If I could decide, this is what I would tell ECB to do with all Europe’s banks… I think

Sir, Tom Braithwaite writes: “Banks have been forced to become safer and more boring. By closing down the casino, regulators have reduced the chances of disasters”, “Investors might yet long for the days of Dimon’s swagger” January 13.

How on earth does Braithwaite know that? Why are we to believe that regulators, who allowed banks to leverage over 60 times to 1 on exposures to the AAArisktocracy, or even more to exposures to infallible sovereigns like Greece, know anything about reducing the chances of disasters?

Let me just start by reminding him that when playing roulette if you bet pennies more on a safe colors than on risky numbers… you are guaranteed to lose more, in the long run.

How does Braithwaite know that disaster is not happening at this very moment, because that small business or that entrepreneur who could save the economy of tomorrows Europe, is denied fair access to credit because these banks are given incentives to play it safe, to play on colors and avoid the numbers?

Braithwaite quotes Stefan Ingves the Chairman of the Basel Committee on Banking Supervision saying “Leverage is an inherent and essential part of modern banking system” and yet Ingves and his regulatory buddies do not understand that by allowing different leverages for different assets they are de facto imposing capital controls which re-directs the flows of credit to the real economy in many dangerous ways.

Sir, the more I see the urgency of correcting for the regulatory distortion imposed by the Basel Committee, and the risk and difficulties of travelling from here to there in terms of required bank equity, the more I believe we need to:

Impose a 10 percent equity requirement on all assets, and then have the ECB offer to subscribe all equity needed to meet those new requirements. ECB should commit not to use the voting rights of that bank equity and to resell 10 percent of it per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Any ECB-QEs before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

Europe, get rid of risk-weights, impose a 10% leverage ratio, and have ECB's helicopter drop equity on your banks

Sir, Wolfgang Münchau, as a tool to avert deflation in Europe, mentions the possibilities of a sizable QE helicopter drop in Europe, like €10.000 per citizen; and, sort of shamelessly using the tragic recent Paris as an excuse, argues for more fiscal stimulus, “Eurozone needs to act before deflation takes hold” January 12.

And I have to wonder, again, what goes on in his and other columnist minds, when they make suggestions like these, while at the same time they do not seem bothered by that Europe’s banks are ordered not to lend to those perceived as risky, like to small businesses and entrepreneurs. Because that is what de facto happens when regulators allow banks to hold less equity against exposures perceived as safe than against exposures perceived as risky.

What would I do? Perhaps order a 10 percent not risk weighted leverage ratio imposed on all European banks to substitute for all credit risk discriminating equity requirements; and then have the ECB to subscribe and pay in what new bank equity might be needed on a case by case basis, all with a firm-commitment to resell those shares to the market within a given period.

That would not only help to fight deflation, but, much more importantly, it would allow those tough risk-taking agents that the economy needs in order to grow when the going gets tough, to get going again.

Some depressions cannot self-correct if what caused them correct. “Deflation” is surrounded by too much mumbo jumbo.

Sir, I refer to John Authers’ “The self-correcting depression and the virtue of deflation”, January 10.

Do I believe in that? You can answer that question yourself by looking at my letter that you published August 2006 titled “Long-term benefits of a hard landing”.

But I do not believe that all depressions can be self-correcting, some needs the primary causes for it to be removed. For instance, there is no way the current depression will self-correct in any sustainable ways without removing those so well intended, but still so utterly dumb, portfolio invariant credit risk weighted equity requirements for banks.

And neither do I believe in all that mumbo jumbo that is painting deflation as the monster of our times… perhaps only looking to justify doing more of what is working for some though clearly not for all.

The most dangerous deflation is that which has happened, big time, in the accountability of bank regulators.

Sir, you write: “The Eurozone cannot go on as it is. Growth is weak to non-existent” and you conclude in that “Deflation risk in Europe leaves no option but QE”, Saturday 10.

Nonsense. If Europe just threw out the windows those portfolio-invariant-credit-risk-weighted-equity-requirements for banks imposed by the Basel Committee; and which effectively blocks the fair access to bank credit of those perceived ex ante as risky, like small businesses and entrepreneurs, much more growth could be achieved; and even the QEs or any fiscal stimulus would have a chance to work better.

What stops this from happening? I am not sure, but one answer could be that admitting to a monstrous mistake could represent a too large embarrassment for the current president of the ECB, the former chairman of the Financial Stability Board… the “Whatever it takes”… (Except for that) Mario Draghi.

To consider what is perceived ex ante as risky to be more risky for the bank system than what is perceived as “absolutely safe” is a huge mistake. And to compound that mistake by allowing different equity requirements for bank assets based on credit risks already cleared for, introduces a distortion in the allocation of bank credit to the real economy, catapults it into being a monumental mistake.

PS. #IamnotFT I dare to think, and say, that expert regulators could succumb to stupid and dangerous group-think

“Regression to the mean”, if allowed by politicians and regulators, will take care of the plutocrats, in due time.

Sir, Paul Marshall in “Blame the rise of the plutocrats on politics not capitalism”, January 9, holds that we need Schumpeter much more than Marx.

As you could deduct from my letter “Long-term benefits of hard landing” and which you kindly published, before you decided to name me a persona non-grata at FT, I totally agree with him

I have never been too much concerned by the rise of plutocrats, since I have always figured that, mostly, it was the result of something good… and I have always counted on the “regression toward the mean” theory, aka “reversion to the mean”, or aka “reversion to mediocrity”, to take care of the problem of the same plutocrats reigning into eternity.

But for that “regression to the mean” to happen, anyone that has that in him to be a plutocrat needs to be able to become a plutocrat… and that requires not only fair access to education as Marshall rightly puts forward, but almost foremost fair access to bank credit. And credit-risk weighted capital requirements for banks which operate in favor of those who have made it; and against those risky who have yet not made it, and who probably most of them will fail while trying to make it; blocks that fair access to bank credit.

And then of course, for the “regression to the mean” to happen, losses need to flow freely, and not be contained by QE dams, which quite often help to make the plutocrats even more plutocrats.

PS. There are some other issues related to the rise of plutocrats that need to be more closely looked into. One is intellectual property right. Why should income from a shielded property right be taxed at the same rate than those profits coming from competing bare-naked in the market?

Systemic distortion of bank credit allocation, is worse than risks with “global systemically important banks”

In November 1999 I concluded and Op-Ed with: “Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

And in May 2003, then as an Executive Director of the World Bank, addressing many regulators at a workshop, I argued: “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 Sir, of course I agree with John Gapper in that “Regulators are right to cut the biggest banks down to size” January 8.

But that said, why is it that even though Gapper clearly understand the meaning (and cost) of higher capital requirements for banks, he seemingly cannot understand what different capital requirements for different bank borrowers mean.

The “risky”, because their borrowings generate higher capital requirements for banks than the “safe”, are being negated fair access to bank credit.

More important than increasing the capital requirements for those banks like JPMorgan that because of their size pose a “global” systemic risk, it is much more important to get rid of the risk–weighted capital requirements which constitute, not just a risk, but an existent systemic distortion that impedes the efficient allocation of bank credit.

The world is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks

Sir, John Plender writes “The Eurozone is being driven towards deflation by a moralistic drive for austerity that does nothing to arrest rising debt as a percentage of GDP because the harder hit economies have shrunk” “World faces threat of a descent into intractable deflation”, January 7.

Wrong! The Eurozone, and others, is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks; and which have these making much higher risk-adjusted returns when lending to the “safe” than when lending to the “risky”.

Since risk-taking is the prime oxygen for any true forward movement, the economic bicycle is stalling and falling; and no QEs or fiscal stimulus could in the medium and long term stop that stop from happening… but only make the awakening worse.

We are in the midst of a slow-motion deep financial crisis that no one dares to speak of.

Sir, Martin Wolf gives a generally positive outlook for 2015 in “An economist’s advice to astrologers” January 7.

That is because he keeps on turning a blind eye to the very dangerous slow motion financial crisis that is occurring, at this very moment, but that for reasons I can’t comprehend seemingly no one dares to name.

And I refer to that primarily as a result of growing general bank capital (equity) requirements, like that derived from Basel III’s leverage ratio, those banks borrowers who because they are perceived as “risky” generate larger regulatory imposed capital requirements on the banks… are getting more and more excluded from having fair access to bank credit.

I do not know if that is going to reflect itself in 2015 but one thing is sure, all the credit negated, or offered in too expensive terms, to small businesses and entrepreneurs during 2015, is going to turn out to be extremely expensive for the economy… and for the job prospects of our youth. 

Wolf’s “chronic demand deficiency syndrome”, created mostly through the anticipation of demand financed with debt, a preempting of future demand, is going to hang over the economy, no doubt about that.

But it is silly risk aversion, expressed in allowing banks to earn higher risk adjusted returns on equity on what is perceived as “safe”, which is the major obstacle for any sturdy economic growth to reassume.

Bank regulators facilitated, even empowered, financiers to turn their back on the forces of equality.

Sir, John Kay writes about how the share of finance professionals in the growing top 1 percent share of all income has grown dramatically, “How financiers turned back the forces of equality" Wednesday 7.

Kay holds that results from “the growth of the finance sector; and the explosion of the remuneration of senior executives”.

To that, at least in the case of banks, and which set the tone for the whole sector, we would have to add: The lower the capital requirements the smaller is the relative importance of shareholders, and so the larger the availability for the remuneration of professionals. And that becomes especially important when the markets perceive, that governments will to a very large degree step in and defend the banks if they run into problems.

And so let’s retitle it. Bank regulators facilitated, even empowered, financiers to turn their back on the forces of equality.

What is this nonsense of a free market consensus when all banks are intervened by regulators?

Sir, Gideon Rachman refers to a weakening in the belief in free markets, “shaken by the financial crisis in 2008 and the subsequent Great Recession, as one of the causes of why “The west has lost intellectual self-confidence”, January 6.

What intellectual nonsense is this? What free-market consensus? The banks, since the inception of the Basel Accord with its Basel I in the early 90’s, and really exploding with Basel II in 2004, have been told, by means of risk-weighted capital requirements, that they can earn their highest risk-adjusted returns on equity, by sticking to the safe.

But unfortunately, medium and long-term bank stability can only result from banks allocating credit efficiently to the real economy, not from banks playing it safe.

Effectively the Basel Committee and the Financial Stability Board told their supervised children: “Stay home and play with you laptops and do not go out and take risks, and we will give you goodies”. And the IMF and the World Bank, with their silence, approved of that.

Sir, is not a child told to stay home and not to venture out, a child doomed to lose all his self-confidence, included that of in his own intellect?

Our current bank regulations are not the result of an intellectual process, but only a primitive reaction to the intuition of “safe” is safe “risky” is risky”, not able to differentiate between ex ante and ex post perceptions. 

And I pray the West still has sufficient intellectual self-confidence left, so as to throw these bank regulators out... otherwise next generations are doomed. 

PS. To top it up regulators showed an ideological based pro-sovereign-governments bias and declared those to be infallible.

India, to end ‘lazy banking’, you must first get rid of Basel’s bank regulations which orders banks to be ‘lazy’.

Sir, I refer to James Crabtree’s report “Modi promises to end India’s ‘lazy banking’” January 5.

It states that Narendra Modi, India’s prime minister, speaking at a summit of India’s public sector financial institutions, “promised to end the country’s heritage of ‘lazy banking’, a term often used to criticize risk-averse lenders”.

Good for him! But does Modi know that would mean India has to abandon the Basel Committee’s whole approach to bank regulations? 

Basel II and III both have, as their principal pillar, credit-risk weighted capital requirements; which allow banks to earn higher risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky… and which therefore stimulates banks to be risk averse… and lazy.

I sure hope Jayant Sinha and Arvind Panagariya understand the need for India to abandon such regulatory foolishness, which they currently have accepted; and sufficient strength to convince the rest of India of it. If successful, I am sure many in developing and develop countries will be much grateful for them setting the example and leading the way.

During the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I presented a document titled “Are the Basel bank regulations good for development?”. I then argued “Absolutely not! Since then I have become convinced these regulations are even more dangerous than I thought. At that time I had not realized the full effect of these capital requirements had in the risk-adjusted returns on bank equity. 

Those Basel II regulations caused the financial crisis 2007-08; that by driving banks excessively into “safe” segments like AAA rated securities, housing finance and “infallible sovereigns” (Greece) against almost no capital, leverages over 50 to 1. 

And those regulations, Basel II and III, are currently impeding the recovery of many economies precisely because they have ordered banks to be lazy… and not lend to “risky” small businesses and entrepreneurs.

Friends, please never forget, risk-taking is the oxygen of development

The Basel Committee for Banking Supervision needs artificial intelligence, the human one does seemingly not suffice.

Sir, it was with much interest, and hope, that I read Richard Waters’ report “Investor rush to artificial intelligence is the real deal” January 5. We sure need it, urgently, at least in the Basel Committee for Banking Supervision.

First any reasonably good AI would most certainly not give in to emotions or sole intuitions as the Basel Committee did when for their risk-weighted capital requirements they decided that “risky” was risky and “safe” was safe. AI would see that in fact it is what is perceived as “safe” by bankers that which creates the biggest exposures and as a consequence the biggest dangers, if the ex ante perception turned out ex post to be wrong.

And AI would also be able to impose portfolio variant capital requirements instead of settling for Basel Committee’s “portfolio invariant” because as they admit when in “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” they explain: “Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

And AI would also of course have asked about the purpose of the banks before regulating the banks… and therefore we would probably have saved us from the credit risk weightings that so distort the allocation of bank credit to the real economy.

That said we have to be careful though so that AI does not Frankenstein on us and imposes its own preferences (ideologies); like what the Basel Committee did when they decided that their bosses, the governments of the sovereigns, were infallible… and therefore banks did not need to hold any capital (equity) when lending to these.

PS. Perhaps we can have a competition between different AIs to see who comes up with the best proposal for how to regulate banks.

Beware of excessive information. (Blissful) ignorance is a potent driver of financial markets and of human activities.

Sir, Tracy Alloway describes the possibility of adding on, as you go along, new pieces of information that will enhance the knowledge of the risks, for instance in securities backed with residential mortgages, “New mutations beckon for system that shares DNA of each loan’s risk” January 3.

And Alloway quotes David Walker of Marketcore saying “This could be very disruptive, because not everybody is for transparency and accountability. Even if they say they are publicly, they may not be privately.”

It is worse than that! If risks were perfectly known, the price of the securities would reflect this and so there would be little profits to be made trading these, and so perhaps there would be no Wall Street. It is imperfect information that has prices zigzagging, which induces market participant to get out of bed in order to sell the not-too-well-perceived risks and buy the not-so-real-safeties.

In other words, ignorance is one of the most potent drivers of financial markets and human activities; and is therefore quite often characterized as quite blissful… at least by the winners.

But the worst that can happen with excessive information, that is when we, because of it, become convinced that we know it all. Like when bank regulators caused our banks to follow excessively the credit risk perceptions issued by some few human fallible credit rating agencies. Clearly some more information (and humility) about our ignorance would have come in handy.

We need bank regulators to be more like lions and less like scared of mice kittens.

Sir, Ralph Atkins’ writes that “Across most of the Eurozone governments can borrow at historically low costs” and I wonder whether he is not comparing apples with oranges, “Financial system is a flighty animal in search of its inner lion” January 2.

The low interest costs he sees are not all the costs there are. The current risk weighted capital requirements for banks, which so much favor bank lending to the “infallible sovereigns”, have introduced huge distortions, which guarantee that capital will not be allocated efficiently; and which final costs could be equally humongous.

He should ask a Greek. Had banks needed to hold as much capital when lending to Greece’s government than what they needed to hold when lending to a small Greek business, then Greece would not have suffered such a build up of excessive sovereign debt and would not be in the mess it is in.

Today, in FT’s and Atkins’ Britain the interest rates on Britain’s public debt is being subsidized by many small businesses or entrepreneurs, through by paying higher relative interest rates or by having less access to bank credit… let us pray the costs of that will be manageable.

Sir, Atkins has no business asking the financial system for its inner lion, when so many problems derive from that regulators have turned into kittens so risk adverse they do not even dare to chase mice.

That this kitten has been able to tame the western markets making them lose “much of their lion-like abilities” should evidence the dangers of empowering kittens with too much regulatory powers.

Selling the notion of being able to make banks safe, at no cost, is pure unabridged populism.

Sir, I refer to Tony Barber’s “Renzi is the last hope for the Italian elite” January 2.

In it Barber attacks populism and writes about how important it is for Italy that “Mr Renzi’s reforms of the tax system, labour market, judiciary, public administration, electoral system and much more succeed”.

Again there is no reference to the unabridged populism contained in the notion that you can make banks safe, at no cost.

That populism is imbedded in the current risk-weighted capital requirements for banks; which allow banks to earn much higher risk adjusted returns on their equity on exposures perceived as safe than on exposures perceived as risky; with not one iota of regulatory concern about how useful for the economy such “risky” exposures could be.

These regulations, carried out in the name of saving the taxpayer from having to pay more taxes, is one of the most important obstacles that is hindering the taxpayers from receiving more taxable income.

That regulatory populism is doing as much damage to Italy, the Eurozone, Europe and the Western World as anything else. Without those regulations we might have had a bank crisis, but none as big as the current that resulted from allowing banks to leverage immensely with what was perceive as safe, like “infallible sovereigns” as Greece, members of the AAAristocracy, and the real estate sector in Spain.

If Renzi is not capable of demolish these populist bank regulations, Italy might still make it, but that would only be as a result of the strengthening of la banca sommersa.

FT, supporting the idea that Basel III is making our banks and our economies safer, is to support populists.

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

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

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

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

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

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

Regulators are telling banks to behave​ ​meaner​ ​than Scrooge, and the Eurozone, and FT, seemingly don’t care.

Sir, John Plender writes that “The spirit of Scrooge hangs over the Eurozone” “Forgive the debt or earn the wrath of its victims” December 30. Forget it! It is much worse than that! Regulators are making Scrooge even meaner.

Can’t you hear how your bank regulators are telling your current Scrooge, in this case your banks: “No, no, no, do not lend to the risky small businesses and entrepreneurs, if you do we will smack you with higher capital requirements, so that you make lower returns on equity. But, if you to as we say, and stay away from what’s risky, and lend to infallible sovereigns, to the AAAristocracy and to the housing sector, then we will reward you with lower capital requirements, so that you can earn much better risk-adjusted returns on equity... and this way, we will all live for ever happy, with stable banks… until… après nous le deluge”.

I can bet Scrooge never discriminated against his borrowers that way. He lent to who pay him the highest risk-adjusted return per quid… not per risk-weighted quid.

Why should companies be banks and banks not? The real challenge for the European Commission

Sir, I refer to Sarah Gordon’s “Juncker’s plan needs companies to open up their healthy coffers” December 30.

And I ask why should companies turn into banks? Why should companies finance “Europe’s younger and smaller firms which, research suggests, create a disproportionate number of new net jobs”.

What’s wrong with banks financing these? And as banks would were it not for the credit-risk-weighted capital requirements for banks, which create such real hurdles for banks when financing what is perceived as “risky”… and this even though those “risky” could signify the safest way out of the crisis.

Who is going to stop the frankly idiotic bank regulations coming out of the Basel Committee? That would be the real challenge for the European Commission. 

Should not US shale oil producers sit down with Opec to have a little conversation about mutual interest?

Sir, I refer to Roula Khalaf’s “A kingdom fit for an oil price ordeal” December 30. It refers to a battle, supposedly for market shares, between traditional oil and shale oil, in which Saudi Arabia in its own name, and fait accompli in the name of Opec, do no want to lose out one more barrel. We will see what happens.

That said to me it has been clear that even more than some weak Opec members might wish for a reduction in oil supplies that strengthens oil process, in order to help their fiscal accounts, so must most of the shale oil producers with their much higher extraction costs.

The fact is though that shale-oil extractors can probably not sit down and chat over production limits with Opec, because that would perhaps be regarded as a cartel… and we can’t have that with private companies, can we?

But at least Opec and shale oil extractors, as well as other oil sourcing countries, could have an interest to sit down and talk about what to do with all those taxmen who, for instance in Europe, by means of gas consumption taxes, are perceiving much higher revenues per barrel of oil than they are… and are of course helping to put a damper on the demand of oil...creating a demand deficiency. I mean, is not a tax collectors cartel just like any other cartel?

Sources for disappointments are plentiful indeed: Basel III Revisions to the Standardized Approach for Credit Risks

Sir, Wolfgang Münchau certainly sounds disappointed in “Clever wrapping disguises Europe’s worn-out policies” December 29. And so do I feel.

You know I have always objected to that corporates with good credit ratings, who already have better access to bank credit, shall have even more preferential access to it, because of bank regulations. And that because credit ratings can be wrong; and because the risks are especially big when it is good credit ratings that are wrong (AIG); and mostly because doing so distorts the allocation of bank credit in the real economy.

But now we see a new proposal from the Basel Committee, Revisions to the Standardized Approach for Credit Risks, which indicates that, instead of using credit ratings, they want to apply “risk weights, range from 60% to 300%, on the basis of two risk drivers: revenue and leverage”.

And that, calculated for the basic 8% capital requirement of Basel III, translates into 4.8% to 24% capital requirements; which then translates into a range of allowed leverage of bank capital of 19.8 - 3.1 to 1.

And that means than now it would be those corporate who come up as winners on a “look-up-table”, having more revenues and less leverage, which will generate less capital requirements for banks; and therefore allow banks to leverage their capital more when lending to them; and so therefore allow banks to earn higher risk-adjusted returns when lending to them; and therefore have preferential access to bank credit.

And so now I need to rephrase and ask: why on earth shall corporates have more or less access to bank credit based on their revenues and leverage, than what access to bank credit corporates already have based on their revenues and leverage?

FT, explain to me, why do you believe the Basel Committee insists in distorting the allocation of bank credit to the real economy? Is not the health of the real economy what in the long run is the most important factor in achieving bank stability?

And to top it up their document also states: “These alternative risk drivers have been selected on the basis that they should be simple, intuitive, readily available and capable of explaining risk consistently across jurisdictions”… as if that is which is really important when regulating banks.

PS. We have seen some merger activity based on tax considerations. Are we now to see mergers based on the Basel Committee’s “look-up-table” positioning?

“Capitalism for hyenas” might be a more accurate description than “capitalism for friends”

Sir, I refer to Chrystia Freeland’s “Puttin’s populist bluster belies the loneliness of the cynic” December 29.

If for instance Andres Schipani would like to write an up to date report on Venezuela and Maduro, he would have to change almost nothing except for some names and regional references… especially now when even Cuba, as was to be expected, has also turned out to be a fair-weather ally.

But, when referring to the crony capitalists that flock around the leaders, I would perhaps disagree with the term “capitalism for friends”. In Venezuela at least, it is really not friends who are sharing those oil revenues which now represent 97 percent of all this nation's exports… it is much more something like “capitalism for hyenas”

$56bn in bank fines equals $1.1tn less in bank lending…minimum

If you take that 5% capital (equity) leverage ratio they want to impose on banks in the US (in Europe only 3%) that signifies an allowed leverage of 20 to 1.

In this respect when Martin Arnold reports on December 27 “Penalties for lenders leap to record $56bn”, and as these penalties go against equity, I read $1.1tn less in bank lending… minimum... and this 2014 only... judicial masochism!

With all the QEs and other stimulus efforts going on; and all the increase of capital requirements for banks going on, the question remains: why on earth were these fines not forced to be paid out in fully paid in voting shares to be resold to the market?

Could an app which controls bank regulators’ natural sissy instincts, be the solution for our unemployed?

Sir I refer to Lisa Pollack’s “It’s only natural to seek an app for everything” of December 24.

It really shed lights on how we could perhaps obtain better bank regulations, not-withstanding regulators natural wishes to impose on our banks a so dangerous and distorting risk adverseness.

An app, that we could perhaps call Basel IV, would for starters reverse regulators automatic beliefs that what is perceived as risky is risky and what is perceived as safe is safe, for a much more correct: what is perceived as risky is actually quite safe, as it is what is perceived as absolutely safe that contains the greatest dangers.

Then since regulators seemingly cannot refrain from the meddling that distorts, this app would immediately convert all of their risk weighting into a neutral one and the same capital requirement for all bank assets.

And finally remembering what Mark Twain said about the bankers being those willing to lend you the umbrella when the sun shined, and wanting it back when it looked like it could rain, the Basel IV app would impose an extra capital requirement, whenever a bank had too much of its assets in AAA rated assets, housing and real estate finance, or loans to infallible sovereigns.

And so hopefully this Basel IV app would also neutralize bank regulators who are only concerned with the safety of the banks… as if shining and healthy banks could survive among the rubbles of a destroyed real economy.

Let us pray Santa brings us such an app a.s.a.p. That would bring our young ones what they most need now… namely better expectancies for finding good jobs.

Basel Committee and Financial Stability Board… please… Let it go¡

Sir, January 2003 in a letter you published I wrote: “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”.

And so one could assume that when Sam Fleming now, December 23, reports that “Banks face sharp restriction on use of rating agencies in loan risk assessment” I should be satisfied.

I am not! Because now the regulators want to impose other criteria to be used by banks for calculating how much capital (equity) they need to hold against an asset.

For instance: “Corporate exposures would no longer be risk-weighted by reference to the external credit rating of the corporate, but they would instead be based on a look-up-table where risk weights range from 60% to 300% on the basis of two risk drivers: revenue and leverage.”

And so all regulators are doing here is introducing new sources of systemic risks; and defining new tools to be used in gaming a system the regulators set up to be gamed.

Why can’t regulators just let it go and let the banks use any method each one of them finds appropriate to measure credit risks; and why can’t they just fix one capital requirement for all assets… no gaming allowed?

Sir, let me explain it to you again, for the umpteenth time.

Do you agree Sir with that a bank will and should decide how much to lend, at what interest rates and on what other terms, based on the credit-risk he perceives the borrower represents?

I assume you answer "yes" Sir, but so then, why on earth should bank regulators also stipulate that the same perceived credit-risk is also to be cleared for in the capital (equity) account of the bank? Is not clearing for the same perceived risk twice overdoing it? 

Does that not mean for instance that, if we instead of allowing two nannies to use their average risk aversion when taking care of our kids, we allow them to apply the sum their risk aversions, then we would run the risk of making real monumental wimps out of our kids?

Sir, it is very clear that our bank regulators are digging themselves and our banks ever deeper in a horrible hole of their own creation. That could be because they do not want to admit their mistakes or, much worse, God help us, because they still do not understand their mistakes.

Mentally grey regulators make banks managers of retiree’s portfolios; and stop them from building future.

Sir Edward Luce argues that today’s pessimism, the western world’s “miserabilism”, results from us “growing older”, “Is the west clinically depressed”, December 22.

And Luce writes: “The greyer we become, the less we save. The less we save, the less we invest. The less we invest the slower we grow.”

But Luce forgets, or wishes to ignore, that the less we are willing to take risks, the more we will put the future behind us.

And that is precisely what have happened with or banks. Mentally greying regulators give banks huge incentives to avoid all what seems risky, like lending to small businesses and entrepreneurs.

That they do allowing much lower capital requirements for banks exposures perceived as safe; and which of course cause banks to make much higher risk-adjusted returns on equity on safe assets than on risky assets.

Can’t you hear them: “Lets squeeze the last ounce of safety we can get out of assets that seem safe today, even if that makes these more dangerous tomorrow, cause what only counts is for us to be more secure for the next few years…Après nous le deluge!”

I tell you Sir; anyone who has young children or grandchildren, and who does not criticize the castration of our banks performed by the Basel Committee and the Financial Stability Board, should be ashamed.

Regulators, in order to regulate banks, should define the purpose of banks. ​​They have not done so :-(

Sir, I refer to Alison Mason letter “Bankers see nothing from the client’s perspective” December 20.

In it she correctly mentions that too much attention is given to what the bankers need and want, and no attention is given to what bank borrowers need and want. And for that to change, “it requires a cultural shift back to a previous way of thinking of banks as intermediary between those who have capital and those who need it”.

I agree, but since there is not a word in current bank regulation that indicates what is the purpose of the bank, it would at least be a very good start if regulators had to explicitly state one, and then try to regulate in accordance.

As is regulators think the only role of banks is to avoid taking risks, and so they allow banks to hold very little capital (equity) against what is perceived as absolutely safe, when compared to what they need to hold against what is perceived as risky.

And banks love it of course, since that way they are able to obtain higher risk-adjusted returns on their equity when financing “the infallible” than when financing the risky.

“The infallible” meaning sovereigns, housing finance and member of the AAAristocracy also love it, since that way their bank borrowings are really subsidized.

It is of course those perceived as risky, like the small businesses and entrepreneurs who are left out in the cold. Precisely those tough risk-takers our unemployed young most need to get going, in order to avoid their going being made unnecessarily tough.

No! We can’t accept markets know more than we the experts do, can we?

Sir, I refer to John Kay’s “Crowd-pleasing theories are no substitute for wise regulations” December 17.

In it he writes “The wisdom of crowds becomes a pathology when the estimates of the crowd cease to be independent of each other, and this is likely when the crowd is large, ill-informed or both. It is in the nature of a crowd to turn on anyone who dissents from what is already an average opinion”.

I fully agree with that but, when the crowd is too small, then the groupthink risks really sets in, and it is in the rules of a mutual admiration group not to dissent in such a way that it could reflect badly on a member of it.

And so that is why “wise” regulators are certainly no perfect substitute for crowds either.

Just look at what our current bank regulators did:

They automatically decided that risky is risky, safe is safe, and therefore banks should be required to hold more capital against risky assets based on perceived risks.

And they ignored any deliberations on that what is risky might not be risky if it is perceived as risky, while what is perceived as safe might be really dangerous if it turns out to be risky, and therefore perhaps banks should be required to hold more capital against what is perceived as safe, than against what is perceived as risky.

Why? Because that would mean that there in their club of great experts regulators they would have to admit that they really do not know much about risks, and that the market could be better at determining it, and of course “We can’t have that… can we?

Regulators wrongly believe that to increase the stability of banks, they must stimulate risk-aversion.

Sir, I refer to Martin Wolf’s “Make policy for real, not ideal, humans” December 17.

In it and with references to the World Bank’s latest World Development Report (WDR2015); and Daniel Kahneman’s “Thinking fast and slow” he writes, “most of our thinking is not deliberative but automatic; it is socially conditioned; and it is shaped by inaccurate mental models”.

Clearly, the socially conditioning of believing experts to be unable to totally get things wrong, have stopped most, Martin Wolf included, from accepting the fact that current bank regulators decided automatically with no deliberation and based on inaccurate mental models. Let me for the umpteenth time repeat the evidence:

Automatic thinking would be: Risky is risky, safe is safe, and therefore banks should be required to hold more capital against risky assets based on perceived risks.

Deliberative thinking would be: What is risky might not be risky if it is perceived as risky, while what is perceived as safe might be really dangerous if it turns out to be risky, and therefore perhaps banks should be required to hold more capital against what is perceived as safe, than against what is perceived as risky.

And an inaccurate mental model is one that is based on that the only purpose of banking is to serve as a safe mattress where to stash away our savings, while ignoring its fundamental social purpose of allocating bank credit as efficiently as possible. And because of that bank regulators did not care on iota about how with their credit risk weighted capital requirements for banks, they have caused huge distortions by allowing “safe” assets to produce much higher risk-adjusted returns on equity than “risky” assets.

WDR2015 mentions “the tendency of poor women to believe that the right treatment for diarrhea is to cut fluid intake, to stop their child ‘leaking’”.

Frankly, those in the Basel Committee, and in the Financial Stability Board, and most “experts” on regulations are just as wrong. They believe that the right thing to do for the stability of our banks (and our economies) is to stop the leakages… by increasing the risk-aversion.

Unfortunately, the power of “automatic” thinking is enormous. In July 2012 Martin Wolf wrote that I regularly reminded him of that “crises occur when what was thought to be low risk turns out to be very high risk” but, as we could see in his latest book “The Shifts and the Shocks”, he has yet not been able to internalize the meaning of it.

Someone needs to put some order on this noise about Greece and its public debt to GDP.

I have held bank regulators responsible for Greece’s excessive debt. That because anyone authorizing banks to lend to a sovereign against 1.6 to zero percent in equity, meaning being able to leverage their equity from 62.5 to infinite times to 1, must know that sovereign is doomed to end up with too much debt.

And to bet that would not happen, sooner or later, is about as a high-risk gamble on a country’s future as these gambles come… and seemingly Greece was one of the first to loose that (someone could argue fixed) bet.

And Sir, that is why I could not really make heads or tails of FT’s editorial titled “A high-risk gamble on the future of Greece” December 10, since having or not a Samaras winning or not a presidential vote seemed, in comparison, like a very minor gamble on Greece’s future.

But now in FT I also see today a full two pages advertisement by a: www.freegreece.info who states that Greece public debt to GDP, after rescheduling and concessions, is only 18%, and not some 175% purportedly reported by Maastricht Treaty.

If so, great news, but then lets pray for that some credit rating does not give Greece an AAA rating, and so that banks and other lenders find it attractive to raise Greece’s debts to, for instance the levels of Germany.

18% and 175% clearly indicates much more than a simple tomayto and tomato issue...and so can somebody put some order here, please?

Tweeting "Oil: The Big Drop"

Sir, I refer to your FT series “Oil: The Big Drop” December 16, in order to suggests some tweets.

Oil is 97% of Venezuela’s exports, and 75% of Russia’s. If oil prices go down 40%... bye-bye Maduro, bye-bye Putin?

Venezuela suffers shortages of basic goods & inflation of more than 63%, and yet its economy is to shrink only 3%?

Hunger or Freedom? High oil prices make Venezuela a medieval feudalism; with citizens serfs to an elected Lord of Manor

The State gets 97% of Venezuela’s exports. How much does its citizens’ relevance increase, each $1 drop in oil price?

If Europe wants high oil prices, to get high inflation, so to repay its sovereign debts, it should be institutionalized

The European taxman is scared European motorists will ask: Why does not gasoline prices go down much?

It seems like those who should have the largest vested interest in joining Opec are shale-oil extractors in the USA

Will there be new rounds of quantitative easing to bail out failed expensive oil lenders and investors?

Have green energy investors or subsidy dependents, adequately hedged against so much lower oil prices?

Ps. More tweets might follow

http://theoilcurse.blogspot.com

http://petropolitan.blogspot.com

On bank regulations why can’t we get to the heart of its problems? Why can’t we keep political agendas out of it?

Sir, I refer to Edward Luce’s “Too big to resist: Wall Street’s come back” December 14.

Anyone who with an open mind reads Daniel Kahneman’s “Thinking, Fast and Slow” 2011, or this years “World Development Report 2015: Mind, Society, and Behavior” issued by the World Bank, should be able to understand the following with respect to current bank regulations:

Regulators (and ours) automatic decision-making makes us believe that safe is safe and risky is risky; while a more deliberative decision-making would have made us understand that in reality very safe could be very risky, and very risky very safe.

And so when so many now scream bloody murder about the influence of big banks in the US congress, because these managed to convince legislators to allow “banks to resume derivative-trading from their taxpayer insured arm”, they posses very little real evidence of what that really means… except, automatically, for the fact that it all sounds so dangerously sophisticated.

No, if there is something we citizens must ask our congressmen to resist, that is the besserwisser bank regulators who, with such incredible hubris, thought themselves capable of being risk-managers for the world, and decided to impose portfolio invariant credit risk weighted capital requirements for banks.

These regulations distorted all common sense out of credit allocation, and cause the banks to expose themselves dangerously much to what is perceived as “absolutely safe”, while exposing themselves dangerously little for the needs of our economy to what is supposedly “risky”, like lending to small businesses and entrepreneurs.

If we, based on what caused the current crisis should prohibit banks to do, it would have very little to do with derivatives, and all to do with investing in AAA rated securities, lending to real estate sector (like in Spain) or lending to “infallible sovereigns” like Greece.

Does this mean for instance that I do not agree with FDIC’s Thomas Hoenig’s objection to US Congress suspending Section 716 of Dodd-Frank? Of course not! But, before starting to scratch the regulatory surface, something which could create false illusions of safety, or even make it all much riskier… we need to get to the heart of what is truly wrong with the current regulations… Sir, enough of distractions!

And also enough of so many trying to make a political agenda and election issue out of bank regulations… as usual it would be our poor and unemployed or under employed youth who most would pay for that.

France, Italy, listen, there is something more important than “liberalization of closed products and labor markets”

Sir, You correctly refer to “the need to take aim at exactly the right problem…the bureaucratic sclerosis that chokes of innovation and growth”, “The struggle for reform in France and Italy” December 13.

And thereafter you also rightly argue that “demand-side boosts and supply side reforms are complements not substitutes”, and lend your support to structural reforms like the “liberalization of closed products and labor markets” because that would help to overcome “stagnant productivity” which was “a chronic problem well before the global financial crisis”.

But the most fundamental structural reform needed in France and Italy, and at the least in all other Western world economies, is to get rid of the distorting credit-risk-weighted capital requirements for banks, and which block bank credit from reaching where it is most needed in terms of helping the real economy to grow… productively.

And Sir, since you steadfastly keep ignoring that, I guess all those countries would be much better off listening to little me, than to big and so important You.

Any recklessness of bankers is by far surpassed by that of their current regulators.

Sir, Brooke Masters writes: “Reckless bankers caused the financial crisis by running their businesses without a care for the long term consequences”, “Bankers will fail to win back trust with tragedy analogies” December 13.

That is reckless reporting.

Regulators, by allowing banks to leverage 50 times and more their equity with assets perceived as “absolutely safe”, while at the same time ordering a much lower leverage for assets perceived as “risky”, caused the crisis and, by not acknowledging their mistake, and thereby hindering bank credit from flowing to where it can be most productive, keeps us submerged into it.

That was indeed reckless behavior, and bank regulators did it by not caring one iota about any long-term consequences… as can easily be evidenced by the fact that they have not even defined what the purpose of our banking system is.

“I can’t breathe!” If with respect to finance somebody has the right to utter that, that is the real economy… for which risk-taking is oxygen.

Sir, I protest FT for also failing to indict bank regulators, for causing our economies to stall and fall. (Is it that you automatically must side with the police?)

Do I own a copyright of myself? If so, should I not get a cut of what’s paid when advertising is tailored to me?

Sir, I refer to your editorial on the upcoming law in Spain that indicates that “all online news aggregators will be required to pay Spanish publishers a fee for contents that they link to”, “Spain’s flawed challenge to the mighty Goggle” December 12.

I mostly agree with what you write, but I do have some question on other two related issues:

First, if online news aggregators have to pay, why do not newspapers also have to do that, for instance when they review a book… and when that review can even lead to the book not being read, much less bought?

Second, cannot it be said that I own a copyright of myself? If so, why should I not get a cut of what’s paid to Google for someone to be able to tailor his advertising to me? And also, when somebody searches me, should not Goggle collect a fee and split it 50-50 with me?

PS. By the way, if all advertising I receive is tailored to me, does that not go against my human right to be able to become someone different… perhaps even someone better… or as a minimum at least someone with a better taste?

PS. Should not Google and other public private eyes also search our permission before searching us for other to us unknown parties?

With capital buffers thin, European Banks can’t handle the higher capital requirements for small business lending.

Sir, I refer to Lex’s note on the lack demand for ECB’s TLTRO funds, “Eurozone banks: horsing around” December 12.

It holds: “You can lead a horse to water. You can put water in a tall glass, add ice, a wedge of lemon and a cute little paper umbrella. You can bring the bendy straw right up to the horse’s lips. But if the horse is not thirsty, it will not drink.”… And so “Reluctance to take cheap money gives credence to the bank’s claims that low business lending is down to a lack of demand”.

BUT, “An alternative explanation, advanced by RBS, is that the low take up highlights the bank’s lack of capital. With capital buffers thin they do not want the risk of small business lending”.

CLOSE, but not really so. The truth is that “with capital buffers thin” they cannot handle those much higher capital requirements that comes associated with the supposedly risky “small business lending”.

How many times have I explained to FT over the last few years that the current risk-weighted capital requirements for banks impede the banks to efficiently allocate bank credit? Hundreds!

PS. In my homeland, Venezuela, after 15 years of being a columnist in its most important daily newspaper, I was among the four first to be expelled without thanks, when government agents purchased that paper. That’s how it is, in a country where the government receives directly 97 percent of all the nations exports.

But how does it work in Britain? Can an editor or some other influential person, order those working in a paper, for instance in FT, to ignore the arguments of someone… for whatever reason?

Capital (equity) requirements for banks, to be correct, need to be based on the perceived credit risks being incorrect.

Sir, the risk weights in Basel II for an AAA to AA rated sovereign was zero percent; the risk weight for a corporate rated AAA to AA was 20 percent; and the risk weight for an unrated corporate, like a small business was 100 percent… and they still are in Basel III

And so it would be interesting to know where Tom Braithwaite got “the risk weights, which obliges the banks to hold more capital against the riskiest assets, were also made tougher” from, “Fed’s push for safety test the business model at US banks”, December 12.

The only real important difference between Basel II and Basel III has been the introduction of the leverage ratio, which is not risk-weighted.

Unfortunately putting the pressure on banks with the leverage ratio to increase their capital (equity) while keeping the risk-weighting in place only means those weighted as “risky” are being more discriminated against that ever.

And Braithwaite writes: The international Basel II rules required banks to hold 2 percent of common equity against risk-weighted assets. The new Base III standards announced in 2010 requires a 7 percent capital ratio by 2019”.

There are of course differences but, since Basel II established “The total capital ratio to risk weighted assets must be no lower than 8%”, while Basel III states that “Total Capital (Tier 1 plus Tier 2 Capital) must be at least 8% of risk-weighted assets at all time”, and so Braithwaite is in my opinion quite shamelessly glossing up differences that really are not that big.

And though Braithwaite correctly states “Adding more equity depresses ROE and makes it more challenging to satisfy investors” he forgets to include the caveat: [those investors who do not appreciate the commensurate reduction in risk].

Nor does Braithwaite seem able to extrapolate from the above that lending to those borrowers against who the banks are forced to hold more equity, will depress ROE the most… and so unfortunately he does not understand how that distorts the allocation of bank credit.

Sir, again, if the perceived risks were correct, banks would need no capital… and any bank in then problem should just be out of business. And that is why it is so utterly silly to have capital requirements for banks based on these perceived risk being correct.

PS. Do I imply then that those experts in the Basel Committee and the Financial Stability Board and other prominent bank regulators are completely wrong? Yes, 180 degrees! 

Europe’s guardians of monetary orthodoxy should fear the printing press, while bank regulatory lunacy persists.

Sir, Reza Moghadam holds that “Europe’s guardians of monetary orthodoxy need not fear the printing press.” December 11.

Moghadam argues that the opposition to printing money” based on the lack of structural reforms is wrong, since “output did not contract at the start of the crisis because of labor and product market regulations – those have been around for decades”. In this he clearly makes a valid point.

But, when even after stating “most European companies rely on banks rather than bond markets for their capital needs”; and that “interest rates for private sector loans have not fallen as much [as yields on sovereigns]; adjusting for lower inflation they have in fact risen” Moghadam goes into a convoluted explanation of how companies, because of higher equity prices, can still benefit from a QE in which ECB buys government bonds… then he clearly shows he has not understood one iota about how current credit risk-weighted capital (equity) requirements for banks distorts the allocation of bank credit to the real economy.

Europe should always be wary of the money “printing press” but, if the printing takes place while the allocation of the resulting liquidity is distorted, then it needs to be truly scared.

Martin Wolf, silly risk aversion is not part of our western values.

In a recent OECD paper titled “Trends in income inequality and its impact on economic growth”, authored by Federico Cingano, we read the following note:

(5) With perfect financial markets, all individuals would invest in the same (optimal) amount of capital, equalizing the marginal returns of investment to the interest rate. This occurs as complete markets allow poor individuals, whose initial wealth would not allow reaching the optimal amount of investment, to borrow from the rich (infra-marginal gains from trade). If, on the contrary, financial markets are not available, and the returns to individual investment projects are decreasing, under-investment by the poor implies that aggregate output would be lower, a loss which would in general increase in the degree of wealth heterogeneity (see e.g. Benabou, 1996; Aghion et al, 1999).

Substitute “risky” for the “poor” and you should be able to understand that current credit-risk-weighted-capital (equity) requirements for banks creates an under-bank-lending to those perceived as risky that leads to a lower aggregate output, most specially that of the future, which is dependent on the risky risk-takers having fair access to bank credit.

Martin Wolf, in “Europe’s lonely and reluctant hegemon” December 10, with relation to Germany's responsibilities towards Europe tells it that “The time of thinking small is past” and that it needs to “take an assertive position in defending western values”.

Sir, I content that little is so “thinking small” than thinking that by allowing banks to hold much less capital against assets perceived as safe; and therefore allowing banks to earn much higher risk-adjusted returns on equity on these assets when compared to what they earn lending to the risky; can somehow make banks more stable, like if these lived in a vacuum isolated from the real economy, will.

And Sir, I vehemently hold that such silly risk aversion is not part of our western values, much the contrary. “God make us daring!”

And so what the Western world (including Germany) first needs to urgently realize, is that those bank regulations dooms it to stall and fall, no matter how much QE-ing, fiscal-deficiting or infrastructure constructing it does... following Martin Wolf’s instructions.

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

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

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

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

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

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

A regulatory guiding hand poses great systemic risks, and often doubles down on its mistakes, like with Basel III.

Sir, I refer to Mark Vandevelde’s “Beware the paternalist in libertarian garb” where December 8 he reviews Cass Sunstein’s book “Valuing life: Humanizing the Regulatory State”.

Vandevelde finalizes the review championing regulation and writing: “Better to acknowledge out loud that, on life’s dark prairie, the torch of freedom is something less useful than a guiding hand”.

Of course that might be true, in some cases, but at the same time he should acknowledge that a guiding hand has immensely larger possibilities to introduce dangerous systemic risks than any free market.

Just look at bank regulators who, to how banks respond to perceived credit risks by means of interest rates, size of exposure and other terms, added on their basically similar response, to the same perceived credit risks, by means of their credit risk weighted capital requirements for banks. And that of course distorted all the allocation of bank credit to the real economy.

It is ok to use the average risk aversion of nannies, that is what the market usually does, but it is sheer lunacy to add up risk aversions, which is what the Basel Committee did.

And when the market gets it wrong, it feels the pain, and it fast corrects itself; but, when regulators get it wrong, they quite often suffer no consequences, and so double down on their mistakes… like with Basel III following Basel II… and keeping credit risk-weighting as a pillar.

Central banks pushing down government borrowing costs to historic lows. Is it by wooing markets, or is it a shotgun wedding?

Sir, Ralph Atkins and Michael MacKenzie write that “the world’s biggest central banks have this year wooed financial markets, pushing down government borrowing costs to historic lows”, “Central banks take their cue from Sinatra” December 11.

Really, is it by wooing or is it more of a shotgun marriage? Since capital requirements for banks are being increased all around, but the risk-weighting that so much favors the borrowings of the infallible sovereigns remains entrenched, more than of Sinatra’s singing it makes one think of his rumored relations to the mafia.

The Basel Committee giving hints on what to do

Grandparents need to be very careful with grand-parenting classes arranged by their children.

Sir, I refer to Gillian Tett’s “When looking after baby is too serious to be left to experience” December 6.

According to an old saying, the reason why grandchildren and grandparents get along so well... is that they share a common enemy. And, in this respect, it should be clear that any grandparent who is offered a “grandparenting class” arranged by their children, should be very careful indeed.

Whenever I hear my child complaining about mine and my 3 year old grandchild’s behavior, I know everything is as it should be… or, at the very least, as I like it to be.

Financial Times

FT, respectfully, in reference to bank regulations, you are better off pleading ignorance.

Sir, you refer to a bank levy that motivated banks “to slim down risky balance sheets”, as something positive, “A misguided raid on the banking sector” December 5.

But what slimming down of the balance sheets do you refer to?

The shedding of the “risky assets” backed by quite reasonable bank equity, or the “absolutely safe assets” backed by little or no bank equity?

The small and well-diversified bank exposures to those perceived as “risky”, or the huge bank exposures to those perceived as “absolutely safe”?

Sir, might it be you have really no idea about what you are talking about?

As I see it, because of the distortions introduced by  their regulators, banks have been slimming down precisely what we least need them to slim down... like loans to small businesses and entrepreneurs.

And Sir, please do not get upset with me. If I held you knew what you were talking about, and so that you agreed with the shedding of “the risky” from the balance sheets of banks, that would be so much worse.

PS. Of course you are right about that plunking the banks on capital is sort of wrong as “The UK could do with having more capital”. You know that in many letters to you I have argued that, for instance, all fines levied on banks, should be paid in voting shares... as to ask for cash seems pure masochism.

Could a “Vanguard FTSE Social Index Fund” purchase debt of a sovereign like Venezuela, which violates human rights?

Sir I refer to Madison Marriage report in FTfm “Funds in cluster bomb ‘hall of shame’” December 1.

Therein “a spokesperson for Vanguard, which oversees $3tn of assets said:

“For US investors who wish to choose investments based on social and personal beliefs, we offer the Vanguard FTSE Social Index Fund, which excludes companies involved with firearms, tobacco, alcohol, adult entertainment, gambling, nuclear power, or those that violate fair labour practices and equal opportunity standards”.

Holy moly, what a mixture of issues! Questions:

How were for instance adult entertainment and gambling thrown into the same bag as nuclear power and equal opportunity standards?

Have strippers and croupiers not the right to an equal opportunity of seeing their jobs financed?

Considering the Equal Credit Opportunity Act (Regulation B) in the US, are these types of funds really legal?

Has not planet earth right to nuclear power in order to avoid having to more coal that is more dangerous for the environment?

Is there a fund that excludes countries, like Germany, which now are dismantling the use of nuclear power?

In general are there any sovereigns excluded? What about for instance the purchase of Venezuelan debt when the UN Human Rights Chief urges it to release arbitrarily detained protestors and politicians?

As a citizen, more than credit ratings, I would perhaps want to see more use of ethic and good governance ratings.

Silly and sissy regulatory risk-aversion is not compatible with a grown-up response to the Eurozone’s problem.

Sir, is a massive ECB-QE liquidity injection, by means of buying safe “sovereign debt purchases”; while keeping bank regulations which forces banks to stay away from assets perceived as risky, like lending to small businesses and entrepreneurs; all in the hope that infrastructure investments and other “safe” goodies will pull the Eurozone out of stagnation... a "grown-up response"?

Wolfgang Münchau seems to think so in his “The Juncker fund will not revive the Eurozone” December 1.

I certainly do not think that such silly and sissy regulatory risk-aversion is compatible with a “grown-up response”, nor with the Eurozone’s revived growth.