EU bank regulators have clearly proven themselves to be a source of systemic risk

Sir, Jan Toporowski writes that the “White House…represents a much more serious systemic threat to European banks. European governments and the ECB need to rethink how European banks are funded and regulated.”, “Threat to European banks of US political agenda”, August 14.

That could be but, foremost, it is the EU that needs to rethink how European banks are regulated. The 0% risk weight that for the purpose of bank capital requirements was assigned to Greece was, without any doubt, what caused that country’s excessive public debt tragedy. And did any EU authority offer to help Greece in order to compensate for that mistake? No! Not even the slightest “We’re sorry”. They do not even acknowledge their mistake… they just keep on blaming Greece.

@PerKurowski

When you stress test lenders, why aren’t there any stress tests scenarios for borrowers?

Sir, Caroline Binham writes that “EBA outlines stress test scenarios for lenders” February 25.

And my immediate reaction is to remind you of that those stress tests do not include, in any way shape or form, an analysis about how banks could be stressing the real economy, with an inefficient allocation of bank credit.

Again, for umpteenth time, I have always argued that the number one social function of banks is not necessarily that of repaying whatever it owes, but allocating their credit as efficiently as possible to the real economy.

But the credit risk weighted capital requirements have made it impossible for banks to fulfill that social duty.

Dare ask: How many millions of small bank loans to SMEs and entrepreneurs, has the Basel Committee’s regulations impeded worldwide?

And so any sensible stress test of banks should not only consider what is on banks’ balance sheets but also what is absent.

And those comprehensive tests would evidence that banks are no longer finance the risky future, but only refinance the safer past.

Though I admit that conclusion might be to stressful for the great distorters, the bank regulators, to bear. 

@PerKurowski ©

Martin Wolf, it is not Europe’s banks which are too feeble to spur growth. It is their regulators who are.

Sir, I refer to Martin Wolf’s “Europe’s banks are too feeble to spur growth” October 29.

Wolf writes: “High leverage impairs the ability to finance growth. A responsibly managed yet highly leveraged institutions would seek to… hold highly rated assets. This is likely to militate against the productive investments the Eurozone needs”.

Indeed… but why is it so Mr. Wolf? Could it possibly be (as I have so mono-thematically explained to you for soon a decade) because feeble bank regulators decided, for no good reason at all, banks needed to hold more capital/equity against highly rated assets than against more “risky” productive assets?

Mr. Wolf, tell us, what responsibly managed bank should not responsibly look to obtain the largest risk adjusted returns on its equity?

Of course some bankers might have lobbied strongly for some ultra-low capital requirements, but it was the regulators who approved these… and so stop blaming the banks so much, and join me in blaming those who are most to be blamed.

Of course Europe’s banks have “too little capital”, and that is mostly because too little capital was required of them when lending to what was officially perceived as safe. But it is not the too little capital that mostly hinders banks from helping the real economy… it is the distortion produced by the credit-risk-weighted equity requirements.

If Europe does not rid itself of those feeble bank regulators, very fast, it could soon be game over for Europe.

Europe, it is your bank regulators who most must be stress-tested!

Sir, I refer to all the writings in FT on October 27 about the stress tests of European banks in order to ask you:

If all banks that failed had only given loans to infallible sovereigns, then they would have classified as the safest. Do you really think that would have helped investors to have confidence in Europe?

Frankly, regulators who can come up with something like The Basel Committee’s Bank Stability Decree, have no moral right to test any bank.

Sir, even a hedge fund founder is quoted stating: “We now know that we can have a 5 per cent contraction in the eurozone economy and the banks will still have more than 8 per cent capital – that is very positive for the sector.”

What? If lucky, it might be more than 8 per cent of capital of the-risk-weighted assets… and that, as you should know by now, can be extremely faraway from meaning the same thing.

And, why after spending so many million dollars on consultants, did they not even give us the so easy calculated leverage ratio?

And talking about the consultants, we should have their names, so as to know who to hold accountable, as paid collaborators of what seems more to be a farce concocted by regulators to save face.

PS. Sir, you who have been so mum on this issue, show me anything perceived or officially stated as "risky" that caused the turmoils in the European banking sector. 

EAB regulators should be fired; they don’t care one iota about the real economy, as long as banks don’t go under during their watch.

Sir, Sam Fleming reports that in order to “limit inconsistencies between the practices of different supervisors” EBA will deploy “a regulatory scoring system” of banks dependant on: “business model analysis, assessments of internal governance, risks to capital and risks to liquidity”, “EU to score lenders in push for regulatory unity” July 8.

As you see not a word about whether banks allocate credit adequately to the real economy. These regulators do not care one iota about that. All they care for is for banks not to fall under their watch… until they retire, and if the real economy has to go under in order for that to happen, so be it.

They should be fired!

Is it ok for a regulator, like EBA, to withhold information from “experienced investors”?

Sir, in previous letters to you, here and here I have expressed concern about what would be the legal responsibility of bank regulators, towards any coco-bond investors, if they withheld important information with respect to the possibilities of those bonds being converted into bank equity.

And now Sam Fleming and Martin Arnold report that the European Banking Authority, EBA, is also expressing some concerns on this issue, “European regulators seek to limit retail sales of bank credit”, May 20 (though not in the US FT issue).

But something is not clear… after the article refers to several reservations about these cocos being sold to retail clients, it informs that “Britain´s regulator, the Financial Conduct authority, has said it plans to consult on new rules to ensure cocos are only marketed to experienced investors”

Would that imply that a regulator can withhold important information from “experienced investors”? If so, just in case, for the record, I have no knowledge about investments whatsoever.

Bank regulators insisting on playing risk managers for the world, evidences hubris and lunacy is still going strong.

Sir, it is indeed scary reading Brooke Masters reporting on a “Call to harmonise bank risk models”, August 6.

The average risk weight for sovereign corporate and institutional debt that European Banking Authority found in 35 big banks is quoted as being 35 percent with a standard deviation of 12 percent. This indicates how frightening badly capitalized most European big banks are.

In Basel II terms a 35 percent risk weight, applied to a generously defined 8 percent basic capital requirement, could indicate the average banks to be assets to equity leveraged about 35 to 1, and some even 55 to 1 and more.

But even scarier, is reading what EBA suggests. Bank regulators should not be risk-managers for the world and have no business concerning themselves with whether the models banks use to analyze their risk work or not. Their responsibility is to think exclusively in terms of what to do when risk-weights and risk-models do not function adequately. And, in this respect, the last thing regulators should do is precisely what the European Banking Authority calls for, which is “further moves towards harmonized rules for risk models”. That only guarantees to increase the systemic risk of many risk models being wrong at the same time. It is as if regulators have learnt nothing at all from this crisis.

All in all what the article indicates, is the need for a more simple leverage ratio type of capital requirement, which, since applied equally to all assets, makes it therefore more independent of risk models. That would of course also help to reduce the extreme distortions in the allocation of bank credit to the real economy introduced by capital requirements based on perceived risks.