Odious debts, odious credits and odious regulations are all yin-yang elements of the financial sector

Sir, M Shepherd, when commenting on Alex Pollock's letter "Sovereign debt has a pretty bad record" August 16 writes that “All too often, debates about defaults on government bonds focus on the borrowers and neglect the lenders.” “The other side of the sovereign debt story”August 18.

Absolutely, and that is why when I write about odious public debt, like that contracted in Venezuela, I always follow it up with one about odious public credit, like those awarded to Venezuela.

But, of course I have to add a point. For instance the immensely excessive public debt in Greece would never have happened had regulators not, for the purpose of setting the capital requirements for banks, assigned Greece a zero percent risk weight.

Those regulators have not been held accountable either, among others because of the network solidarity FT has showed them … in fact they have been promoted to central banks… and our banking system still lives under the distorting thumb of risk weights.

@PerKurowski

Is now OECD blaming central bankers? Has it no shame? OECD is just as guilty.

Sir, William White, the chair of the OECD’s economic and development review committee tells us “Only government action can resolve a global solvency crisis” September 26.

I don’t get it. Is now the OECD blaming central bankers? What? Since 1988, with the Basel Accord, Basel I, approved enthusiastically by the OECD, the sovereigns of the OECD, in other words OECD governments, for the purpose of the capital requirements for banks, have been risk weighted at 0%, while We the People have been assigned a risk weight of 0%. What good has that done us?

White writes: “The monetary stimulus provided repeatedly over the past eight years has failed to produce the expected expansion of aggregate demand.” Is expansion of aggregate demand by monetary stimulus the only thing that was expected to solve stagnation? If so, our grandchildren are screwed. What about the workings of the real economy, like the SMEs and the entrepreneurs, those that OECD and bank regulators don’t want to have access to bank credit, only on account of these being risky borrowers?

@PerKurowski ©

Statism, by way of bank regulations, marches on! Thou shall not hold anything but the Infallible Sovereign’s debt

Sir, Robin Wigglesworth in Short View August 11 writes: “New rules slapped on the US money market fund industry… are set to come fully into effect in October. The changes have spurred a gradual investor exodus from the funds, and the conversion of ‘prime’ MMFs which invest into corporate debt into ones that invest only in Treasuries (which are less affected by the new regulations).”

So clearly those statists that furthered their agenda by way of bank regulations, like in 1988 when the Basel Accord decreed a risk weight of zero percent for the government and 100% for We the People, keep marching on unabated.

And since Wigglesworth also refers to the Libor “Lie-bor” rate manipulation, let me also remind you that no private sector manipulation ever, has produced even a fraction of the costs for the society at large, as has the Basel Committee's outrageous manipulation of the allocation of bank credit to the real economy.

@PerKurowski ©

At what point do negative rates on government debt become absolutely incompatible with its zero % risk weight?

Sir, in reference to Dan McCrum’s “Fire up the printing presses for a useful jolt to the economy” August 5, this is what I have to say.

Government issues bonds, the public buy these, and central banks, wanting the economy to grow, then buy these from the public.

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then Martin Wolf and other recommend the government to take advantage of these low rates, in order to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then buy more government bonds from the public… and on and on it goes.

And, to top it up, banks and insurance companies are told by their regulators: “If you do not buy 0% risk-weighted government bonds, then you have to cough up with more equity”. And so banks (and insurance companies and alike) buy more government bonds, and the rates on these keep falling and falling… where does it end?

At what point do negative rates become absolutely incompatible with a 0% risk weight? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, if SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge higher interest rates, making the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©

John Kay, how can you justify the risk weight of the sovereign being zero percent? Are you a runaway statist?

Sir, John Kay holds “When real interest rates on 50-year maturities for sovereign bonds are roughly zero, there is little reason to worry about the fresh debt this imposes on our children. I am sure they would rather have houses to live in and be able to cross bridges that will outlive their parents.” “Smoke, mirrors and helicopter money” May 17.

Of course the children would, but only if they had the jobs that give them the income needed to pay for the mortgages and utilities of those houses, and only if those bridges took them somewhere they wanted or needed to go to.

And besides that real interest rates at roughly zero, should make the children think about from where is that income to pay for the parents pensions going to come, and so that they won’t have to help their loved parents survive.

Again, for the umpteenth time, if we as a society are not willing to take the risks of opening up new roads for our economy, our children’s future and ours is blocked.

And that is why I fight against the risk weighted capital requirements for banks that de the facto block these from financing the riskier future and keep them solely refinancing the for the time being safer past.

And Kay refers to “the belief that central banks can never be insolvent because they can always print money and that bank notes are not exchangeable for anything but another bank note”, but accepts that “if the central bank prints enough of them they lose their value.”

And so again I ask: If so, how can you then justify regulators setting the risk weight for so many sovereigns at zero percent? That helps the real interest rates on sovereign bonds to be low! That is a regulatory subsidy for government debt! A subsidy paid by all the "risky" that because of that are denied fair access to bank credit.

Also assigning the government a risk weight that is lower than the one given to the citizens, those who give the government its final strength, signifies, de facto, a belief that government bureaucrats know better what to do with bank credit than citizens. That is pure and unabridged statism!

@PerKurowski ©

Sovereign debt risk weightings system, which assigns a zero risk weight, needs more than overhauling. Throw it out!

Sir, soon 30 years after regulators decided with Basel I in 1988 that the risk weights for the “infallible” sovereigns were to be zero percent, Patrick Jenkins now writes: “finding a way to overhaul the absurd assumption that all government debt carries zero risk, is pretty fundamental for the future health of European finance” “Sovereign debt risk weightings system needs overhauling” May 3.

Boy is he lost! The question is not whether “all” governments should carry a zero risk, but whether any government should carry a higher risk weight than those citizens that represent whatever strength the sovereign has, and that now are risk weighted at 100 percent.

Anyone who thinks that banks should be able to leverage more their equity when lending to sovereigns than when lending to citizens, must believe government bureaucrats know better what to do with other peoples’ money, than SMEs and entrepreneurs with their own money and with what they owe, and so they must therefore be statists.

Sir, I am amazed how many statists there seems to be at the Financial Times.

@PerKurowski ©

What? “ROE is not a meaningful measure of performance”? If you are a shareholder it sure is.

Sir, Oliver Ralph writes: “Most big banks use their own assessments of risk when calculating RWAs, and there is no clarity about how they do so. “Flawed return on equity metric will not be shaken off easily” November 17.

There might not be clarity about the “how they do so” but there is no doubt about the why they do so. It is to lower the equity requirements, so that they can earn as high as possible expected risk-adjusted returns on assets. Just like kids would promote the nutritional value of ice cream and chocolate cake and negate steadfastly that of broccoli and spinach.

Of course the return on equity ROE is one of the most important measures they are and good luck to anyone trying to raise capital saying it isn’t so. Oliver Ralph is perfectly clear when stating “Ignore it at your peril”.

Bank ROE has of course mutated as an information tool. Nowadays it is very difficult to establish how much of it is produced from real banking… how much from over-leveraging banking, and how much from pitifully bad risk weightings.

Suffice to see the zero percent risk weights for sovereigns. Those sovereigns who in our face announce inflation targets so that can repay us with currency worth less… those which already mention the need of increasing taxes in order to repay their debts.

@PerKurowski ©

“Treasury risks” and the zero percent risk weight for Treasuries, do seem a bit like odd bedfellows.

Sir, I refer to Robin Wigglesworth’s “Treasury risk rises as debt ceiling looms” October 9.

I just want to point out how strange it is to read about Treasury risks, in a world in which no one discusses the zero percent risk weights for Treasury, that set when determining the risk-weighted capital requirements for banks.

@PerKurowski ©  J