our real economy will suffer a lot.

I know too little of the insura © nce industry to estimate their capital requirements but, in the case of banks, these should be required to hold 10 percent in capital against all assets to cover for the unexpected, which, even though it can be expected, includes such events as regulators having no idea of what they are doing.

PS. I challenge you to read the European Commission’s explanations of Solvency II and count the self confessed distortions it will produce.

@PerKurowski