Democracy goes way beyond the 1% vs. the 99% debate.

Sir, I agree in much with what Edward Luce puts forward in his “America’s democracy is fit for the 1 percent” March 31 but, the issue of undue influence in a democracy, goes much further than the simplistic 1% vs. the 99% debate.

For instance I hold the view that corporate taxes should be zero, since only citizens should be able to wield the influence of paying government bureaucrats their salaries.

And also that 1% too often seems to imply that all those in the 1%, like in the 99%, are alike which we know they aren’t. For instance you would not want to tax the wealthy in order to further benefit the oligarchy, or do you?

Instead of QE, why not an ECB cheque to each European?

Sir, Wolfgang Münchau comes strongly out in favor of a quantitative easing program of well over $1tn… among other “to get banks to sell assets to the ECB, the proceeds of which they would use to lend to companies”, “Central bankers talk far too much and act to little” March 31.

I wonder, with current risk-weighted capital requirements for banks, would that lending to companies really result in a for the real economy efficient way? It would not! For that, better than QEs, is to get rid of those entirely unmerited regulatory distortions against the access to bank credit of “the risky”, medium and small businesses entrepreneurs and start-ups.

And since lately there has been quite some outrage over the unequal distribution of wealth, should we not consider that QE’s, the way they have been designed, are really drivers of inequality? In that case, why not a cheque to every European instead, and then take it from there? Please don’t let anyone fool you, ECB, by buying specific type of assets, is handing out lots of free cash to some few.

Europe needs energy, indeed, but more than electricity human energy, that which is propelled by risk taking.

Sir, Leif Johansson, the chairman of Ericsson and Astra Seneca, when urged by the FT to pick out one issue that needs to be addressed to make Europe more competitive, suggests: “energy; both security of supply but also energy competitiveness especially versus the US”, March 31.

I would agree but, instead of energy represented by electricity, which is what Johansson refers to, I would argue for the need of more human energy… that which is driven by the willingness to take risks.

That human energy is currently being killed by regulations which allow, in Europe more than anywhere else, banks to earn higher risk adjusted returns when lending to the “infallible sovereigns” and the AAAristocracy, than when lending to the “risky” medium and small businesses entrepreneurs and start ups.

Leif Johansson should remember that in the churches of Sweden psalms were often sung imploring “Gud gör oss djärva”, “God make us daring”.

Right now banks in Europe are not financing the risky future, they are just refinancing the safer past… and that Europe, is no way to go.

Believing too much in “the power of peace” can be hazardous to the health of your nation.

Sir, I refer to Simon Kuper’s “The surprising power of peace”, March 29.

It is always better to be skeptical and pleasantly surprised by “the power of peace” than naïve and unpleasantly surprised by its weakness. Most Venezuelans, including most of those who strongly protested the previous ways of Venezuela, and thereby perhaps unwittingly helped to open the way for Hugo Chavez, stand today in utter disbelief watching how everything has degenerated. I cannot but reflect on how much better off we could have been if we had believed much much less in “the power of peace”.

And I say this also in reference to George Osborne and Wolfgang Schäuble now recommending a “balanced and proportionate” response to Russia. That sounds a bit like believing too much in “the power of peace”.

How do we rein in runaway obsessions with data, like that of the Basel Committee?

Sir Tim Harford’s article “Big mistake?”, March 29, is just great.

When Harford mentions that “Google’s own search algorithm moved the goalpost when it began automatically suggesting diagnosis when people entered medical symptoms” he refers to the problem of knowing whether the data one looks at is original or is data which has resulted from the looking.

In other words when acting upon the data one interferes with the data. That is for instance what happened in the case of the Big Basel Committee Mistake.

Regulators looked at credit ratings and decided that when these were excellent, banks needed to hold less capital, and so banks then made higher risk adjusted returns on equity, and so the banks naturally rushed in to increase their holdings of these assets… so much that these assets very fast became very dangerous to the banking system as a whole, as in the case of AAA rated securities and Greece.

That to me was perfectly clear would happen when in January 2003 FT published a letter in which I said: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

Unfortunately since there is still little data that shows regulators have fully understood the problem, I wonder how Harford or anyone else suggest we reign in the runaway obsessions with data.

When and if taxing the wealthy, because of inequality, remember that governments are part of the problem.

Sir, Thomas Piketty proposes to “Save capitalism from the capitalists by taxing wealth” March 29, and of course there’s nothing wrong with those having the most in society carrying the heaviest load… especially when it comes to finance opportunities.

But, as Piketty also admits, much of the reason for the growing unequal capital is that “the political process [is] so tightly captured by top earners”… and so governments are part of the problem, and can therefore not be trusted with efficiently distributing those revenues.

For instance, if the purpose is to fund education, I can think of many systems whereby funds from the wealthy can go directly to pay for the costs of less wealthy students, with no one getting their hand in the tilt for political or other purposes.

In other words, when redistributing economic wealth, we must make sure we are not increasing excessively the might of wealthy governments, since that can create and even worse sort of inequality, which could endanger capitalism even more.

Personally, before going after the wealthy, I would prefer to tax at a higher rate all those who benefit from special relations… be it monopolies, protected intellectual property or similar… because even in the case of wealth there are some which are better earned than others.

PS. And let me take the opportunity to remind of the need to get rid of that odious opportunity killer, and that odious inequality driver, that risk based bank capital requirements represent… and which of course has nothing to do with capitalism and all to do with regulatory foolishness.

On responding to Russia and on Europe’s decline, Churchill and von Bismarck might have differed from Osborne and Schäuble.

Sir George Osborne and Wolfgang Schäuble write about responding to Russia in a “balanced and proportionate way”, “The eurozone cannot dictate Europe´s rules alone” March 28. Is that really enough? Might it not be so that history shows that Europe must respond to Russia in an unbalanced and disproportionate way?

And these two European gentlemen also write that “No one should assume that European decline is inevitable”. No… but it can happen! As long as regulators, with their risk weighted capital requirements allow banks to earn higher risk-adjusted returns on equity when lending to what is perceived as “safe” than when lending to what is perceived as “risky”, its decline is inevitable. In order to have a future Europe must risk continuing opening those risky doors behind which its luck might be hiding.

Sir, do you believe Winston Churchill and Otto von Bismarck would have cosigned George Osborne´ and Wolfgang Schäuble´s article?

With respect to increasing bank capital we need banks and regulators to be partners, not enemies.

Sir I refer to Gina Chon and Camilla Hall’s “Fed looks beyond bank’s financial targets” March 27.

As a result of regulators falling for the risk-weights’ trick, banks are now, ate least when compared to pre-Basel Committee history, dramatically undercapitalized. It behooves everyone in the economy to see that capital increased substantially so that bank credit is not unduly blocked.

I have no idea of what the Fed saw in Citibank when performing its stress testing and that caused it to reject its capital plan for dividends and share buybacks, but I do know that if the word “punishment” describes it appropriately, the Fed is on the wrong track.

If the real economy is going to get out of this mess… and it is a mess… the Fed and the banks must be partners in finding lots of new bank capital in a credible way. And bank capital will not be raised sufficiently by mistreating the shareholders of banks… nor by fooling some investors into buying Coco bonds, suspecting the probabilities for these to be converted, are knowingly underrepresented.

In fact the Fed and other regulatory authorities must tread on the issue of Coco bonds with extreme care, less they also be liable for withholding information and misrepresentation. And for this I refer to “Flurry of Coco bonds sends yields tumbling” by Christopher Thompson.

If I buy a Coco today and become converted into a bank shareholder three years from now I guess I cannot complain... but what if that happens three weeks from now?

Perhaps Otmar Issing should lower the volume of his preaching to Europe.

Sir, in much I agree with what Otmar Issing writes in “Get your finances in order and stop blaming Germany”, March 26, though perhaps he might not be the best suited to be doing the preaching.

As a former chief economist of ECB Issing should have known that: allowing German banks to lend too much to for instance Spain and Italy, against zero capital, and affecting those German small businesses who do not get credit because when lending to them German banks do need to hold much capital; and which later might cause German bank busts which hurt German taxpayers, could be said being disguised transfers from Germans to Spain and Italy.

When Otmar Issing ends stating “The Eurozone did not fall into a crisis because the initial rules were flawed” he should not forget how flawed bank regulations became, are.

Otmar Issing, for your benefit, here´s an aide-mémoire… Who did the Eurozone in?

$100bn in legal settlements for banks also means $2tn less in bank lending capacity

Sir Richard McGregor and Aaron Stanley write on FT’s first page “Banks hit by $100bn in US legal settlements since crisis” March 26.

If I was a medium or a small business, an entrepreneur or a start-up, starved for bank credit, and if I multiplied that bank capital gone in legal settlements by the allowed leverage implied by in a 5% leverage ratio, 20 times, I would know it means I am $2tn in bank credit capacity further away from having my fund needs satisfied.

If in Europe, with its Basel III 3% leverage ratio, 33 times, I would find myself an even more distant $3.3tn from it.

If Europe (and America) does not free itself from runaway control freaks… game´s over.

Sir, John Kay writes “Regulators will get the blame for the stupidity of crowds” March 26 though what is most urgent in the Western world, so that accountability would mean something is that regulators should be blamed for their own stupidity.

Kay writes “Naivety is as much of a problem as criminality. Most businesses plans read persuasively- until…” Indeed, but rarely have we seen something as naïve as bank regulators who thought and still think that with their trick of risk-weighing the capital requirements, they could produce safe banks without producing dangerous negative ripples in the real economy.

Kay writes about concerns “about the availability of funds to small and medium sized businesses” and holds “The flow of intermediation is blocked by the debris of bank failures”. Wrong! That flow of intermediation of funds is primarily blocked by the fact that regulators require banks to hold more capital against it than against the flow of funds to for instance the “infallible” sovereigns or to the AAAristocracy.

Kay concludes mentioning that there were some institutions which provided “the new P2P lending and equity crowdfunding services… They were called banks.” But, instead of begging for banks to return to what they were, he calls for the regulators to make sure that what´s new should be “operating in a more closely regulated environment”. Frankly!

Let me phrase it the following way. Every time a bank credit in Europe (or America or anywhere else) is not given to a small and medium sized business, only because these cannot provide the banks with a competitive return on equity as a result of higher capital requirements, a door, behind which we could find the luck needed to power our future, has been shut.

More than “safer” we need to make our financial system more “functional”

Sir, as an Executive Director in the World Bank, 2002-2004, during the Basel II discussions, with respect to big banks I said: “Knowing that “the larger they are, the harder they fall” if I were regulator, I would be thinking about a progressive tax on size”. 

And, so of course I find Mark Roe’s and Michael Tröge’s proposal of “How to make the financial system safer”, March 25 quite interesting.

That said many questions come to mind.

First, if there is a tax on liabilities, who will pay for it the most, borrowers by means of higher interests, or depositors by means of lower interests?

And, since what equity holders are really out after is high returns on their equity, and these are much obtained through leverage, it would not seem like these taxes would be able to sufficiently substitute for regulations that limits bank leverage.

But the authors also state: “Until now, regulators have largely used command and control mechanisms to make banks safer: requiring them to have more capital, banning or reducing their riskiest activities, and punishing reckless behavior after the fact”. And on that I must comment.

What regulators have NOT done is requiring banks to have more capital to reduce risky activities; what they have done is allowing banks to have very little capital for what was perceived as “absolutely safe” not risky activities… and that is what really has created the big risks.

And so when the authors write that “Banks understandably do not like regulators getting involved in their strategic decisions” it shows they have not yet understood what has been going on.

On the contrary, banks have LOVED regulators for getting more and more involved with their strategic decisions… to such an extent of having even adopted the banks risk models of capital allocation.

No it is we, the not bankers, we who want safe and functional banks, we who do not want the regulators to get involved with banks’ strategic decisions. Let the banks do what they want in order to prepare for any expected risks, and expected losses, because that is truly all they can do.

The regulator’s role on the contrary is to make sure there is some bank capital to take care of the unexpected risks, of the unexpected losses, of the risks of banks not being able to do good strategic decisions, and for that it is almost a sine qua nom, that the regulators stay away as far as possible from the influence of banks.

Right now, as a result of regulators layering their risk perceptions on similar banker’s risk perceptions, we have an unsafe and utterly dysfunctional banking system incapable of allocating credit efficiently to the real economy. And so, before doing anything more creative let us just correct for that.

And also, more than bankers devising “fiendishly complicated transaction to work around the rules”, the reality might be regulators designing innumerable rules for the bankers to work around.

What is the use of a perfect banking union among imperfect banks?

Sir, on March 24 you refer to “A highly imperfect banking union”, but leave out what is the most important fact, namely that this union is among imperfect banks. That Eurozone banks and sovereigns remain tightly embraced”, as you subtitle it, has less to do with a flawed union and much more to do with fact that regulators allow banks to lend to the European sovereigns holding much less capital than when lending to other European unrated borrowers.

And such regulations as you should understand, makes it impossible for banks to allocate bank credit efficiently.

FT, you need more journalistic boldness to live up to your motto, “Without fear and without favour”

Sir, again you publish the “Boldness in Business” extra in which you celebrate boldness. And yet you are still not been able to write about that absurdly misguided and extremely dangerous cowardness that has taken over bank regulations.

For the umpteenth time… current risk based capital requirements allow banks to earn much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”.

That not only stops banks from giving adequate access to bank credit to those who most need it, like medium and small businesses, entrepreneurs and start ups, but it also guarantees that banks will, against much too little capital, be building up dangerous exposures to “infallible sovereigns”, to “safe” sectors as housing, and to the AAAristocracy.

What is keeping FT from putting forward this matter for discussion” Might it be some lack of boldness among those who so proudly proclaim “Without fear and without favour”?

The risk based capital requirements for banks represent a tragic crossroad of history

Sir, I refer to Simon Kuper’s great description of the assassination in Sarajevo which initiated World War I, “The crossroads of history”, March22. He writes that “you want to shout at Franz Ferdinand across history ‘Get out of town!’“ That was the kind o warning that some of us were shouting out when we saw what was coming at us in Basel II.

Really that day when someone came up with the suggestion that banks would be safer by means of capital requirements based on risks, more risk more capital, less risk less capital, and no one in the inner circle that mattered objected strongly enough … that day the world, especially the Western World, took the wrong path at the crossroads of history.

Not only would this regulation severely distort the allocation of credit to the real economy, but it would also make the bank system much riskier, since we know that all major crises have always resulted from, excessive exposures to what was ex ante considered as “absolutely safe”.

It was bad enough having already allowed banks to hold less capital when lending to the housing sector, since this ignored the fact that a house that comes without a job is really sort of a second class house… but then, allowing banks to earn higher risk adjusted returns on equity on what is perceived as “safe” than on what is perceived as “risky”, that really turned it into an outright criminal history changing event.

Kuper with respect to the Bosniche Post’s late edition “You sense a small local paper struggling to cope with the news story of the century”… and I sense the struggle of the Financial Times to ignore the financial story of the millennium!

Kuper also mentions that one of the two assassins who survived jail, Vaso Cubrilovic, has stated “It wasn’t our intentions to cause a world war”. But, Sir, the amazing fact is that those who were responsible for the Basel II AAA-bomb, those who of course had no intentions of causing us a bank crisis in the world, are still allowed to freely shoot down the prospects of jobs for our youth with their “improved” Basel III.

Pray the future which gifted minds will prioritize is that of Venezuela, and not just that of the gifted minds, like Cisneros’.

Sir, Gustavo Cisneros holds that “Vatican diplomacy could be Venezuela’s salvation”, March 21. I wonder how much diplomacy he believes is needed to overcome Venezuela’s original economic sin, namely that all oil revenues flow directly to the government coffers. As is, that income currently signifies around 98 % of all the nation’s exports.

Had oil revenues been shared out directly to the Venezuelan citizens and so that the government worked for them and not the other way round, then Cisneros would also perhaps have seen no reason to enter into a cozy relation with the government which has so discredited him with one half of Venezuela. And then Cisneros might not have been in need to prepare these just in case the wind abruptly changes mass marketed editorials.

“Gifted minds that prioritize the future will build consensus”. Indeed but let the Vatican and all of us pray that the prioritized future refers to Venezuela’s, and not just to that of the gifted minds.

http://theoilcurse.blogspot.com/

http://petropolitan.blogspot.com/

Europe, a perfect disunion of useful banks, is much better than a perfect union of useless banks

Sir, Wolfgang Münchau holds that “Europe should say no to a flawed banking union”, March 17.

Indeed, I agree, but not so much for the reasons Münchau holds.

Current risk based capital requirements allow banks to obtain higher risk adjusted returns on equity when lending to the safe than when lending to the risky. And that distorts completely the allocation of bank credit to the real economy. And banks which do not allocate bank credit efficiently are useless banks.

And in reference to bank unions, nothing sounds as systemic dangerous than a perfect union of useless banks. Were regulators to make amends for their mistake, then Europe would anyhow be much better off than today with a perfect disunion of useful banks.

Sometimes there is even more homeland business going on outside the borders than within.

Sir, Tim Harford writes “The world economy is far more integrated now. Some of this globalization is independent of national borders…”, “The Business of borders” March 15.

Indeed, in 2007 I estimated the earnings of the emigrants of El Salvador working in the USA, to be 67 percent higher than the GDP produced in El Salvador by those who remained in their country.

ECB should foremost help to eliminate, not neutralize, the distortions produced by risk based capital requirements for banks.

Sir I refer to Martin Wolf’s “The spectre of eurozone deflation” March 12. In what can be done about that threat Wolf mentions that “the ECB… should announce a longer-tem refinancing operation to unblock the flow of credit to small and medium sized enterprises”.

Sir that indicates that Wolf still refuses to acknowledge the fact that credit has been blocked to these borrowers, not by a lack of funds, but because banks are required to hold more capital against loans to them, and this only because regulators decide these are much riskier than loans to the “infallible sovereigns” or to the AAAristocracy, and feel they have the right to intervene and distort.

Well no, until the horrendous regulatory mistake committed by Basel regulations is fully recognized, and a careful plan out of the imbroglio has been executed... any independent ECB effort to neutralize the distortions could make matters worse.

PS. Sir, You decide whether you want to copy Martin Wolf with this or not. I will not since he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

The Basel Committee blocks Machievelli´s historical fortunas, while making our mis-fortunas worse.

Sir, Timothy Garton Ash makes reference to “!historical luck, the fortuna that Niccolὸ Machiavelli calls the arbiter of half of the things we do” "States are born by accident but sustained by ardour”, March 8.

That applies directly to what I have in vain been trying to explain to FT for so many years now about what is wrong with current bank regulations.

Capital requirements which allow banks to earn higher risk-adjusted returns on equity when lending to the “safe” than when lending to the “risky”, effectively blocks the access of bank credit to the fortunas the real economy needs to grow and remain sturdy, while at the same time guaranteeing that if a huge mis-fortuna happens, like when an “absolutely safe” suddenly turns out very risky, banks will not have the capital to defend themselves with.

I am sure future historians will write about the period when the Basel Committee castrated our banks and with that our economies, and the elite like the Financial Times kept mum about it.

God make us daring!

And what if the captain of the Titanic had unwittingly directly set the course on an iceberg?

Sir, I refer to Tim Harford’s “Let’s have some real-times economics” March 8.

Let’s suppose we have parents who like cookies and chocolate and dislike broccoli and spinach so much they want to make certain their kids eat cookies and chocolate and stay away from broccoli and spinach.

And so, ignoring that kids already share their taste preferences, they reward their children with chocolate if they eat cookies and punish them with spinach if they eat broccoli.

And of course the result is their children grow into a generation much more obese than their parents who, in their younger days have been told to eat broccolis and spinach too.

The above describes the risk-weighted capital requirements that, one way or another, especially since 2004 when Basel II was approved, have distorted the allocation of bank credit to the real economy.

Banks are told that if they lend to the “safe”, something which they already liked, they need to hold less capital and will therefore be rewarded with higher risk-adjusted returns on their equity than if they lend to the “risky”. 

And, as a result, the “infallible sovereigns”, the housing sector and the AAAristocracy receive too much bank credit in too lenient terms; while the “risky” medium and small businesses, entrepreneurs and start-ups receive too little credit in too onerous terms. And as a result the banks grow dangerously obese with “safe” fats and carbohydrates, all while the real economy becomes weakened from the lack of “risky” proteins.

And so, if Harford can express the “frustration of watching… Titanic… The ship is doomed, yet our heroes suspect nothing ”, when reading the recently published transcripts of the Federal Reserve’s Open Market Committee held on September 16 2008, to me it is worse. 

I see no evidence of that, at least with respect to bank regulations, "our heroes" show they knew they were setting the course on an iceberg. Worse yet, they might still not know it, and so our banks and our economies are set on the course of crashing into new icebergs.

Why can’t lending to female entrepreneurs be leveraged as much as lending to “infallible” sovereigns?

Sir, Gillian Tett writes about Goldman teaming up with the International Finance Corporation, the private sector lending arm of the World Bank, by putting $50m into a $600m fund that would extend loans to 100.000 cash starved female entrepreneurs, “Goldman discovers that money can buy respect”, March 7.

That represents a 12 to 1 leverage which, when compared to the 33 to 1 leverage Basel III minimum allowed by the 3% leverage ratio, seems extremely small, in relative terms. As I see it there is no doubt that a well diversified portfolio of loans to female (or male) entrepreneurs must be more productive and safer than a portfolio concentrated in loans to some infallible sovereign, to the housing sector or to someone of the AAAristocracy. If so the fund instead of $600m could be $1.650. 

In conclusion, Morgan and the World Bank should be able to do much better for women entrepreneurs by lobbying the Basel Committee… though I do understand that the publicity value of such efforts might not be that large.

FT, perhaps you should ask for some time out in order to collect your marbles.

Sir I refer to your “The BoE’s big test is yet to come” March 6.

You write “QE has increased wealth inequality” true, but then, sort of as an excuse, you hold that “some of this inequality is temporary and will be reversed when the monetary support is withdrawn”. A truly astonishing statement that can only be interpreted in the animas of Keynes’ “in the long run we are all dead”.

And then you write: “QE… failed to produce the kind of sharp rebound policy makers had hoped for… The banks have failed to lend to smaller enterprises, which would have helped to spur growth”. True, but then again, as a sort of excuse you hold that “the BoE does not decide what banks… do with their money”. And that Sir you should know by now, at least from my over 1000 letters to FT on the subject, is a completely false statement.

BoE, by approving of different capital requirements for banks for different assets, based on ex ante risk perceptions, allow banks to earn different risk-adjusted returns on equity for different assets… and if you think that does not represent the kind of carrots and sticks that make banks decide what to do with their money, then you might be in need of some time out in order to collect your marbles.

Britain, if you had oil revenue power concentrated like in Venezuela, yours could be even more of a ‘malandro’, a hoodlum, nation.

Sir, I refer to 99.99% of what is currently written about Venezuela, like yours “Venezuela: the ‘malandro’ nation” March 5.

If you’d only taken time to really set yourself into the challenges of a country where over 98 percent of all its exports go into government coffers, you would not be writing about a “Hugo Chávez legacy” or the charmlessness of his successor, Nicolas Maduro.

You would probably be writing about the fact that no one, no matter how good intentions he has, no matter how charming he is, no matter how brilliant he might be, should, in the company of some few petrocrats and oilygarchs, have the right to wield such extraordinary powers.

And Andres Schipani titles his report “Venezuela´s poor wait for the revolution to deliver”, which only helps to promote the illusion of something waiting for them at the end of the rainbow. A much better title would be “Venezuela´s ever growing poor keep standing in the wrong line”

No Sir, let me assure you that if your Britain was set up as my Venezuela is, yours might be a much more ´malandro’ nation than mine… suffice to see what happened when some of your kings wielded too much power… and heads rolled!

When fighting inequality, in a sustainable way, it is more important to distribute opportunities than to redistribute income.

Sir Jonathan Ostry, a deputy director of the research department of the IMF holds that some recent research indicates that “Redistribution is associated with higher and more durable growth” “We do not have to live with the scourge of inequality” March 4.

Indeed that might be so but, before redistributing income, making sure opportunities are equally distributed, is much more important when fighting inequality, at least in a sustainable way.

For instance there are some ludicrous risk based capital requirements for banks that by favoring the “infallible sovereigns” the housing sector and the AAAristocracy, discriminate against the access to bank credit of “the risky”, mostly the medium and small businesses, the entrepreneurs and start-ups.

Unfortunately, both the World Bank and the IMF have been totally silent on this inequality driver for much too long.

If Ostry really wants to help out, then he should recommend IMF’s research department to look into the reasons for all major bank crisis in history. That research would be extremely helpful, since it would certainly indicate that the Basel Committee for Banking Supervision is going after the wrong “risky”.

Unfortunately, the fact that something is correctly stated does not suffice for it to be correctly understood

Sir, John Authers writes “Risk is greatest when there is no perception of risk” March 3. Indeed that is what I have written to you and to Authers innumerable letters over the years. Those perceived as “absolutely safe” are those who pose the largest possibility of dangerous unexpected losses.

And yet, nailing the truth, and even holding that “regulation can easily be counterproductive”, Authers’ still seems incapable, or not wanting, to extract the most important lesson from it.

That lesson is of course that current risk based capital requirements for banks, those based on the perceptions about the risks of expected losses make absolutely no sense at all.

The strange inability to infer the right conclusions from the right facts is also made very clear by how Authers’ ends his article. There he holds that the cure for “the greatest risks come from those things that have no history of problems, and which are not perceived as high risk” is additional “research [in this case] into fund manager’s systemic risks”… and that, Sir, is proposing to dig us even deeper in the hole he now knows we’re in.

To find a solution to Venezuela, you have to be clear about its problem.

Sir, John Paul Rathbone, Andres Schipani and Mark Frank write “Venezuela: In search of a solution” March 3.

I am sorry, that neither Venezuela nor your reporters can identify the real problem, just shows how hard it is to develop a solution to its problems.

Let me just ask… what would you believe the real problem of the Britain would be, if your government was receiving, as income, to dispose of in any way it liked, over 98 percent of Britain’s exports?

What’s the added value of bank regulators who only concern themselves with the risks bankers already perceive?

Sir I refer to Martin Arnold´s “Foreign banks scramble to calculate potential losses if crisis deepens [in Ukraine]", March 3, just to remind you of the fact that these are the type of “unexpected losses” against which bank regulators, in excess of their quite low leverage ratio, do not require banks to have capital against.

In other words poor us, our banks are in hand of regulators who are primarily concerned with the risks we, or at least our bankers, should all be able to perceive. What’s the added value of that?

Risk weighted capital requirements for banks guarantee excessive exposures against little capital

Sir, I refer to Martin Wolf’s lunch conversation with Andrew Smithers, “I don’t have any faith in forecasts” March 1.

In it Wolf quotes Smither saying “There’s a chapter in the new book on what I think economics should be about, which is not forecasts. It’s about not taking the wrong risks. You don’t know what’s going to happen but you can avoid excessive risk-taking and this, unfortunately, has not been the policy of the Federal Reserve”… and I would have to add, and neither of the Basel Committee.

Bank regulators, with their risk-weighted capital requirements, which are not even based on forecasts but on current ex ante perceptions of risks, guarantee excessive risk taking, against very little capital, to what is perceived as absolutely safe.

I am not copying Martin Wolf with this as he has expressed not wanting to hear more from me about risk-based capital requirements… he knows it all, at least so he says, but, since the above is precisely what Wolf seems unable to understand… perhaps you should copy him.

Capitals of ordinary citizens should also have rights to political asylum.

Sir I refer to your “Close the account on Swiss secrecy” February 28. If I wanted to be politically correct, I guess I would have to loudly shout out a “Hear, hear!”

BUT, I need to add that in the same vein there is political asylum granted for people being persecuted in their homeland, there should also be asylum rights granted to capital when these are being persecuted, beyond reason. Otherwise the closing down of a possibility to hold secret accounts seems a bit like a wet dream of a Global Sheriffs of Nottingham mutual admiration club.

I have no firm idea of how to go about it, but perhaps there could be a Global Council of Citizens, in front of which a citizen could anonymously make a specific country based appeal. When? Perhaps when taxation becomes too high, let us say over 50%; when the government role in the economy becomes too high, let us say 40% of GDP; or when there are notoriously public displays of government waste.

But of course, the capitals of anyone who has held a government office within a period, like for instance the last 20 years, should possess no such rights.

Really, is there anything to be gained by retaining all capitals of all citizens in a country, if all that means is that the capital gets all wasted?

I remember when my country, Venezuela, in February 1983 woke up to a huge financial disaster, mainly as a consequence of the government having acquired too much debt and keeping the Bolívar from devaluing too long. At that moment most politicians swore that the cause of it all was capital flight, and this even when they all must have known that had there been no capital flight, it would all have been wasted. The truth is that the capital reserves built up abroad by some Venezuelans, by quite a few in fact, then allowed Venezuela to recover fairly fast from the disaster… unfortunately only to start the buildup of the next one.

Also, FT, do you really want to close Switzerland down as a haven for secret capital flight when that might only mean promoting other deeper and darker havens?

PS. Granted you might not really know what it is to be living in countries like Zimbabwe.

PS. I recently ended and Op-Ed in my country with the following PS: “In a country in which all those here described injustices are committed, and many more, and on top of it all they print out monstrous amounts of inorganic Bolivars without caring about the inflation that will cause, one could ask: Is not capital flight sometimes a citizen's moral obligation… towards his own nation?

Divorce counselors should urgently remind banks and regulators of the kids, the real economy.

Sir I refer to Gillian Tett´s proposal of having conflict specialists, sort of “divorce lawyers”, handling some of the issues derived from conflicts arising from regulatory differences in different regulatory jurisdictions, “Regulators may disagree but should say who calls the shots”, February 28.

On one hand banks, naturally, want to make as high return on their equity as possible and, on the other, current regulators want banks to avoid taking any risks.

And the result of all the bickering has been that banks are now allowed to earn huge risk adjusted returns on equity, as long as they lend to what for the moment van be perceived as “absolutely safe”, like any “infallible sovereigns”, the housing sector, and the AAAristocracy… so that banks stay away from lending to those perceived as “risky”, the medium and small businesses, the entrepreneurs and start-ups.

And so I would instead hold that it is more urgent to call in divorce counselors so as to remind the parties of the fact that you cannot possibly discriminate this way in the family, the real economy, without it breaking down.

Indeed... why not a tax on too-big-to-fail-banks?

Sir, I refer to James Politi’s and Gina Chon’s “Big banks pledge to fight tax on assets” February 26.

In May 2003, more than a decade ago, as an Executive Director of the World Bank (2002-2004), below is what I told some hundred bank regulators gathered at the World Bank for a Risk Management Workshop.

“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.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And while you're at it, Mr. Dave Camp, US Congress, House Ways and Means Commitee, look into this too

In order to rein in inequality, bank regulations must change too.

Sir, I refer to Professor Robert H Wade’s letter “In order to rein in inequality, market need to change”, February 21. Therein Wade writes: “any serious attempt to rein in income and wealth inequality in the US, Britain and elsewhere has to change the institutional structure of markets so that they are less efficient at sluicing pre-tax income up towards the top”.

That is correct but let us not ignore that at the core of that “sluicing”, lies the number one source of damnable inequality politics, namely that which impedes equal opportunities for all. And in this respect, nothing is sluicing cheap and plentiful bank credit away from the “risky” medium and small businesses, entrepreneurs and start-ups, towards the “infallible sovereign and the AAAristocracy, than the current risk-weighted capital requirements for banks.

And that these capital requirements do by allowing banks to hold much less capital against assets deemed “safe”, than against assets deemed “risky”, which of course means that banks will earn much higher risk-adjusted returns on equity when lending to what is perceived as “safe”, than when lending to what is perceived as “risky”.

And all that odious regulatory discrimination for nothing, since never ever has a crisis of the bank system resulted from excessive exposures to what was ex ante perceived as “risky” these always have resulted from excessive exposures to what ex ante was perceived “absolutely safe” but that, ex post, turned out to be risky.

Sadly though, that regulatory discrimination seems to be of no concern whatsoever for most current “inequality fighters”… (like Professor Joseph Stiglitz)

FT’s silence makes it unwittingly a lobbyist for “The Infallible” accessing bank credit on preferential terms

Sir, I refer to Sarah Gordon’s Analysis on a serious lack of bank-credit to SME’s in Europe, “Give them some credit” February 19. And how bad things are is not really clear, because for instance “Published interest rates do not take into account potential borrowers who have been offered loans with high interest rates that they then decline, those who have been refused credit, or those who have simply become discouraged and stopped asking.”

Gordon writes “Banks have become more risk-averse since the crisis, not just to protect their bruised balance sheets but also to meet demands from regulators to improve capital buffers”. And the article also quotes Daniel Cloquet, director of entrepreneurship and SMEs at Business Europe, stating “At the moment, the capital requirement rules basically favor [banks holding] government debt.”

So clearly one of the main obstacle for the SMEs accessing bank credit, something about I have been writing you innumerable letters, are the risk-weighted capital requirements. By favoring so much bank lending to the “The Infallible”, like to some sovereigns and the AAAristocracy, these discriminate against the bank borrowings of “The Risky”.

But even though Gordon refers to a serious of other initiatives to help financing SMEs, some of which, like online crowd-funding mechanisms sound truly marginal… again there is not a word about the need of changing the risk-weighted capital requirements, so as to eliminate the distortions they produce in the allocation of bank credit to the real economy. And, this even though FT must be aware by now that never ever has a systemic bank crisis resulted from excessive exposures to SMEs and similar.

And so I have to conclude that for one reason I cannot really comprehend, the Financial Times does not really care about that capital requirement banks makes it harder for SMEs, and similar “risky”, to access bank credit.

And the truth is that FT’s silence on this issue makes it effectively a lobbyist for “The Infallible” accessing bank credit on preferential terms. I assume it is not on purpose.

Bank regulators, Basel Committee, Financial Stability Board, listen to Violet Crawley “Don’t be defeatist, it’s so middle class.”

Sir, Lawrence Summers writes “Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve results. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences”, “America risks becoming a Downton Abbey” February 17.

He is right. One reason for growing inequality is that notwithstanding banks already lend less, at higher interest rates and in tougher terms, to those perceived as risky, regulators decided to intervene by requiring banks to also hold much more capital when lending to “risky” medium and small businesses, entrepreneurs and start-ups, than when lending to an “infallible sovereign”, or to the AAAristocracy.

And regulators did that because they were too scared of risk as such and because they never got down to understand: first, that for the banking system, what is truly dangerous is what is perceived as absolutely safe and can therefore generate too big exposures; and second, for the real economy, what is most dangerous long terms is not taking the necessary risks.

And so, if I was to bring Downton Abbey into this issue, that would be by quoting Violet Crawley with her straight to the point “Don’t be defeatist, it’s so middle class.”

No Mohamed El Erian, nowadays, extraordinarily dumb bank regulators, are making it all so much worse.

Sir, Mohammed El Erian in reference to banks betting on risky emerging markets holds that “In some ways today’s financial sector is little different from the one I first got to know decades ago… Yet not everything has gone full circle. Regulators and shareholders no longer allow banks to make such risky bets, even though they hold more capital” “Emerging world fashions that change with the seasons” February 15.

What? He must mean regulators no longer allow banks to make such risky bets… because banks are allowed to hold so much less capital when lending to something perceived as “absolutely safe” and therefore have to go where they can earn so much higher risk-adjusted returns on equity.

Banks have always lent primarily to what they have perceived as safe and tried to avoid what seems too risky. The difference nowadays is that regulations are helping banks to build up even larger and more dangerous exposures to what is ex ante perceived as absolutely safe but that could, foreseeable, become very risky ex post… and, when that happens, bank will then be guaranteed to find themselves naked with no capital to defend themselves with.

In other words, not everything is the same, extraordinarily dumb regulators are just making everything so much worse.

The “peskiest exceptional” that hit our banking system was dumb Basel Committee regulators.

Sir, the LEX Column, February 14, when referring to French banks, writes about how hard it is to provide a shareholder’s return when “pesky exceptionals keep butting in”.

But, the reality of “pesky exceptionals”, is the primary reason for which banks need to hold capital because if any ordinarily perceived risks are not adequately managed then the responsible banker should be fired or the bank must fail… or both.

Unfortunately that is precisely the big mistake of Basel Committee’s bank regulations… the capital requirements were set not based on the possibility of unexpected “pesky exceptionals”, but based on the ordinary perceived risks of the expected losses.

In other words, with Basel II, we had the misfortune to run into exceptionally pesky regulators; who we now have unfortunately allowed to keep on working on Basel III. In this respect not holding regulators accountable, is also turning us into pesky exceptionals.

With bank regulators like the Basel Committee the real economy needs non-banks.

Sir, I refer to Gillian Tett’s “Titans of finance have moved on from banks” February 14.

There she writes: “What is really striking is the volume of non-bank financing that is quietly being supplied with minimal regulatory scrutiny… Non-banks are swelling in size because they do not face the same regulatory burden as banks, allowing them to turn a profit on business that banks now find uneconomic.” 

That is one way of phrasing it which does not really convey the truth. Banks, allowed to leverage 40-60 times their equity when lending to infallible sovereigns, housing and the AAAristocracy, can hardly be said subjected to a lot of regulatory scrutiny. Quite the contrary, the real market anchored effective scrutiny of the non-banks, is surely larger than that of the regulators scrutiny of the banks.

And neither is it the regulatory burden that makes some bank lending un-economic. It is more the regulatory unburdening, low capital requirements, which has allowed banks to make extremely high risk-adjusted returns on equity when lending to previously mentioned “infallible”; and this has created the incentives for banks to completely abandon lending to the “risky”, like the medium and small businesses, the entrepreneurs and start-ups.

That the growing presence of non banks “worries regulators”, should come as no surprise, since they clearly do not give a iota about if banks allocate credit efficiently to the real economy. No, with bank regulators like the current ones, the real economy is doomed to depend much more on non-banks.

Getting rid of stupid risk-weighted bank capital requirements, that is a dog hair to write home about.

Sir, I refer to Martin Wolf´s “Hair of a dog risks a bigger hangover for Britain” February 14.

There Wolf writes: “It is widely believed that it is safer to rely on private borrowing as a source of demand. An expansion of private borrowing to buy evermore expensive houses is deemed good, but an expansion of government borrowing to build roads or railways, is not. Privately created credit-backed money is thought sound, while government-created money is not. None of this makes much sense.”

What is he talking about? Those whose beliefs are the most relevant in these matters, the bank regulators, they very strongly believe, as they express in the risk-weights which determine the capital requirements for banks, that lending to the government, the infallible sovereign, is enormously safer when compared to lending to anything private, including houses.

Of course, that said, bank regulators also strongly believe, in that much egged on by politicians, that lending to buy houses, is enormously safer when compared to lending to any “risky” medium and small business, entrepreneurs and start-up… those who could help to create the jobs that could pay for the costs of living in the houses.

Do I mind governments building roads and railways? Of course not, but I sure do mind government and housing (and the AAAristocracy) getting much more and cheaper financing than what would ordinarily be the case, only because shortsighted and monumentally naïve regulators think that lending to be safer than lending to the “risky” real economy.

Want to really get rid of the hangover Mr. Wolf? Well then get rid of the current bank regulators, and of their dumb and distorting risk-weighted capital requirements. That is indeed a dog hair to write home about.

PS. Sir, I leave it in your hand to copy or not copy Martin Wolf with this letter, since I do not wish to receive a letter from him telling me again I write too much, or that he already knows what there is to be known, on issues such as the risk-weighted capital requirements for banks.

Richard Lambert, before concerning himself with bankers’ education should think about bank regulators’

Sir, I refer to John Gapper’s “There is no such thing as the banking profession” February 13.

There Gapper writes that an option favored, among others by Sir Richard Lambert, head of UK’s Banking Standards Review, “is to encourage bankers to take professional exams and rebuild their sense of pride and identity. Bad bankers might be struck off by professional bodies”

Good idea, but what about the professional exams for bank regulators which right now seems of even urgent importance.

You know Sir I hold this because bank regulators who decide to use perceived risk of expected losses to set the capital requirements for banks, that which is primarily to cover for any unexpected losses, evidence they do not know what they are doing. With their amateurism they not only created this crisis, by making banks create dangerous exposures to what is “absolutely safe”, but they also keep us from getting out of the crisis, by de-incentivizing banks from lending to “risky” medium and small businesses, entrepreneurs and start-ups.

So please, enroll regulators in a Bank Regulations 101 course… as fast as possible. With their distortions they have put the current generation on the track of becoming a lost one.

Tax income from protected intellectual property rights at a higher rate than income from when competing naked in the market

Sir, Martin Wolf writes “Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects”, “Enslave the robots and free the poor”, February 12.

And that as you know, is a theme close to my heart. On it I have written to you, to Martin Wolf and to other of your journalists many letter over the years. In fact only last week I wrote you a letter referring to Martin Wolf's article titled just like this one. I did not copy Wolf, and you might have not either.

Though it might very well have been thought of earlier by someone else I started to formally promote such a tax scheme in 2008, by means of an Op-Ed in El Universal, Caracas, titled “We need a tax intellectual property rights’ income”.

Wolf also writes “We must reconsider leisure… let people enjoy themselves busily”.

And that is another theme that I have often written about, as I feel it is of utmost importance for any society to know what to do well with its structural unemployed. As a example you can read “We need worthy and decent unemployments”

PS. Sir, I leave it in your hand to copy or not copy Martin Wolf with this letter, since I do not wish to receive a letter from him telling me again I write too much, or that he already knows what there is to be known, on issues such as the risk-weighted capital requirements for banks.

Daniėle Nouy, new chair of Single Supervisory Mechanism, should hear out those like me who detest current bank regulations.

Sir, I refer to Sam Fleming´s, Alice Ross’s and Claire Jones’s “ECB Super>regulator prepares to be unpopular” February 10.

Of course, as you know from my more than a thousand letters, I much welcome that Daniėle Nouy “As one of the regulators who presided over the setting up of the Basel II accord on bank capital, which stressed risk-weighted assets as the best measure of a lender’s health… now admits her thinking on how banks are assessed has evolved… and now [at least] believes the leverage ratio¸ which compares a bank’s capital with its entire assets, is also a crucial measure.”

And of course, having held that bank regulators should be faster on the trigger, so that adequate pruning was done, I also fully agree with her opinion of “Let weak banks fail”, as reported on the front page by the same reporters.

But, when Ms Nouy there holds that “One of the biggest lessons of the current crisis is that there is no risk-free assets so sovereign assets are not risk free”, I just can’t refrain from asking, why on earth did it take the current crisis to find out that, when history is so full of examples? Sincerely it is hard to believe that regulators were so naïve to believe that… so one has at least the right to suspect some other motivation.

And also, when Ms Nouy speaks about the “health check” of banks “which will include an asset quality review and stress test”, I get the feeling she has not fully realized the Basel Mistake, in the sense of the worst not being what is on the banks’ books, but what is NOT there, like all the loans to the “risky” medium and small businesses, entrepreneurs and start-ups, which were never made, only because of discriminating risk-weighted capital requirements.

I would dare Ms Nouy to sit down one hour with me to give her a piece of my mind on what wrongs the Basel Committee has made, primarily letting expected losses stand in for unexpected losses, and then on what I believe should be done. And she should not be nervous about that, since I absolutely share all her concerns about “it’s not the best moment in the middle of the crisis to change the rules”… though surely transitioning has to be initiated… without making it worse.

And citizens could sue agencies for too good credit ratings of sovereigns, which caused governments to borrow too much.

Sir, I refer to Stephen Foley’s and Guy Dinmore’s “Italy eyes €234bn suit after ratings groups failed to value la dolce vita” February 5. It reminded me of an Op-Ed of September 2002 titled “The riskiness of country risk”.

In it I wrote: “What a nightmare it must be to be risk evaluator! Imagine trying to get some shuteye while lying awake in bed thinking that any moment one of those judges, those with the global reach that have a say in anything and everything, determinates that a country has become essentially bankrupt due to your mistake, and then drags you kicking and screaming before an International Court, accused of violating human rights.

What a difficult job to be a rater of sovereign creditworthiness! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. Any which way, either extreme will cause hunger and human misery.”

And so what’s more to say. If the Italian Government sues the credit rating agencies for having given Italy too bad ratings, an Italian citizen might equally sue these for having given Italy too good ratings

And after that, what about suing the regulator who with their risk-weighted capital requirements for banks multiplied immensely any signal emitted by the credit ratings?

Those responsible for Basel II should have been made yesterday’s men years ago

Sir, in “The return of yesterday´s men”, February 5, you hold that Jean-Claude Juncker, Martin Schulz and Guy Verhofstadt “will not strike many as representing a genuine choice… for the presidency of the European Commission”. And that is so because these gentlemen represent “a familiar orthodoxy of elite driven integration….that sounds tired and irrelevant to millions of citizens whose lives have been turned upside down by [among other] the collapse of banks”.

Yes, you are most probably correct in your assessment, but why have you not gone out and criticized in a similar way the members of the Basel Committee or of the Financial Stability Board? They with their utterly failed Basel II have had a much more direct role in causing the collapse of banks.

If there had been any type of accountability all these experts would since long be “yesterday’s men”. Instead, they were put in charge of Basel III and, in some cases, like with Mario Draghi, even promoted.

Income derived from protected intellectual property should be taxed at higher rates than income obtained from competing naked.

Sir, Martin Wolf refers to “the role of rental income, particularly from intellectual property” as one explanation of “rising inequality of labor income and of the distribution of income between labor and capital”, “If robots divide us, they will conquer” February 5.

In this respect I would just want to note that for years I have argued that all income which results from an intellectual property that is being protected should be taxed at a higher rate, than any income that is produced by competing in the markets naked.

But I need also to express certain uneasiness with the concept of capital getting more and more rewarded than labor, because the truth is that, currently, because of artificially low interest, very much capital is almost not being rewarded at all. Many pensioners are not receiving what they should be receiving for that capital they worked and saved so hard to obtain.

Finally, with respect to the prospect of robots conquering us, I would hate that to happen, but, on the other hand, these would never ever come up with such crazy notions of basing the capital requirements for banks, those that should primarily be there to cover for unexpected losses, on the perceptions about the expected losses, and much less on these perceptions being correct.

William Rhodes, worse than regulatory uncertainties is the current regulatory certainty.

Sir, William Rhodes writes that "many other countries are challenged by the weakness of bank lending to productive, employment-generating investments. The banks are in large measure constrained by regulatory uncertainties." "Major central banks must co-ordinate policy", February 4.

Wrong! Banks, when lending to productive, employment-generating investments are in large measure constrained by regulatory certainties... those that order banks to have much more capital against such “risky” lending than against lending to the less productive “absolutely safe”… those which thereby allow banks to earn much higher risk adjusted returns on equity when lending to something safe-not-productive than when lending to something risky-productive

Development is about the poor not needing help.

Sir, Frank Vogl of The Partnership for Transparency Fund writes: “Citizen-led development to ensure the extremely poor in many communities across the globe can receive state benefits – food rations, basic social security, free healthcare access to free schools, without being forced to pay bribes and without being cheated by lowly government officials – is yielding tremendous results”, “Citizen-led development is yielding results” February 1.

That are indeed great welcomed results…but whatever, please, do not call that “development”. Development is about all those extremely poor ending up not needing state benefits.

The purpose of a bank is not to fight Aids, but to make profits serving the financing needs of the real economy.

Sir, Gillian Tett refers to BoA and Bono cooperating in fighting global aids “An unlikely pact in making sweet music” January 1. And Tett also quotes Paul Polman of Unilever arguing that many corporate workers want to “find a higher purpose than just making money” and that banks such as BoA have strong motives to “engage” in innovative ways.

It all sounds very commendable but, if I was a bank regulator, which I am not, I am not sure I would agree or even allow a bank which depends so much on implicit government guarantees to do such things.

And I say so because the real purpose of a bank is to make profits to its shareholders, while serving in the most effective way possible, the financing needs of the real economy. And the truth is that every dollar BoA or other banks would spend in these ways, out their pre-tax earnings, will diminish their capital, and thereby diminish their capacity to lend to medium and small businesses, entrepreneurs and start-ups… something which would help all… including those fighting against Aids.

How sad that elites meet in Davos and are not capable to discuss much more fundamental issues such as why the regulators, when setting the capital requirements that are supposed to cover for unexpected losses, did so based on perceived expected losses. This which has created total havoc in the allocation of bank credit to the real economy is a much more important issue. Yet it is ignored… most probably as it steps on the toes of all bankers making huge risk-adjusted returns on equity when lending to "The Infallible".

Getting rid of the risk-weighting of the capital requirements... that would indeed represent sweet music to all the unemployed youth.

There will not be any normalization of bank credit in Europe until regulators do a 180 degrees volte-face.

Sir, Sarah Gordon writes that “While the region’s [highly credit rated] groups have gorged on cheap credit, its multitude of smaller companies have had to deal with a scarcity of funding”, “Poor corporate credit is holding back Europe’s recovery”, January 31.

Of course, how could it be otherwise, when regulators, especially in times of scarce bank capital, require banks to hold much more capital when lending to those who are perceived as having higher expected losses than to those who possess a high credit rating.

Gordon mentions that because companies are “now driven by the desire to invest. This will inevitably, result in normalization of credit at some point.” Forget it! There will be no normalization of credit until regulators realize that capital requirements for banks should have very little to do with expected losses, and a lot to do with unexpected losses, and therefore get rid of the current system of risk-weighting.

When regulators exorcised primal risk-taking from the banks, they doomed our economies to decadence.

Sir, Edmund Phelps writes that “Nations with once-dynamic economies will be helpless to recover their prosperity as long as they misunderstand what causes economic progress”, "Free innovators from the state’s deadening hand”, January 31.

Indeed before it is realized that primal risk-taking is what leads to innovations and start-ups, and which is what keeps the economy sturdy muscular. Any economic growth based on risk-aversion leads only to economic obesity. Unfortunately, bank regulators, with their loony capital requirements based on ex ante perceived expected losses exorcised such risk taking from the banks.

And Edmund Phelps also correctly states “The state is no better suited to take a big role in the technical innovation than in artistic creation”. But Phelps might not be aware of how bank regulations are stacked in favor of the state assuming such role. Currently when a bank gives a loan to a “risky” innovator, let’s for example call it a Solyndra; it is required to have much much more capital than when lending it to the “infallible sovereign”, and so that instead a bureaucrat can relend that money to an innovator, like a Solyndra.

Sir, don’t you recognize insanity when you see it?

Tobias Buck reports on how “banks from countries such as Spain and Italy borrow money cheaply from the European Central Bank to buy high-yielding sovereign debt from their own governments”, “Spain’s lenders reap profit on Madrid bonds”, January 30. And that the banks can do, because they need to hold no capital against these “infallible sovereigns”.

Frankly, Sir, don’t you recognize insanity when you see it? This is what the banks are doing in countries where the unemployment rates, especially those of the youth, want to make you cry. How on earth are the banks to help these countries to get out of what seems to be a death spiral?

And all because bank regulators do not care an iota about asking themselves what is the purpose of banks before regulating these… and therefore allow themselves to come up with loony risk-weighted capital requirements based on perceived risk of expected losses and which directly discriminates against the access to bank credit of the “risky” medium and small businesses, entrepreneurs and start-ups.

How could Europe have allowed itself to fall in the hands of regulators who do not care about the real economy? And how can FT keep quite on this?

Risk weighted capital requirements for banks means some will receive too much credit, too cheap, others too little, too expensive.

Sir, John Plender in “How to spend $2.8tn of corporate cash” FTfm January 27, writes “The financial sector is there to intermediate between those with surplus funds and those who wish to invest. It can be relied to do so”

Not so fast Mr Plender. The most important financial intermediaries, the banks, are kept from efficiently allocating credit in the real economy, as a result capital requirements based on perceived risk. In fact, since banks can lend to “the infallible” against very little capital, the lending to “the risky”, which requires much more capital, is coming to a halt.

But seemingly the regulators are blissfully unaware of that it is them who are distorting. I say this because Christopher Thompson writes “Non-financial corporate loans in have fallen… creating a headache for regulators keen to encourage lending,, especially to small and medium sized businesses, which provide the bulk of Europe´s employment” “Balance sheets hint at EU bank confidence”, also January 27.

A “headache for regulators”, Europe has indeed fallen in the hands of a real inept bunch of bank regulators. What about the pain of the unemployed?

Real banking reform will only happen when regulators understand and acknowledge what they did wrong, and correct it.

Sir, Martin Arnold writes “Regulators are forcing banks to hold much more capital and to reduce their leverage, which is making some areas of business unprofitable. This is pushing some banks to quit those areas”, “Bankers assess once-in-generation reform” January 24.

That is indeed one way to word it, but since the truth is that the profitability of these areas was artificial in that it was based on the fact that they required much less capital than other, there should hopefully be other areas which could regain competitive profitability… like lending to medium and small businesses, entrepreneurs and startups.

The real reforms of banking will, sooner or later, only come when regulators understand and acknowledge the following:

You can´t have capital requirements for banks that are “portfolio invariant”, namely those which do not consider the benefits from a diversification of assets in “the risky” category, or the dangers of excessive concentration of assets to “the infallible”.

The fact that an asset is deemed risky because it has high "expected losses", does not mean one iota that it has the potential of more “unexpected losses”, which is what capital is there for, than what is perceived as “absolutely safe”.

That the efficient allocation of bank credit to the real economy is, medium and long term, of much more significance for the real safety of banks, than what can be achieved by any distorting risk management carried out by regulators-

Unfortunately, before the above is fully realized, things could get much worse.

The distortive risk weighted capital requirements for banks will haunt Ben Bernanke and Martin Wolf

Sir, Martin Wolf writes that contemporary “banks are constrained not by reserves but by their perception of risk and rewards of additional lending”, “Model of a modern central banker” January 22.

That is indeed so, but Wolf forgot to include that banks are also constrained by capital requirements, and by how the regulators’ perceptions of risks are transmitted by means of the risk-weighting of these.

When Wolf comments “An active an enterprising financial system creates risk, often by raising leverage dramatically in good times” he is ignoring the fact that the extreme high bank leverages of now, are actually leverages that were and are authorized by the regulators… and since banking itself is much about leveraging, banks must go to where they can earn the highest-risk adjusted returns on equity… which is usually where the capital requirements are the smallest.

And that created the distortions which not only produced the crisis when allowing investment banks and European banks to leverage immensely on AAA rated securities, and “infallible sovereigns”, but it also hindered the liquidity provided by for instance quantitative easing from reaching those who could do the most with it… like the medium and small businesses, entrepreneurs and start-ups. 

Ben Bernanke has most certainly done good things as a central banker, and Martin Wolf has definitely written great pieces as a journalist, but I do believe that history will hold their silence about this source of distortion seriously against them… and this even if they plead ignorance about it.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Excessive exposures to what is “absolutely safe” by regulated banks could be much more dangerous than whatever lurks in the shadows.

Sir Tracy Alloway writes “Shadow banks, we are told, are unregulated institutions that lurk in the dark corners of the financial system – away from the supervised activities of run-of-the-mill commercial banks”, “Competition for banking business lurks in the shadows” January 18.

But perhaps we should keep in mind that those unregulated shadow institutions are not able to leverage remotely as much as the banks who operate in sunlight… so the question of safety is sort of relative.

And Alloway also comments “that there is perhaps an underappreciated danger: that non bank lenders will encourage riskier behavior at larger banks that find themselves compelled to try to compete with the shadows”. But that would only happen if banks are able to dress up that riskier behavior in such as way that it is perceived as “absolutely safe” so that they do not need to hold much capital.

As is, the real risky behavior of banks is building up excessive and dangerous exposures to what is perceived as “absolutely safe”… all a consequence of capital requirements which are portfolio invariant.

Alloway hopes that these “shadow lenders serve a purpose” satisfying “the needs of the real economy”. Indeed let us hope and pray it is so, because as is, the supervised banks, with the risk aversion imposed on them, are kept from doing so.

What contains “expected losses” can also contain the “unexpected profits” we need for increased productivity.

Sir, in “Two challenges for the global economy”, January 18, with respect to a decline in economic productivity, you mention: “The solution lies in structural reforms aimed at allowing the most innovative sectors to expand”. That is correct. What is not correct is to believe that you can so easily, so besserwisser, identify what are the most innovative sectors… and so the market needs to be free to collaborate doing that.

But regulators currently impose on banks risk-weighted capital requirements, which wrongly, and stupidly, assumes that what is perceived to risk more expected losses, also risks more unexpected losses. And that is monumentally wrong. Not only does history show us that the worst “unexpected losses” most often derive from what was considered to have the smallest expected losses… but it also implicitly assumes that what risks a lot of expected losses, cannot contain huge unexpected profits, and that more than pay for any losses incurred.

And that double consideration for perceived risk discriminates all what is perceived as risky from fair access to bank credit… and impedes the markets invisible hand to operate freely.

While that regulatory mistake stays in place, our chances to produce the unexpected profits needed to change the current gloomy productivity outlook are indeed slim.

How on earth can regulators be so daft so as to believe that our future lies in the hands of banks playing it safe?

How on earth can regulators be so daft so as to ignore that asking our banks to play it excessively safe is truly dangerous for the economy and for the banks?

OCC, before asking banks to raise their standards of risk management, should stop regulators' distorting parallel risk managing

Sir, Tom Braithwaite and Camilla Hall report that “The Office of the Comptroller of the Currency said it plan to raise the standards it expected for risk management at the largest banks”. “Goldman and City wreck Wall St hopes for escaping doldrums”, January 17.

Before doing that OCC should first consider the distortions the risk-weighted capital requirements for banks cause.

As OCC should know, bankers clear sufficiently well for perceived risks, by means of interest rates, size of exposures and contract terms. But current capital requirements those which the regulators order banks to hold primarily as a buffer against some “unexpected losses”, are based on the same perceptions of “expected losses”.

And so the system now considers twice the “expected losses” and none the “unexpected losses”. And as a result, the regulators have introduced a distortion that makes any high standard risk management that serves a societal purpose absolutely impossible.

And this is especially wrong when the capital requirements are portfolio invariant, because that ignores the benefits of diversification for what is perceived as “risky”, and the dangers of excessive concentration for what is perceived as “safe”.

OCC should understand that it has no problem if banks manage their risks well, only if they don’t, and so it makes absolutely no sense to base the capital requirements for banks, on the same perceptions of risk used by the banks.

OCC should understand that those who most represent “no-expected-losses” are in fact those most liable to produce the largest and most dangerous unexpected losses.

OCC, do the world a favor, throw out the risk-weights a simple straight leverage ratio and allow the bank to be banks again… not credit distributors in accordance with what the risk-weighting which produces different capital requirement tells them.

Sincerely it surprises me that, in the “home of the brave”, with a market that prides itself to be free and to give equal opportunities, OCC allows for capital requirements which allow banks to earn much higher risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky.

The implied discrimination does not seem to be compatible with the Equal Credit Opportunity Act (Regulation B).