Sometimes, quite often, a government’s help costs you more than it is worth

Sir, Sarah Gordon with respect to the possible consequences of Brexit for small business writes: “The British government has failed to provide the support that is needed” “Aloof state abandons UK small businesses to their Brexit fate” October 18.

Since any government assistance way too often goes hand in hand with having to waste your time, or your money paying their crony consultants for a lot of tasks not necessarily relevant to the problem at hand, I’m not really sure small businesses are here net losers as a result of that lack of support.

Besides what’s to be expected from a government that allows banks to hold much less capital when lending to the sovereign and financing house purchases, than when lending to small businesses?

@PerKurowski

That banks do not lend to small businesses in Europe has a reason and is not something irreversible

Michael Sherwood and Richard Gnodde write “The international regulatory response to the financial crisis, which is intended to make sure that banks are better capitalised and their lending operations more cautious, could in some ways make the predicament of small business worse”, “A ‘big bang’ to expand the European economy” February 24.

And they go on: “Robust banks will strengthen the financial sector as a whole. But bank credit is likely to become less freely available and more costly — to the detriment of those companies and economies that are more dependent upon it.”

Sir, are we supposed to believe these two vice-chairmen of Goldman Sachs Group do not know, that is not an irreversible process? That what is making it difficult for small businesses to have access to bank credit in Europe, is foremost that banks need to hold much more equity when lending to these than when lending to something able to be perceived as less risky from solely a credit point of view?

I doubt it, the problems is that they, as bankers, have a vested interest in maintaining the current system which allows banks to earn higher risk adjusted returns on equity with exposures to assets perceived, or made to be perceived safe. It is after all a bankers dream come true… a big ROE without having to take risks.

What is hard for me to understand though is why FT, who is not a bank, does not even want to acknowledge the distortionary impact produced in the allocation of bank credits to the real economy by requiring banks to hold different amounts of equity against different assets.

Sir FT, I do not understand how you cannot find current bank regulations more than a bit loony.

We citizens authorize governments to support banks among others with some backstop mechanisms, and not to mention the bailouts.

And then come the regulators and allow banks to leverage that support especially when banks invest in those safe assets in which we, risk adverse small investors, want to invest in, with are own not-leveraged funds.

And in this way the regulators make the banks compete directly with us for what little supposedly really safe is available; and also make them stay away from what should be the banks’ prime business, namely lending to the risky, like small businesses and entrepreneurs, as they are the experts in that... not we.

Sir FT, I do not understand how you cannot find that more than a bit loony.

Spain (the whole Western world) needs a manifesto that explains what happened and then inspires hope… and here is what I propose.

Sir, Andres Ortega’s “The debt Greece owes us is the least of Spain’s worries” February 5 is a very responsible written article… perhaps too responsible for the times, because a call for responsibility, to produce responsibility, must be accompanied by a clearer reason for hope than what is reflected in his “So extend and pretend — and reform and grow.”

The following would be my message, my manifesto to Spain.

“Bank regulators, with the intentions of making our banks safer, decided that banks needed to hold more equity against what was perceived as risky, than against what was perceived as safe. Unfortunately, this translated into that banks were able to earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky… and that, as you should be able to understand, excluded all small businesses and entrepreneurs, our primary growth agents, from having fair access to bank credit.

In this respect we are announcing that, effectively today, we are requiring our banks to hold the same equity against all assets, 8 percent; and since that generates immediately an immense deficit of required banks equity, which the markets will not be able fast, we, the government of Spain, will subscribe all equity needed to fill that gap, with the intention of not exercising its voting rights and of selling it back to the market, little by little over the years.”

Andres Ortega writes about “a wedge between the north and south of the Eurozone”. He would benefit from understanding that the real wedge is between “the risky” and “the safe”, between the ordinary citizens and their "infallible sovereigns" and the AAArisktocracy.

What would make a Negro slave on a cotton plantation in 1800 America, not feel being discriminated against?

Sir, I refer to Luke Johnson’s valedictory essay for the FT “A farewell after eight years championing founders” January 28.

The following Johnson writes is extraordinary: “I believe independent ownership of business assets is incredibly important if we want a vibrant economy. Founders possess animal spirits and optimism that contribute disproportionately to innovation, job creation and tax generation. They are the essential ingredient for a more prosperous society, together with the rule of law and sound property rights. These inventors, mavericks and would-be tycoons exist to take risks most of us seek to avoid in our careers.

Start-ups renew industry and society, and pioneer and implement new technology that established institutions shun, because it would upset their cosy oligopolies. Crony capitalists — whose annual conference was held last week in Davos — are not entrepreneurs, but corporate managers who hate free markets and the idea of proper competition, while squandering most of their time on office politics and games of patronage.”

How extremely sad then that Luke Johnson completely missed out on how bank regulators, with Basel I favoring the “infallible sovereigns”, and with Basel II favoring the AAArisktocracy… impeded the fair access to bank credit of his “risky” risk-taking entrepreneurs.

What is it that makes those who should most see a distortion and discrimination in order to fight it, not seeing it?

Europe, without cleaning up your bank regulations, all what ECB, Brussels and governments do, is useless and dangerous.

Sir, we have bank regulators allowing banks to hold much less equity when lending to a sovereign, than when lending to a small businesses or an entrepreneur; and we have ECB planning to buy up more sovereign debt.

That evidences a public policy based on the assumption that government bureaucrats know better how to invest in an effective way for the economy, and for the society, other people’s money, than what small businesses and entrepreneurs can do when pursuing their own dreams. That is truly a shaky ground on which to salvage the future, of for instance Europe.

And all that nonsense derives from that utterly absurd belief that governments, sovereigns, are less risky, because they have the capacity to tax its own people or to print money.

Sir, whether you stimulate the economy in Europe with ECB’s planned QEs, helicopter drops of money on citizens, or fiscal deficits, does not really matter, neither will work; as long as you have regulations that hinder credit from going freely to where it is most wanted and needed.

And therefore it is so hard for me to understand how Wolfgang Münchau (and You, and most other) can suggest, or evaluate programs, without referring to the need to correct this fundamental flaw, “An imperfect compromise for the Eurozone” January 26.

PS. Münchau writes “Germany’s retirement system — where pensions are not invested in the stock market, but in low-yielding government bonds — is not equipped for an environment in which interest rates are at zero for long periods”. Does he think that system to be better prepared if ECB is too successful fighting deflation?

Sadly small businesses, entrepreneurs, and unemployed, have little reason to celebrate ECB’s/Draghi’s QEs.

Sir, Martin Wolf divides the opposition to ECB’s/Draghi’s QEs into those who think this “takes the pressure off governments to deploy expansionary fiscal policies” and those “who think QE is close to being an invention of the devil…hyperinflation… and that it will lift the pressure on governments to [structural] reform”, “Draghi’s bold promise to do what it takes for as long as it takes” January 23.

Wolf does so mainly because he believes that “the eurozone did not fall into a slump because supply-side problems suddenly became worse. It faltered because demand collapsed.”

I don’t think so. I am certain that had it not been for the Basel Accords credit-risk-weighted capital requirements, made worse by means of some ideological weightings in favor of government borrowings, the preceding debt-fueled anticipation of consumption boom might not have happened, but neither the “slump”.

Why is it so hard for Martin Wolf to understand that if banks had to hold as much equity against assets like loans to sovereigns, AAArisktocracy and real-estate, than what they are required to hold when lending to the “risky” small businesses and entrepreneurs, all our economies would be much sturdier.

In July 2012 Martin Wolf wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." And yet he does not comprehend what I really meant with that, namely, if so, then… how risky can a borrower perceived as risky really be?

I perfectly understand why the markets and asset holders celebrate Draghi’s announcements. I just wish it were the small businesses and entrepreneurs, and consequentially the unemployed, who had the real reason to celebrate.

Getting rid of those odiously discriminating and distorting credit risk weighted equity requirements for banks and having the ECB put the €1tn in as temporary equity in Europe’s banks, well that would be something really bold, and something which all could celebrate.

An excessive risk aversion, an “Après nous le deluge”, is the bequest of what kind of generation?

Sir, I refer to John Kay’s “Inequality is the bequest of an unequal generation” January 21. To it, I would like to add the following:

Our forefathers’ central banks and bank regulators, unless they lived in dictatorships or in communist lands, never told banks who to lend or not to lend. And as a consequence banks took many risks that have played out right for us.

Our generation on the contrary, represented by the Basel Committee, by means of credit risk weighted equity requirements, are de facto instructing banks to stay away from what is perceived risky and to favor the access to bank credit of the “infallible” sovereigns, the AAArisktocracy and the housing sector. 

John Kay, that sissy and perfectly useless risk-aversion, and which like in neon lights screams out “Après nous le deluge”, makes us what kind of generation? 

I am sure that our grandchildren are going to pay dearly for our banks not lending sufficiently and in fair terms to small businesses and entrepreneurs... and once they understand what happened they will not be kind on the current generation of bank regulators.

Basel Committee, Financial Stability Board: Hear hear… Tim Harford’s "The Power of saying ‘NO’"

Sir, hear hear… Tim Harford’s, “The Power of saying ‘no’”, January 17.

“Please, please, dear bank regulator, allow us lower equity requirements on these ultra safe exposures and we promise that will stay away from what’s risky”

Absolutely NOT! The real bank crises have always occurred when something ex ante was considered as “absolutely safe” so I will not run the risk of next time that happens, you will, because of me, stand there with your pants down and no equity. Copy: finance.historians@gmail.com

Absolutely NOT! If I allow this, then I will not be able to look into the eyes of all those small businesses and entrepreneurs, who will be denied credit as a result of favoring the AAArisktocracy; or into the eyes of all those young unemployed, who could become a lost generation if I did so. Copy: risky.borrowers@gmail.com unemployed.youth@gmail.com

PS. But, unfortunately, bank regulators did not have it in them to say “NO!” to bankers.

We are in the midst of a slow-motion deep financial crisis that no one dares to speak of.

Sir, Martin Wolf gives a generally positive outlook for 2015 in “An economist’s advice to astrologers” January 7.

That is because he keeps on turning a blind eye to the very dangerous slow motion financial crisis that is occurring, at this very moment, but that for reasons I can’t comprehend seemingly no one dares to name.

And I refer to that primarily as a result of growing general bank capital (equity) requirements, like that derived from Basel III’s leverage ratio, those banks borrowers who because they are perceived as “risky” generate larger regulatory imposed capital requirements on the banks… are getting more and more excluded from having fair access to bank credit.

I do not know if that is going to reflect itself in 2015 but one thing is sure, all the credit negated, or offered in too expensive terms, to small businesses and entrepreneurs during 2015, is going to turn out to be extremely expensive for the economy… and for the job prospects of our youth. 

Wolf’s “chronic demand deficiency syndrome”, created mostly through the anticipation of demand financed with debt, a preempting of future demand, is going to hang over the economy, no doubt about that.

But it is silly risk aversion, expressed in allowing banks to earn higher risk adjusted returns on equity on what is perceived as “safe”, which is the major obstacle for any sturdy economic growth to reassume.

Stress testing of banks should foremost test whether these serve the real needs of the real economy.

Sir, I refer to your “Stress testing should not just apply to the banks” December 31.

In it you argue that “Regulators need a holistic approach to risk in the financial system” and therefore they should also include “the non-banks that are playing an increasingly important role in supporting the economy” so that “the world can be confident that the process of making banks safer is not simply shifting risk elsewhere”.

And again Sir, you totally ignore what is the biggest risk with a financial system, namely that it does not allocate bank credit adequately for the needs of the real economy. Again you seem to imply there is a possibility of having save banks standing there in shiny armor in the midst of the rubbles of the real economy… and of that being a worthy goal to pursue.

No Sir! The stress testing of banks we most need now, starts with ascertaining whether our risky small businesses and entrepreneurs are having fair access to bank credit. The stress testing of banks we most need now, should foremost test whether banks are serving the real needs of the real economy.

PS. As I have told you more than a hundred times, banks are not doing that, thanks to our stupid bank regulators... so perhaps they do not dare to stress-test their own mistakes. 

Why should companies be banks and banks not? The real challenge for the European Commission

Sir, I refer to Sarah Gordon’s “Juncker’s plan needs companies to open up their healthy coffers” December 30.

And I ask why should companies turn into banks? Why should companies finance “Europe’s younger and smaller firms which, research suggests, create a disproportionate number of new net jobs”.

What’s wrong with banks financing these? And as banks would were it not for the credit-risk-weighted capital requirements for banks, which create such real hurdles for banks when financing what is perceived as “risky”… and this even though those “risky” could signify the safest way out of the crisis.

Who is going to stop the frankly idiotic bank regulations coming out of the Basel Committee? That would be the real challenge for the European Commission. 

Regulators, in order to regulate banks, should define the purpose of banks. ​​They have not done so :-(

Sir, I refer to Alison Mason letter “Bankers see nothing from the client’s perspective” December 20.

In it she correctly mentions that too much attention is given to what the bankers need and want, and no attention is given to what bank borrowers need and want. And for that to change, “it requires a cultural shift back to a previous way of thinking of banks as intermediary between those who have capital and those who need it”.

I agree, but since there is not a word in current bank regulation that indicates what is the purpose of the bank, it would at least be a very good start if regulators had to explicitly state one, and then try to regulate in accordance.

As is regulators think the only role of banks is to avoid taking risks, and so they allow banks to hold very little capital (equity) against what is perceived as absolutely safe, when compared to what they need to hold against what is perceived as risky.

And banks love it of course, since that way they are able to obtain higher risk-adjusted returns on their equity when financing “the infallible” than when financing the risky.

“The infallible” meaning sovereigns, housing finance and member of the AAAristocracy also love it, since that way their bank borrowings are really subsidized.

It is of course those perceived as risky, like the small businesses and entrepreneurs who are left out in the cold. Precisely those tough risk-takers our unemployed young most need to get going, in order to avoid their going being made unnecessarily tough.

Do liberal values include risk-aversion? If so, bye-bye Europe

Sir, Richard Vinen in his “The Pope is wrong – old Europe is a new world” of November 29 extols Europe’s liberal values. And I have a question for him, and for you.

During the last decades regulators have imposed on the European banks credit risk weighted equity requirements. With these they allow banks to earn much higher risk adjusted returns on equity when lending to what is perceived as “absolutely safe” than when lending to what is perceived as “risky”. And so of course return on equity maximizing banks, respond to these incentives and do not lend more to the “risky”, like to small businesses and entrepreneurs. And, given that risk taking is the oxygen of any economy moving forward, Europe is now stalling and falling.

And so my question is: do liberal values include such risk-aversion?

And I ask that because in my opinion little has turned Europe in that old granny Pope Francis refers to, that these risk-adverse regulations.

Risk-taking is for the young, for the optimists, for the believers in a bright future. Risk aversion is for the old, the pessimists, for the ones who do not dare to bet what they have today in order to get a better future.

What a pity Pope Francis did not in his speech to the European Parliament remind Europe of The Parable of the Talents.

While risk based capital requirements for banks remain, small companies will not have fair access to bank credit.

Sir Sarah Gordon writes: “Smaller companies [in Europe] have also been able to take advantage of easier borrowing conditions”, “Light amid the gloom”, November 28.

Yes, in absolute terms, the smaller companies might indeed currently face easier borrowing conditions but, in a competitive economy, what most matters for the correct allocation of bank credit, is not the absolute but the relative borrowing conditions. And in that respect, let me assure you that smaller companies, those primarily squeezed by the credit risk weighted capital requirements for banks, are worse of than ever, as a result of the increasing capital/equity squeeze on banks.

And Gordon also wrote: “Even the lack of access to bank lending during the financial crisis [and thereafter] has had positive effects, with small and medium-sized enterprises reducing their over reliance on banks and diversifying their funding sources.” And I am not sure what to make of it. 

Is Sarah Gordon, blaming small and medium-sized companies for their over reliance on banks? If so whoever told her it is their responsibility to achieve a diversification of their funding sources? Have they not enough problems as is, running their smaller companies’ businesses?

No, those really responsible for allowing small businesses to have fair access to bank credit are primarily the regulators, and they are not acknowledging, or much worse yet, perhaps not even understanding the fact that they do impede it… and so, sadly, there is still too much darkness amid the gloom.

“My deflation is horrible, yours, oil, not so bad”

Sir, inflation seems to be have been identified as the number one tool to smack grandmother Europe back into fertility and force her to vibrate on the dance floor again. And though that must sound quite eerie to the poor of Europe, those who always end up being most taxed by inflation, most of you in FT clearly agree with that approach.

And that is why I was slightly surprised when I now read you categorically stating: “Weaker oil prices are a restorative that the flagging world economy needs”, “Opec members flounder in a flood of cheap oil.” November 28.

I say that because it would seem that lower oil prices are more likely to fuel deflation than inflation. But, I guess the beauty of inflation, like so much other, is also in the eye of the beholder, “my inflation is splendid, your inflation not so good”.

Sir, for the record, let me remind that though some inflation could help to put some kick back into granny again, that can only happen as long as she really wants, dares, and is allowed to do a comeback.

Unfortunately, while Europe insists on credit risk adverse regulations that effectively stop banks from lending to small businesses and entrepreneurs, that does not seem to be what the family wants for her. Currently Granny Europe is kept more into a “let me just die as painlessly as possible” mood.

PS. By the way, Opec should have invited the USA shale oil producers (extractors)

Has ECB and Draghi read Piketty and now want to impose a wealth tax on Europe’s piggy-banks?

Sir, Claire Jones reports Mario Draghi said that the ECB would “do what we must to raise inflation and inflation expectations as fast as possible, “Dovish Draghi raises hopes for more ECB stimulus” November 22.

And since the ECB is aiming at 2 percent inflation that would be equivalent to a 2 percent wealth tax on all the piggy-banks in Europe. Has ECB and Draghi understood Piketty a bit too much?

Frankly, in a Europe with such problems like that banks are effectively restrained by crazy regulators from lending to medium and small businesses, entrepreneurs and start-ups, those tough risky risk-takers that Europe so urgently need to get going, to then hear all this talk about inflation as an overriding minimal requisite for a solution, should make all a bit nervous… specially the poor (and the piggy-banks) who always end being those most taxed by inflation.

The Fed’s regressive bank regulations, makes it a biased source of information

Sir, Tom Braithwaite’s writes that “stock and bond prices for the banks would be more accurate if [the market] knew what the Fed thought about the strength of these banks and their management”, “Smoke needs to clear over Fed supervision of US banking system”, November 17.

Indeed, that sounds extremely rational but, unfortunately, if the views of the Fed are biased, the signals it sends out will of course make it worse for the economy as a whole.

I say this because it is clear that the Fed agrees with regressive regulations which much favors bank lending to the infallible, in detriment of lending to the risky, and so opining based on such mistaken criteria cannot lead to anything good.

Just look at the “Camels” ratings that Braithwaite refers to and that many want to be disclosed. These cover “capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk”; with no indicator for what is most important for the real economy, and thereby implicitly in the medium and long run is also vital for the banks, namely if the bank allocates credit efficiently to the real economy.

And so, even if in the land of the free and the home of the brave, the Fed would rate much higher a bank that exclusively lends to the sovereign and the AAAristocracy, than a bank that dares lending to “risky” citizens and their small businesses. And if that helps anyone, that might be those very elderly in want of short-term safety, and clearly not the young who need banks to take risks in order to have a future.

And what is really hard to understand is when Braithwaite refers to Jose Lopez, an economist at the Federal Reserve Bank of San Francisco, opining in 1999 that the disclosure of Fed’s Camels ratings “could benefit supervisors by improving the pricing of bank securities and increasing the efficiency of the market discipline brought to bear on banks”. Does the Fed need the market to reassure it by reaffirming the Fed’s own biases? Is it not doing enough damage as is?

Is Commerzbank earning more on small and medium sized companies because of more lending or higher interests?

Sir, I refer to Alice Ross’ “Commerzbank buoyed by rise in core lending” November 7.

I was pleasantly surprised when reading of “a rise in operating profits… in the core bank, which includes lending to private customers and Germany’s small and medium-sized companies, the Mittelstand.”

But, since I do not understand how banks can lend to that type of clients, as that requires them to hold more equity, perhaps that does not signify more lending but rather that these borrowers are more desperate for credit, and therefore accept paying interest rates which are higher than their riskiness merits.

It would be great if Ross takes this opportunity to deepen an analysis of what really is happening with the access to credit of these "risky" bank clients.

Quite many of our modern day bankers have, unfortunately, never known a small or medium sized enterprise.

Sir, I refer to the analysis “Bank stress tests fail to tackle deflation spectre” October 28.

In it we read Jean-Pierre Mustier, head of corporate and investment bank at Unicredit saying: “I think the issue of small and medium-sized enterprises lending is one of demand and not so much of supply”.

And I have a feeling Mr. Mustier might be one of those modern bankers who have never ever known a small or medium sized enterprise.

And if Mr. Mustier does not understand the impact on the supply of credit to small and medium-sized enterprises, the fact that banks are required to hold so much more equity when lending to these than when lending to “absolutely safe” has, that might be because Mr. Mustier as a banker has only lent to “infallible sovereigns” or members of the AAAristocracy.