February 17, 2016

It would be helpful if Martin Wolf finally realizes the dangers the risk weighted capital requirements for banks pose.

Sir, now, more than 12 years after Basel II was approved Martin Wolf writes: “If one ignores the vanishing trick of risk-weighting, the true leverage of many large banks remains at more than 20 to one.” “Banks are weak links in the economic chain” February 17.

But, of course, the real question though is, why have regulators ignored the dangers “the vanishing trick of risk-weighting” poses? Not only can that risk weighting that was envisioned to provide better and more comparable information on banks confound the markets more; it also provides banks with an versatile instrument to game the regulations; and, worst of all, it distorts the allocation of bank credit to the economy.

On that last, the distortion, Wolf might at long last begin to wake up as he writes: “Banks are highly leveraged plays on economies. If economies are sick, banks are likely to be sicker.” So now let us hope that from that he could deduct that the way bank credit is allocated to the real economy carries real significance to the health of the economies and the banks.

And then, Hallelujah, Martin Wolf finally accepts “that banks are exposed to almost everything”. That should allow him to understand the idiocy of re-weighing for basically the only risk that banks with interest rates and amounts of exposure already clear for, while leaving the whole universe of other risks a bank faces out of the regulatory equation.

Sir, as you well know by now I will with much interest follow where Wolf goes to now because it would of course be very useful if the leading economic commentator of the Financial Times opened his eyes to what has and is really happening with our banks.

Currently, by regulators allowing banks to earn higher risk adjusted returns on equity financing on what is perceived or deemed as safe than on what is perceived as risky, banks have stopped financing the riskier future and settled on refinancing the safer past… and that cannot be good for anyone, least so for our children and grandchildren.

And of course, all for nothing because major bank crisis never ever result from excessive exposures to something ex ante perceived as risky.

@PerKurowski ©