February 27, 2016

Whether there are thousands of small banks, or just a few TBTF, if regulations are bad and distort, it’s all the same shit.

Sir, I refer to John Dizard’s “Banks are destined to accept break-ups in exchange for lighter regulation” February 27.

It should not be a question of heavy vs lighter regulations. Many of us would like to see banks accepting break-ups as a result of better regulations. Because frankly, it is silly to break-up banks, if they are anyhow going to be joined together in a lousy regulatory matrimony.

2001, in an Op-Ed, I warned: “Today, when the world seems to be asking much for bank mergers or consolidations, I wonder if we on the contrary should be imposing on banks special reserves depending on their size. The bigger the bank is, the worse the fall, and the greater our need to avoid being hurt.” 

But, just as important, in the same Op-Ed, I also warned about the risk of regulations, in the following terms:

“The regulatory risk: Before there were many countries and many ways of how to regulate banks. Today, with Basel proudly issuing rules that should apply worldwide, the effects of any mistake could be truly explosive.

“Excessive similarity: Encouraging banks to adopt common rules and standards, is to ignore the differences between economies, so some countries end up with inadequate banking systems not tailored to their needs. Certainly, regulations whose main objective appears to be only to preserve bank capital, conflict directly with other banking functions, such as promoting economic growth, and democratize access to capital.”

And Sir, as you well know, I opine that when the regulators decided to introduce credit risk weighted capital requirements for banks, which distorted the allocation of bank credit to the real economy, then they blew it for all of us. And our economies are still suffering, because these regulators just don’t want to admit they blew it, and for what reasons.

For instance when John Dizard mentions “securitisation fakery”, he should not forget that the main driver of such fakery was the fact that there was going to be very different capital requirements depending on how that securitization got rated… and that distortionary incentive is still well alive and kicking more than ever.

So at the end of the day, if all AAA rated securities backed with lousy mortgages to the subprime sector were held by one or by a thousand banks, it’s all he same shit. 

Stefan Ingves the current chair of the Basel Committee, but also the chair of the Swedish Riksbank, recently had this to say of Swedish banks: “Banks have changed the way they calculate risk weights, the risk-weighted capital adequacy therefore look good. But in the end they do not have much more capital than before the financial crisis.”

Sir, can we really take our current regulators to the bank?

PS. For all practical purposes it would seem I have been as much censored by the Government of the Financial Times than as I have been by the Government of Venezuela. J

@PerKurowski ©