Minimal capital requirements are a potent growth hormone for too big to fail banks.

Sir, I refer to Ben McLannahan’s “Kashkari scheme to end ‘too big to fail’ deserves a fair hearing” November 20.

Neel Kashkari, Jeb Hensarling and Thomas Hoenig are all correct in requiring banks to hold more equity… the minimum capital requirements of 1.6% and less, meaning leverages 62 times to 1, and more, have been the most potent growth hormones ever for the too big to fail banks.

But, since I sincerely believe that one of the greatest dangers for the banks, and for the real economy, is the distortions produced by risk-weighted capital requirements, were this source of distortion to be completely removed, then I think that a 8 to10 percent capital on all assets would suffice… especially if there is a clear reduction in the moral hazard producing government guarantees… especially if the prosecutors of wrong-doings begin to go after the responsible executives and not just shareholders’ capital.

That fixed capital requirement of 8 to 10% should of course also be applied to sovereign debt.

Though I am not a US citizen, I do have immense respect for USA’s Declaration of Independence and Constitution, and I must say, pardon me, that the risk weights of 0% the Sovereign and 100% We the People, reads to me like a slap in the face of the Founding Fathers.

PS. Clearly there is a conflict between wanting the banks to hold more capital, which would be the result of eliminating current risk weighted capital requirements, with wanting the banks to also serve the credit needs of weak economies. But there are ways to harmonize, like grandfathering any changes in the capital rules meaning leaving them as is for all the current assets of banks.

PS. You might ask yourselves what do I have to do with all this. Let me be clear, as a Venezuelan, and a Polish citizen, one whose father was liberated by American soldiers from a concentration camp in 1945, and as a grandfather of two Canadians, I am absolutely sure we all have much skin in the game with respect to how it goes for America… (And that goes for you too Sir… much more that you would naturally want to admit) 

@PerKurowski

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 ©