Bank risks needs to be reflected in its overall capital requirement and not through distorting specific requirements.

Sir, Paul J. Davies makes good arguments when discussing capital requirements for foreign exchange swaps in “Basel’s market clean-up has the wrong swap in mind” January 30. 

Unfortunately, when he writes that the Basel Committee method is “to penalise uncleared swaps with higher capital charges… in most cases rightly so”, and therefore just wants to exclude the foreign exchange swaps, he shows not having understood the fundamental mistake of current regulations, and which is that, when you penalise some you are de facto favoring others, and so de facto distorting. 

If regulators are concerned, for instance with the risk of uncleared derivatives, it is one thing for them to order the bank to increase the capital it holds against all not risk weighted assets, let us say from 6 to 6.2 percent, and quite another, to target specific assets with a higher capital requirements. The first adjusts the capital to the overall risk level of that banks activity, the second just distorts and discriminates against what the regulator perceives is risky.

Are we to allow Solvency II do to our insurance companies what Basel II did to our banks?

Sir, Paul J Davies in “Capital rules raise fears over insurers’ risk appetite” April 20, though correct in so many aspects sadly makes precisely the same mistake that the Basel Committee did when they established their capital requirements for banks based on officially perceived risk. He says “The higher returns on risky assets ought to be diluted by a higher capital charge in perfect proportion. That ignores that the “higher return on risky assets” he sees is the result of the market already having looked at the same risk information available and adjusted their risk-premiums and interest rates correspondingly.

Is it not bad enough that Basel II drove our banks excessively into what was officially perceived as not risky assets, carrying no capital at all, to now have Solvency II doing the same of our insurance companies?

From Basel II into Solvency II… has the European Parliament lost it?

As reported by Nikki Tait and Paul J Davies, April 23, not only do the higher risks have to pay higher insurance rates because the market so demands it, but now they have to be additionally penalized in order to compensate for the higher capital requirements for higher risks that will be imposed on the European insurers by the European Parliament; as a result of something called “Solvency II” and which sounds and reads frightfully similar to Basel II.

Do they never learn? Now again, what will result from all this is increasing the incentives for disguising as being of lower-risks and for having the regulators go to sleep in the belief that all has been taken care of. Who is going to measure the risks? The insurance risk rating agencies? Start praying!

Mr Jouyet cannot have the cake and eat it too

Sir as reported by Paul J Davies in “France demands stronger ratings supervision” January 22, it looks like Mr Jean-Pierre Jouyet, the French regulator strives to have the cake and eat it too. On one hand he wants to increase the supervision of the credit rating agencies and so which presumably would make them more “trustworthy” for all to follow and on the other hand he “wants to see the role of agencies in the financial system reduced.” He needs to make up his mind. May I suggest he concentrates on the latter alternative as the first would only risk digging ourselves deeper into the hole we’re in.

Europe has the sovereign right to guard its interests even when doing it stupidly.

Sir Paul J. Davies and Nikki Tait report “Concern over Brussels rating agencies plan”, December 1. What can one say? If a Hugo Chávez feels he needs a Banco del Sur to make a difference in this world why should not Europe want to have their Credit Rating Agency de Europa? And, with respect to that ´This introduces an extra-territorial approach and will be seen as protectionism” why should Europe also not have the right to try their best to see that the next subprime swampland where the credit rating agencies will surely take us again, sooner or later, lies not in California but in old Europe?

If Europe accepts the possibility that the credit rating agencies do introduce a bias is that in itself not a prime reason for asking the Basel Committee to eliminate completely the role of the credit rating agencies in setting the minimum capital requirements for the banks?

FT… how come?

Sir I refer to your Special Report World Economy 2008 published with occasion of the meetings of the World Bank and the International Monetary Fund in Washington this week.

In it Paul J Davies in "High noon chimes for collateral with no name" says "A system that simply trusts in collateral without regards to its particulars is one that fosters the creation of ever more hideously complex problem". Since the principal reason for the current turmoil is not that the system trusted too much the collateral but that it trusted too much others to do their job of analyzing it, I would have worded it instead as "A system where participants are led to believe so much in the opinions of some few credit rating agencies…"

Also Norma Cohen in “Race against the storm” mentions that “The infection in the credit markets, by all accounts, began with mortgages, specifically those to borrowers with poor and patchy credit” but this completely ignores the fact that most of the market did not lend to borrowers with “poor and patchy credits”, most of the market bought AAA rated securities.

UNCTAD for instance is perfectly clear about what has happened and in their policy brief titled "The Crisis of the Century", released on October 6 they state "There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque."

Now in your 12 page special report, surprisingly, the credit rating agencies are referenced only once, and that is when you have to report on the opinions of Christine Lagarde, France’s finance minister.

How come? What strange and dark silencing forces are in action at the Financial Times? They seem to be much present at the World Bank and IMF meetings too.

I have saved a copy of this Special Report by the Financial Times as evidence… though I do not know of what, yet.

It was the regulators that initiated the fetishisation of the credit rating agencies

Sir Paul J. Davies in “The false of security at the heart of the credit crunch” September 19 relates how Peter Fisher, a former undersecretary for domestic finance at the US Treasury explains that it was the financial systems extreme “reliance on the supremacy of secured asset based lending” or the “fetishisation of collateral” that made a necessity out of the credit ratings agencies, because a “credit rating is the bare minimum that can be taken in lieu of any real inquiry into a borrower’s cash flow”.

Absolutely not! First, there is nothing wrong with secured asset based lending if the value or cash flow generated by those assets has been correctly assessed. Second, a credit rating, if done right, should of course include a real inquiry into the borrower’s cash flow. The fetishisation of the credit rating agencies occurred primarily because the regulatory authorities declared the credit ratings so correct that they could be used, for instance, to determine the minimum capital requirements of the banks. And, lets be frank, if the regulators believed that much in the credit rating agencies, how could you really expect stop that kind of blind-faith from permeating the rest of the market?