Crises occur when what was thought to be low risk turns out to be very high risk

In July 2012 in “Seven ways to clean up our banking ‘cesspit’” Martin Wolf wrote: “In setting these equity requirements, it is essential to recognise that so-called ‘risk-weighted’assets can and will be gamed by both banks and regulators. As 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. For this reason, unweighted leverage matters. It needs to be far lower.”

What's really dangerous to our bank systems is what's perceived as safe, not what's perceived as risky

Martin Wolf in "Seven ways to clean up our banking ‘cesspit’" July 12, 2012 wrote:

"Fifth, in setting these equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As 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. For this reason, unweighted leverage matters. It needs to be far lower."

P.S. And still they (he) don't get it... or do not want to get it

It takes bungee jumping to get us out of this, so please let those wanting to risk it jump!

Sir, I refer to Martin Wolf’s “We still have that sinking feeling” July 11. 

That is nothing to be surprised about, in an economy where governments and central banks pour fiscal deficits and liquidity on it, while simultaneously bank regulators impede bank lending to basic economic engines like small businesses and entrepreneurs, just on account of these being perceived as “risky”. Containing the indispensable risk-taking is pure and unabridged assisted suicide of the economy. 

And Wolf comments again on deleveraging, but seems not able to understand the fact that the economy is more underleveraged than ever on what is originally perceived as risky, something which is of course quite different from an over-leverage to what was perceived as absolutely not risky but then turned into risky. 

Stop wasting time on important but completely secondary issues, like manipulative Libor settings, excessive bonuses and what have you, and start acting urgently on allowing the risk-takers take the risks we all depend on.

If you temporarily lower the capital requirements for banks when lending to small businesses and entrepreneurs, by for instance 50 percent, the banks will NOT build up excessive exposures to these, because bankers never do so to something they perceive as risky, then you would at least allow some of the willing risky risk-takers to start helping us risk-adverse citizens.

But at least stop the regulatory disunion of European banks.

Sir, Wolfgang Münchau gives many reasons for “Why we won’t solve the eurozone crisis for 20 years” July 9, among others the difficulties of approving and implementing a banking union. 

That might be so, but, meanwhile, there is no reason to make the crisis worse by feeding the disunion produced by the bank regulators when it applies different capital requirements to European banks when lending to different European banks. Those distortions, they could get rid of over just one weekend.

The mother of all (official) interest rates manipulation.

Sir, capital requirements for banks are larger when these lend to something perceived as risky and lower when to something perceived as not risky. It is an utterly absurd proposition, because what is perceived as risky has never caused a major bank crisis. But, much worse, it also signifies that those perceived as risky must pay higher interest rates and those perceived as not risky lower interest rates, than would have been the case absent these regulations. And this amounts to an extraordinarily large official interest rate manipulation… and its effect is way more than some few basis points… and the widening of the spread between risky and not risky according to my calculations is way over hundred basis points. 

So let’s see what all those perceived as risky, usually correlated with the have-nots, who already pay higher interest rates, would have to say about regulations that made them pay one percent more in additional interest on all their bank loans, while those perceived as not-risky, usually correlated with the haves, who already pay lower rates, had to pay one percent less. 

I have now at least registered a general complaint at the Consumer Financial Protection Bureau CFPB, established in the Dodd-Frank Act, indicating that this odious discrimination against the “risky” does not seem to be allowed under the Equal Credit Opportunity Act (Regulation B).

Though a bad outcome is usually associated with risk it does NOT mean it was produced by something "risky"

Sir, “The tale of sober nonconformists... yielding to investment bankers with a thirst for risk” is how John Plender subtitles his “How the traders trumped theQuakers” July 7. 

He is wrong. Investment bankers do not thirst for risks but for profits, and therefore they loved and used the high leverages of equity they were authorized to have by their bank regulators, when engaging with something officially perceived as not risky. 

And the fact that we associate a bad outcome with something risky does not mean it was produced by something risky, in fact often the really bad outcomes, are produced by something perceived as absolutely not risky. Precisely what happened in this crisis, when the correlation of what went very wrong, and the low capital requirements allowed, is absolute. 

This, the fact that like Plender most experts keep on using the mistaken hypothesis of excessive risk-taking, is tragic, because that stops them from understanding what really happened, in order to be able to correct for it. That is why Basel III is digging our banks even deeper in the hole they were placed.

And again, Big Blunder was kept under the table

Except for when fraud was present, bank crises have always resulted from excessive lending to what was perceived as absolutely not risky. There were never too large bank exposures to what was originally perceived as risky. 

Even so bank regulators decided to favor what was perceived as not-risky, and which was therefore already so much favored by banks, by means of allowing banks to hold extraordinarily little capital against these safe assets, and which allowed them to leverage more their equity. 

And as a natural consequence of favoring the not-risky, they imposed a de-facto regulatory tax on the risky, those already being taxed by banks precisely on account of being perceived as risky. 

And this extraordinary regulatory mistake, the greatest intellectual blunder I know of, plus the various responses to the current crisis, among others ignoring Big Blunder, has caused the most monstrously obese bank exposures to what is officially perceived as not risky and, in relative terms, truly anorexic exposures to what is perceived as risky, like to small businesses and entrepreneurs. 

And from the looks of it, unless there are immediate regulatory changes, all our banks seem doomed to end up gasping for profits and capital on the last officially perceived safe beaches, probably US Treasury and Bundesbank. 

I had bad feelings about it all quite early. In November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” And little did I know that the regulators were creating the AAA-bomb that detonated in mid-2007. 

And over the years I have written more than a hundred letters about this regulatory mistake to Martin Wolf, the influential Financial Times’ chief economics commentator; so many that he has accused me, quite rightly perhaps, of being a monothematic bore. 

And this is why I feel sad, for all of us, when, five years into the crisis, I read about Mr. Wolf enjoying lunch in Paris (a “perfectly pink” foie de veau), in the company of Jean-Claude Trichet, recently the chair of the oversight body of the Basel Committee on Banking Supervision, and still blithely ignoring Big Blunder. 

Or, in a mutual admiration club context, perhaps it is not comme il faut to speak about mistakes. If so, how sad silly club rules trump truths. Talk about a not- so-brilliant “unités brillantes.”

FT, why preach to others what you do not do yourself?

Sir, in “An emerging risk” July 7, you correctly state that “Misdirected credit can channel too much money into… a sector and this can create a dangerous bubble”, and that “suboptimal credit allocation can harm economic growth both in the short and the long run”. 

And then you urge developing countries to ensure “credit flows where it is most needed” and that “credit flows are driven by economic and not political considerations”. 

And so let me ask, what’s wrong with following those same suggestions at home? Right now, yours not too bright regulators are just assuring that bank credit flows to what they officially perceive as “not risky”, for absolutely no good purpose at all. 

Don’t you see they just keep inflating the too safe bank assets bubble?

FT is not covering itself in much glory either

Sir, in “Nursery politics and Libor fixing” July 7 you urge politicians to “ensure that credit flows to the real economy” and yet you refuse to advance my argument that the “real economy” cannot be advanced by capital requirements based on perceived risks, since these have nothing to do with it.

You cry out for politicians to engage in “serious debate” and not act “little more than a pair of bickering schoolchildren”, and yet you feel yourself authorized to silence one of the very few voices you know alerted about the crisis, even in FT, just because that could hurt some weak egos of some FT prima-donnas.

Bank regulators too, must be chronically stressed.

Sir, John Coates writes “Chronic stress can cause us to recall mostly negative moments, to se danger everywhere, to succumb to learnt helplessness… The trading community may thus become irrationally risk averse, causing the markets to freeze and monetary policy to become all but ineffective” “Banks should train their traders like Olympic athletes” July 7. 

How interesting, this condition applies also perfectly well to our bank regulators who got us in trouble by giving banks too much incentive to venture into the officially perceived risk-free land, where for instance over 60 to 1 bank equity leverage was allowed, and have thereafter frozen in fear insisting that banks shall pursue even more what is officially perceived as risk free… and thereby dooming our banks to end up gasping for profits and capital on the last officially perceived safe beaches, probably US Treasury and Bundesbank.

An anatomy of a crisis, for what purpose?

Sir you hold that Spain needs an “Anatomy of a crisis” in order to understand what went wrong with its banks, July 6. Nonsense! We know that already. The banks just went for financing too much the real estate sector, because bank regulators, regarding that as safer, allowed the banks to hold less capital.

How to break up a too big to fail and too big to capitalize bank... in hours!

Sir, Sebastian Mallaby is absolutely right about that the too big to fail banks must be broken up, ”Woodrow Wilson knew how to beard behemoths” July 5.

The largest problem though is that they are also too large to capitalize, as a consequence of the current capital requirements being too small for assets perceived as not-risky, but that are turning riskier by the hour, and which have left the banks with a contingency of extraordinary needs of capital. 

As a consultant I table the following break-up plan. 

First, decide that all resulting banks will need to have 8 percent in equity against any asset from there on. (See the Ps) 

Then create four management teams and have them, in turn, round after round, select 10 billion of assets belonging to Senior Mammoth Bank, until you have four Junior Mammoth banks. 

Then force all those who hold credits against Senior Mammoth bank in excess of 250.000 dollars to convert whatever percent of these is required to cause each of the four Junior Mammoth banks to have 8 of all assets in equity. 

And then let the market work swapping assets and pricing the final value of the breakups. 

If, there is a need for it, repeat the process again, for each of the four juniors. 

Ps. Mallaby writes “If the regulators impose a simple leverage ratio, measuring a bank’s capital against its assets, then they fail to distinguish between risky assets and safe ones, perversely rewarding banks that make the diciest loans.” He is stubbornly wrong. 

The difference between risky and not risky assets is already covered for in the interest rates, the size of the exposures and other terms, and so what the current risk-weighting produces, is an amazing distortion that allows the banks to earn (leverage) more on their equity, on what is perceived as not risky. That just dooms all our banks to end up gasping for oxygen and capital on the last officially perceived safe beach… perhaps, the US Treasury or the Bundesbank.

If you want to invest in a bank then you need to know that your capital injection is the last one needed… otherwise you are better off waiting for better opportunities. The regulators postponing bank capital increases into the future, thinking they are helpful, are just making everything so much worse, for everyone. 

Governments, start by guaranteeing one hour of work per week for absolutely everyone, and then take it from there

Sir, Robert and Edward Skidelsky, in “Enough is enough of thewest’s age of consumption” write that “Government should gradually reduce the maximum allowable hours for work for most occupations, guaranteeing a job for everyone who wants to work that amount of time” July 5. 

Wrong! Governments should gradually increase the guaranteed hours of work for all workers. Start guaranteeing one hour and move up from there! 

Government has no role guaranteeing more hours of work to one who already has more than the average hours of work.

Without a banking sector capable of assuming risks, there cannot be a recovery

Sir, Richard Lambert ends “Britain’s banks are too fragile for political games” July 4, with “The economy cannot recover in the absence of a stable banking system: nothing can be more urgent than that.” He is correct, but neither can the economy recovery with a banking sector with capital scarcity that, as a result of the capital requirements based on ex ante perceived risk, is basically ordered to avoid the risks associated with a recovery of the economy. 

The way you are going, with those highly distortive capital requirements, all our banks are doomed to end up gasping for oxygen and capital on the last officially perceived safe beach… in the best case, for the UK, gilts, but also, perhaps, the US Treasury or the Bundesbank. 

And the Financial Times is not capable to warn about this?

If European regulators discriminate against Spain and Italy, why should not the citizens do the same?

Sir, Martin Wolf in “A step at last in the right direction”, July 4 writes that “Rational Spaniards and Italians still cannot regard a euro in their banks as being as safe as a euro in a German one, largely because elevated insolvency and break up risks evidently remain” and he forgot to add that this is also because bank regulators feel the same and require any bank to hold more capital when lending to a Spanish or Italian bank, than Germany, just because their respective sovereign has a lower credit rating.

The way we are going, with those highly distortive capital requirements, all our banks are doomed to end up gasping for oxygen and capital on the last officially perceived safe beach… probably the US Treasury or the Bundesbank.

The priority in Europe should be, urgently, to correct these outrights dumb capital requirements.

And with respect to the intellectual capture of FT, where does the buck stop?

Sir, of course, Barclays´ fiddling with Libor affair is a scandal, and you are entirely correct to question whether its Chairman´s resignation based, on a the buck stops here, suffices, “Barclays scandal” July 3. 

But much more scandalous than that, at least with respect to its implications, is how the buck, of how regulators, fiddling with risk weights, manipulated the interest rates in favor of those perceived as not risky and against those perceived as risky, and that does not even appear on the radar-screen. 

It will be interesting to see in the future, where in FT the buck for withholding the analysis that places the largest blame for the crisis in the lap of regulators stops. 

Really, how did you allow yourself to become so intellectually captured by that so dangerous nonsense of capital requirements for banks which discriminate based on perceived risks elsewhere already discriminate for? 

As is, in my mind, FT is in part responsible for the fact that our banks might all end up gasping for oxygen and capital on the last safest shores, which at this moment would seem to be the US Treasury and the Bundesbank.

Sorry, Gillian, try acting like a better financial journalist

Sir, Gillian Tett holds that “banks need to redefine why they exist. A new sense of mission and modus operandi is required, “Don´t just say sorry, Bob, try acting like a steward” July 3. 

But in a much similar vein, I could also ask Gillian Tett to try acting as a better financial journalist, and inform her readers that, in all the bank regulations produced by the Basel Committee, there is not one single word that pertains to what the purpose of the banks is and, notwithstanding that, the regulators still gladly proceed to regulate, totally unencumbered. 

Ms. Tett also mentions Mr. John Taft of Royal Bank of Canada´s request that banks act as wise stewards of the nation´s cash. How are they supposed to do that? Ms. Tett must know by now that function has already been usurped by the bank regulators who, with great hubris, act like the self appointed risk managers of the world, and allocate, in a very haphazardous way, the risk-weights which determine the capital requirements for the banks… and thereby really determine the directions of the nation´s cash. 

Over to you Ms. Tett, try to inform your readers more completely.

Bank regulators need to empower the shareholders of banks.

Sir, John Authers prays for that “Shareholders will play a decisive role in banker’s pay” July 2. 

Yes, that could happen, if regulators order the banks to listen more to the shareholders. And, for that to happen, they have to get rid of regulations that basically tell the bankers to ignore their shareholders. For instance, in Basel II, if a bank lends to one of the “infallible sovereigns” it is not required to have any capital, any shareholder, at all. 

The best way regulators could help to empower shareholders again is to require the banks to hold, for instance, 8 percent in equity against any asset. 

A European banking union should not discriminate between European sovereigns.

Sir, in “One small step for European mankind” June 30, you subtitled it with “The lethal sovereign-bank embrace begins to be pried loose”. 

Hold it there, not so fast, the most lethal part of that sovereign-bank embrace, is that which allows banks to leverage much more its equity when lending to a sovereign perceived as “safe” than when lending to one perceived as “risky”… something which neither sounds much compatible with having a European banking union. 

If those regulations are not changed, they will only doom all the European banks to end up with dangerous obese exposures to the last perceived safe haven in Europe, probably Germany.

And what about conceit in journalism?

Sir, Gillian Tett writes correctly that “Libor affair exposes big conceit at the heart of banking” June 29, but there might equally be some big conceit going on at the heart of journalism. 

Two questions: What is the most important dollar reference rate… the risk free US Treasury rate or Libor? And, who has effectively manipulated those rates the most, Barclays the Libor rate, or the bank regulators the US Treasury rate by means of allowing the banks to hold these instruments with less capital than other assets? 

Clearly, in terms of its significance, the manipulation of the US Treasury “risk free” rate has been much more significant than whatever Barclays can have done to Libor but that, Gillian and her colleagues at FT decided to ignore, with much conceit.


Should not an anthropologist be about the most humble of all professionals? 

And when regulators manipulate interest rates, is that ok?

Sir, when regulators set the capital requirements for banks based on perceived risks, even though these perceived risks are already priced in by the bankers in the interest rates, they are though perhaps unwittingly, effectively manipulating the interest rates. The direct consequence of it is that those officially perceived as not-risky, have to pay much less in interests than what would have been the case without this distortion, and those officially perceived as risky need to pay much more… and all for absolutely no good reason at all. 

And so when reading “Barclays fined a record $450m” for manipulating interest rates, my first thought was, “well done, but where can the “risky” small businesses and entrepreneurs also sue the regulators for all the monstrously excessive interests they have had to pay over the years? 

Simple calculations indicate to me that a not-rated bank client, exclusively on account of this odious regulatory discrimination, has to pay about 270 bp (2.7%) more in interest rates when compared to an AAA rated bank client… or, like now, in times of extremely scarce bank capital, suffer the consequences of being excluded from access to bank credit.

Europe needs to eliminate the subsidy of the “risky” to the “safe”.

Sir, Martin Wolf gives a good but incomplete analysis in “Look beyond summits forsalvation” June 27. 

Like all others intellectual prisoners of the bank regulatory pillar of capital requirements based on ex ante perceived risk, he fails to understand how all the banks are currently condemned to end up gasping for air, and capital, on the last officially deemed safe-havens in town, Bundesbank and US Treasury, more sooner than later. 

As a result he also fails to understand the artificially imposed regulatory subsidies that the “risky” European countries pay to the “safe”, by means of the much lower interest rates the latter must pay when compared to what would have been the case absent these regulations.

Bank regulations are beset with nanny populism

Sir, Nick Clegg in “Be alive to the risks and rewards of a banking union” June 27, states “We have put in place a bank levy, weighted towards riskier activities”. That is pure unadulterated bank regulatory nanny populism, as it implies that the government, ex ante, knows more than the market and the banks about which are the riskier activities, ex post. 

To know how wrong that is it suffices to see what caused the current crisis, namely excessive pure vanilla investments and loans to what was considered officially as not risky and therefore required minimum capital of the banks. 

Mr. Clegg, and all of you other intellectual prisoners of the current bank regulations paradigm, please do not forget that market and banks already clear for risks and so when a regulator does that too, he only produces dangerous distortions.

Credit rating agencies are just only other weathermen

Sir, imagine the old Mark Twain banker, he who wants to lend you the umbrella when the sun shines but wants to take it back as soon as it seems like it is going to rain. That banker would clearly be taking notice of what the weathermen had to say, to set the interest rates, the amounts of the loan and the other terms.

But what would happen if the regulators also told the banker that if the weatherman spoke of sun his bank was required to hold little capital but, if of rain, it had to hold more capital?

Obviously that would doom the Twain banker to choke on sunny expectations (AAAs and infallible sovereigns), and avoid possible rains (small business and entrepreneurs) like the pest… only to find out, too late, that weather reports are not always accurate.

Patrick Jenkins writes “Rating agencies still so relevant they need regulating” June 26. If he had understood the horrible consequences of the excessive and outright unmerited relevance given to the credit ratings, when deciding the capital requirements for banks, he would not be arguing for regulating these agencies but on reducing their relevance. Is the weathermen regulated?

PleaseFT, read the letter I wrote and that you published January 11, 2003

The correlation between the problem loans of banks and the lower capital requirements is 1

Sir bank regulators caused the current financial crisis by allowing banks to hold very little capital, for what was ex-ante officially perceived as not risky, and are deepening it by requiring them to hold more capital when there is none to be found.

Victor Mallet and Miles Johnson should really have titled their article “The bank that broke Spain” June 22 as “The Regulators that broke the bank that broke Spain” For how long will FT turn a blind eye to the sad fact that the Western World is drowning in seriously undercapitalized Bankias?

The Great Bank Retrenchment to the Last Safe Haven is on full speed ahead and so all our banks seem doomed to end up trampled to death on the shores of the Bundesbank and US Treasury.

What does Michel Barnier know about fairness?

Sir, Michel Barnier, the EU commissioner overseeing financial services calls on US authorities to apply regulations fairly, “The US must not seek to override EU regulators” June 22. Frankly, what does Michael Barnier, and other regulators know about fairness?

The regulators forced those perceived as risky and who therefore already had to pay higher interest rates, had less access to bank credit, and needed to accept harsher terms for their borrowings, to be additionally discriminated against, by means of causing higher capital requirements for banks than what is the case when banks lend to those officially perceived as not risky.

If that is not unfair what is? Especially when considering that no bank crisis ever has resulted from excessive exposures to what was perceived as risky, as these have always, except when pure fraud was present, resulted from excessive exposure to what had been believed to be absolutely not risky. 

And by discriminating that way so unfairly against the risky, the regulators themselves caused the current crisis, which is something they would have known had they dared to run a simple regression between the real current bank loan problems and their lower capital requirements, as it would have shown a correlation of 1.

Why do bank regulators subsidize Germany’s borrowings and tax Spain’s?

Sir, I refer to your “Eurozone weights another palliative” June 21, and many other writings referring to the increasing interest rates on some European sovereign borrowings.

The capital requirements for banks when lending to Spain, is much larger than when these lend to Germany, why? Is the risk differential not already imbedded in the rates? Is not the interest rate spread between those borrowers higher than they would be in a free market? Is this not counterproductive? Why does Germany receive a regulatory subsidy while Spain has to pay a regulatory tax?

Lacking a sufficiently large safe haven the Eurozone needs to stop its retrenchment.

Sir, Wolfgang Münchau, in “What happens if Angela Merkel does get her way”, June 18, asks “Why should citizens leave their money in local banks, when foreign investors are pulling out and when even the EU is making preparations to impose capital controls?” Indeed, why? But, worse so, why should they do it when bank regulators in Europe, by means of the capital requirements for banks based on perceived risk, have for a long time been ordering a European retrenchment to safety, foolishly believing that to be possible? 

It is of course the whole Eurozone that is in danger, as there is no way the Europe would find a sufficiently large safe haven for all. And this is why I have often found reason to mention that perhaps the Eurozone should not concern itself so much solely with Greece, Spain, Italy and Portugal, but more proactively try to find a more general solutions, based for instance on a Euro II, or a Euro-North and a Euro-South.

That could perhaps provide it with the tools to get out of this horrendous mess, detonated by bank regulations which among other allowed European banks to lend to Greece leveraging their equity a mindboggling 62.5 to 1... a mess made so much worse by now requiring they reduce to a 12.5 to 1 leverage or less that same exposure.

Mr. Sir Mervyn King and Mr. George Osborne, here is a much better proposal!

Sir I refer to Martin Wolf’s “We should not pin our hopes on Britain’s plan A-plus” June 16. 

Why should not those not creditworthy who want to borrow not be allowed to compete for access to bank credit on the same regulatory terms than those who are creditworthy but do not want to borrow? That is a question that Martin Wolf should try one day to answer, as currently the banks are required to hold more capital when lending to the risky than when lending to the not risky. 

This issue of discriminatory bank capital requirements is ignored over and over again, by those who feebly believe, even after all current evidence against such nonsense, that the best thing to do is to make sure that already risk adverse bankers avoid taking any ex ante deemed high risks. It is truly sad to see what a brave society can reduce itself to, when it allows its nannies to reign supremely. 

Instead of a temporary banking funding scheme such as is proposed by Mervyn King and or George Osborne I propose that regulators urgently calculate any individual bank´s capital to total assets ratio, and ask for it to apply a capital requirement that increases ever so slightly on any new asset it acquires… until reaching some basic goal. That way they would be able to put the banks on a stronger footing to lend, with much less distortion.

On the current banking reform plans, I feel more like crying.

Sir, First question: What is worse, a general systemic bank crisis that destroys the economy, whether inside or outside a ring-fence, or that taxpayers need to pay for some of the losses of that crisis? Clearly the occurrence of the systemic crisis is the worst since the latter is just a consequence, and the taxpayer would still have to pay in so many other ways. 

Second question: What caused and is causing the current crisis, bad lending and investments by the banks, or too little bank equity. Obviously the first, since if all bank lending and investment yielded a positive return for the bank, in theory there would not even be a need for bank equity. 

Third question: What really caused the current crisis, excessive lending to what was officially perceived as not risky, or excessive lending to what was officially perceived as risky? Clearly the first, because the bank exposures to what ex ante is perceived as risky, are of course, as usual, very small. 

Fourth question: What does Martin Wolf believe caused the excessive exposures to what was ex ante officially deemed as not risky, and that he believes has now been solved so much that he gives “Two cheers for Britain´s banking reform plan” June 15? I don´t know, but if asked he would probably give me a rundown of all macroeconomic structural imbalances. See also next post "Mr. Wolf think he´s understood the problem with risk-weighted bank capital. He has not!"

But I do know that what caused the banks to indulge excessively in “safe” exposures was the fact that when doing so banks were allowed to have much less capital, meaning much more leverage, meaning much more return on bank equity, than when lending to or investing in the already scary risky. 

And since we have yet to hear the regulatory authorities even acknowledging the problem with that silly bank capital discrimination based on perceived risks which have already been discriminated for before, when setting interest rates and deciding on the amounts, I find no reason to cheer, much the contrary I feel like crying. (Especially since I have explained this to Mr. Wolf in about a hundred letters, and he was also a member of the Independent Commission on Banking)

Mr. Martin Wolf think he´s understood the problem with risk-weighted bank capital. He has not!

Sir, Martin Wolf in “Two cheers for Britain´s banking reform plans” June 15, states that rejecting a general rise in bank equity “makes almost everything depend on risk-weighted capital: a fallible, even intellectually fraudulent, concept, as the Independent Commission on Banking´s final report”. And so one could think Mr. Wolf has now finally understood the problem with risk-weighted bank capital. Unfortunately, not yet! 

The ICB report states: “Risk-weighting has merit in principle but inevitable imperfections in practice. For example, the low risk weights attributed to some sovereign bonds have clearly been inconsistent with the market’s view of the likelihood of their default. So there is a strong case for capping total (un-weighted) leverage too, as a backstop.” And this basically means that ICB thinks the problem with the risk-weights is that these could be wrong. But that´s not it, it is much more intellectually fraudulent than that! 

The use of the risk-weights based on perceived risk is wrong even if the weights are perfect, even if they are consistent with the market views, because these perceived risks have already been cleared for by the banks (by means of the interest rate, amount exposed and other terms) and so forcing that risk perception to also affect the capital of a bank, dooms the banks to overdose on perceived risks. 

If you really want to have correct risk-weights for bank capital then these would have to be calculated based on how bankers react to perceived risks. And then, at least according to Mark Twain´s “a banker lends you the umbrella when sun shines and wants it back when it rains”, you might find instead a need for higher capital requirements for banks when the perceived risk of default of the borrower is low than for when the perceived risk is high.

Europe! Stop your regulators from playing risk managers… that is too risky

Sir, Niall Ferguson and Nouriel Roubini, in “Germany is failing to learn the lessons of the 1930s…” June 9, also fail themselves when not including the necessity of dismantling bank regulations that had the regulators playing risk managers handing out discriminating risk-weights which determined the final capital requirements for banks.

Had for instance a German bank, when lending to Greece, been required to hold the same 8 percent in capital it needed when lending to a German unrated small business, instead of a paltry 1.6 percent, implying an authorized leverage of 62.5 to 1, you can be sure that Greece would never have been able to borrow as much as it did.

How sad Europe is still being analyzed by looking at the facts using the wrong hypothesis… and therefore its crisis has not yet been fully understood.

It is of no use pouring water on a drowning plant

Sir, Samuel Brittan writes “You don´t need to be a lefty to support Krugman” June 8. Of course not! But, supporting aggressive government spending to remedy a recession produced by a crisis before eliminating the cause for it, is just throwing fairly good money after really bad. 

This crisis resulted from the imposition of capital requirements for banks which discriminated based on perceived risk, and created obese bank exposures to whatever was officially deemed as not risky and anorexic exposures to what is officially deemed as risky… and that discrimination is still in full effect.. especially when bank capital is more scarce than ever.

The “risky” borrowers should also complain about discriminatory bank regulations

Sir, Shahien Nasiripour and Tracy Alloway report on the concerns of some large US banks with respect to some new capital rules because these “will hurt them relative to overseas competitors” “Fed set to announce capital proposals”, June 7. 

These banks are of course in the perfect right to object any sort of discrimination, but, when will the Financial Times dedicate one single analysis to the discrimination that many borrowers are subjected to, when their bank borrowings give cause for a higher capital requirement than the borrowing of others? 

Does FT really think that a loan to a small business or an entrepreneur, he who already has to pay a higher interest rate and can only access a smaller loan than those who have officially been declared as “not risky” is correct, and does not create distortions? 

If you only report the complaints of the big banks… you are assisting them in becoming too big. 

If FT had complained in time about the fact that a UK bank was required to have 8 percent in capital lending to the grocery down the corner but only 1.6 percent if lending to Greece then perhaps we would not be in the current mess. Who knows? 

The article also reminds us that Jamie Dimon, chief executive of JPMorgan Chase, has decried the new Basel III rules as “anti American”, or un-American as it is usually expressed. But, again, that begs the question, if the American banks, according to Basel II and III, need to hold more capital when lending to American small businesses or entrepreneurs than when lending to foreign sovereigns or corporations deemed as not risky, is that not equally anti American?

Unions don’t work based on discrimination

Sir, you and others write about “Banking union and the euro’s future” June 6, without even referring to the disunion effect discriminatory capital requirements have. 

If you really want to start a banking union then you should start by allowing all banks to be required to have the same capital when lending to each other… and the same goes of course, for all lending to sovereigns. 

At this moment a Spanish bank needs for instance to hold much more capital when lending to Spain or to a Spanish bank that when lending to Germany or to a German bank, and that only stokes the eurozone fire.

PS. This was written before I knew of the Sovereign Debt Privilege that assigned all eurozone sovereigns a 0% risk weight even if they were taking on debt denominated in a currency that de facto was not their own domestic printable one. That was even crazier than Basel I or II.

When compared to irrational regulatory exuberance, the usual market one seems like small fry.

Sir, John Kay refers to an “implausible faith in the markets”, which clearly exists, and which is clearly dumb, but which, unfortunately, is surpassed by an implausible faith in the regulators, “Only market evangelist can reconcile Jekyll with Hyde”, June 6. 

Let us just look at one example. Basel II established that banks were required to hold 8 percent in capital when lending to an unrated small business, 1.6 percent when lending to a sovereign rated like Greece was recently and zero percent when lending to a truly “infallible” sovereign, like for instance Germany. 

And that meant that banks were allowed to leverage their equity 12.5, 62.5, and infinitely to 1, and with that regulators who with much hubris thought themselves capable to act as the risk-managers of the world, considered they had eliminated bank crisis forever. Has Mr. Kay seen any type of irrational market exuberance that surpasses this irrational regulatory exuberance?

The truth is the best anti-panic agent.

Sir, Martin Wolf is correct writing that investors who are buying “bonds at current rates are indicating a deep aversion to the downside risks”, “Panic has become all too rational” June 6. 

But, how he can he ignore the fact that the officially safe havens are also being crowded by banks forced there, by regulators, because parking their liquidity elsewhere would require them to have more of the currently so scarce bank capital? 

The best way to eliminate panic is to shine light on what has caused the emergency… but seemingly some cannot find it in themselves to do so.

Fooled by the nominal interest rates, Mr. Summers asks the government to fall for another type of teaser rates

Sir, Lawrence Summers is just another economist fooled by looking only at the nominal low interest rates for government debt of some “infallible” sovereigns, “Look beyond the interest rates to get out of the gloom”. Those interest rates do not reflect real free market rates, but the rates after the subsidies given to much government borrowing implicit in requiring the banks to have much less capital for that than for other type of lending. 

If the capital requirements for banks when lending to a small business or an entrepreneurs was the same as when lending to the government… then we could talk about market rates. As is, to the cost of government debt, we need to add all the opportunity cost of all bank lending that does not occur because of the subsidy… and those could be immense. 

Mr. Summers even suggests that governments should issue debt to buy government buildings it currently rents… and to me that sounds like tempting the government to fall for another type of teaser rates. 

PS. It is amazing that the Financial Times has not made an issue yet of the current interest rates not being what the market rates they are supposed to be.

All bank spreads are not alike

Sir, Michael Mackenzie, Ajay Makan and Nicole Bullock write that the spread on US consumer mortgages has widen over the last year when compared to that of Treasuries, “Mortgage rates fillip for banks”, June 4. 

Unfortunately, their analysis is flawed as it fails to take into account that all spreads are not alike, as to earn some require the bank to hold more capital than to earn others, and so in fact the complete opposite conclusion could be the valid one. 

In these days of scarce bank capital, had they run the figures on that which most generate capital requirements for the banks, namely the lending to the “risky” small businesses and entrepreneurs then they would have seen what borrowers are really hurting the most.

Mr. Martin Wolf, please run a regression of the current problem loans on the 20 percent or less Basel II risk weights

Sir, Martin Wolf, in “The riddle of German self-interest”, May 30, refers to governments and banks as “the drunks are seeking to stay upright by leaning on one another”, but fails, as usual, to explain that the brewage these drunkards intoxicated on, were the basically non-existent capital requirements for banks when engaging with something officially perceived as not-risky. 

Mr. Wolf should run a regression between all the problem loans in banks that caused this crisis, like lousy securities disguised as splendid triple-A’s, loans to Icelandic banks, loans by the Spanish banks to the real estate sector in Spain, loans to a Greek government, and other similar… on the risk-weight of 20 percent or less and which, according to Basel II, allowed the banks to finance that mentioned holding only 1.6 percent or less in capital. 

If the Germans would come to understand what was the primary cause Europe ran into trouble, then they might be more sympathetic to Wolf’s urgings, otherwise there is no reason why they should not believe these are simply the expression of his own self-interest.

But Roosevelt and Churchill would have saved us from the dumb bank regulators.

Sir, Edward Luce, in “The worst is still ahead for Obama’s chief firefighter” May 28 writes “If there’s just Roosevelt and Churchill sitting in a room with a brandy, that’s an easier negotiation” 

Absolutely! And this is what these two great gentlemen would say. 

“Franklin, why do we not get rid of this stupid bank regulations they sold us as being able to control for the risk of default, and which has only brought us obese bank exposures to what was officially perceived as absolutely not risky, generating so many losses in lousily awarded mortgages disguised as splendid triple-A’s, lousy loans to Icelandic banks, lousy bank loans by the Spanish banks to the real estate, lousy loans to a Greek government?” 

“Indeed dear Winston, and to top it up, as I believe you call it, they also hindered our banks to give loans to our “risky” small businesses and entrepreneurs, and which you and I know are the ones most likely to take our nations forwards”… and so… 

“We, Franklin Roosevelt and Winston Churchill, in order to save the Western world, knowing that risk-taking is the oxygen of any development, hereby decree the closure of the Basel Committee for Banking Supervision and the expulsion, forever, of their silly wimpy nannies. We also declare substituting immediately a Financial Functionality Board for a purposeless Financial Stability Board”

For a fragile Europe to change fast, it needs to understand much better what caused its problems.

Sir, Martin Wolf ask us to “Consider how much better off Europe would have been if the exchange rate mechanism had continued, instead, with wide bands. Interest rates in the crisis-hit countries would probably have been higher and asset price bubbles and current account deficits smaller”, “A fragile Europe must change fast” May 23. 

Indeed Wolf is right, but only partially. He still stubbornly, no matter how much I explain it to him, refuses to consider that much more important than the Euro, for the construction of bubbles and deficits were the minuscule capital requirements for banks when lending to what was officially perceived as safe. 

Has Wolf for instance completely forgotten the over 1 trillion in Euros that where invested in triple-A rated securities backed with lousily awarded mortgages to the subprime sector, and which required only 1.6 percent in capital of the banks, the same minimal capital requirement as when lending to Greece? What on earth had that to do with the Euro?

Low-government borrowing rates? Hah!

Sir, Martin Wolf cheerfully quotes Jonathan Portes of the National Institute of Economics and Social Research saying “with long-term government borrowing as cheap as in living memory, with unemployed workers… this is the time for government to borrow and invest”, “Cameron is consigning the UK to stagnation” May 18.

Not necessarily so! Government lending is not viewed by the markets as an attractive cruise boat, but more as a floating piece of driftwood they need to hang on to so as not to drown… and, if to the low rates nominal rates, we add the opportunity cost of all those who are being squeezed out from lending because their borrowings generate capital requirements for the banks while the “infallible sovereign” does not, then the real rates on government borrowing could be historically the highest.

Why do they not for instance half the current capital requirements for banks when lending to small businesses and entrepreneurs, so to allow these to lend a helping hand? Or has the whole debate and regulations been monopolized by the “we-trust-only-governments” crowd?

Yet Jamie Dimon knows immensely more of his business than the regulators do of theirs.

Sir, in “JPMorgan takes a salutary stumble” May 15, you hold that “Bank’s loss illustrates why its boss is wrong on regulation”. Mr. Dimon must certainly be wrong in many ways, at least I have never thought him or anyone else as infallible, but, let me assure that if it is about getting it wrong on regulations, then the regulators are the champs. 

You mention “reckless practices to reduce risk” and in this I believe we have never ever seen something as reckless as our current regulators. They allowed the banks to hold minimum capital requirements for what they from the outside considered as safer lending than other, without giving a thought to the fact that the perceptions on risks had already been cleared for by the bankers, and that this would alter the whole dynamics of the market. 

If I was a shareholder of JPMorgan I would most probably wish for Jamie Dimon to remain as its head, but, as a citizen, I have no doubt I would sack most of our current dumb regulators. 

Do we not need to reign in the too-big-to-fail? Of course we do! But there are wise ways and there are reckless dumb ways of doing that. A wise way begins by eliminating all the growth-hormones that have made them so big, like ultralow capital requirements, the dumb way is to give them a special treatment, like is now proposed under the systemic approach, and which will only result in making them bigger and more dangerous.

Jamie Dimon, would you help me save my savings, in the shadows, please?

Sir, in reference to John Gapper´s “Jamie Dimon is a whale of a hedge fund manager” May 12, I would not make such a big thing about the 2 billion dollars or so in losses sustained by JP Morgan. 

Allowing the banks to lend out to the “infallible sovereigns” against no capital at all, signifies putting all ours, and our children’s´ and our grandchildren’s’ funds, in a truly mindboggling huge hedge fund where the proprietary dealings are not made by a Jamie Dimon, but by some unknown government bureaucrats… with certainly more skewed incentives…and that I guarantee will be much more harmful for tax payers than whatever a JP Morgan can invent. 

Frankly sometimes I feel the urge of picking up the phone and calling a Mr. Dimon or someone like him, to beg him to help me save my small savings… that is as long as he agrees to do that in the shadows, as far away as possible from our current loony banks regulators.

Although with cancer, Europe still smokes… a lot!

Sir, Jens Weidmann, the president of the Deutsche Bundesbank, in “Monetary policy is no panacea for Europe´s ill”, May 8, writes that “Macroeconomic imbalances and unsustainable public and private debt in some member states lie at the heart of the sovereign crisis”. 

Indeed that is the cancer but, the smoking that caused it, was the silly discrimination through the capital requirements for banks in favor of what was officially perceived as not risky and against what was perceived as risky. Like for instance the 62 to 1 leverage a German bank was allowed to have when lending to Greece, compared to the only 12 to 1 leverage allowed when lending to a German entrepreneur. 

And so I feel there is need to remind Mr. Weidmann of the sad fact that Europe still smokes… a lot!

The World needs a World Bank

Sir, as a former Executive Director of the World Bank, 2002-2004 I would like to add to the many insightful comments of Sarah Murray, on the difficulties of being a president of a World Bank, “Leaders face a set of complex challenges” April 26. 

As I see it, and in much as I experienced it, the real problem of the World Bank is that, at its Board of Executive Directors, the World at large, and its humans, are not truly represented, only parochial governmental interests are. 

If we are going to have a chance to rally support for such global critical issues as world-wide sustainability and job creation for our youth, I do believe we need some sort of World’s World Bank, and, a good start, just for starters, could be adding to the Board some independent voices who do not report to a government, or, much worse, to a single ideology. 

Would such a proposal be feasible? I haven’t the faintest! But, if we cannot get the human beings to cooperate and work as one, on some vital issues, across the borders, our chances of all humans making it are much reduced… let’s not kid ourselves.

Who placed and keep the banks on a eurozone knife-edge?

Sir, part of the problems with banks is that those same regulators who should have required equity from the banks when these placed sovereign loans on their books, but did not, because the regulators wished to consider these sovereigns as infallible, are now dumb enough to require the banks to immediately adjust to the fact that the sovereigns might not be so infallible after all. In other words, the banks are forced to deleverage, which hits of course the most those who require the most of bank equity, namely the officially decreed as risky, namely the small businesses and entrepreneurs, namely those least responsible for this crisis. 

In a period where countercyclical action is required, new bank equity should be raised to support new lending and not to cover capital requirements for old bad lending. But, even though Martin Wolf now begins to admit the need “to break the adverse loop between subpar growth, deteriorating fiscal positions, increasing recapitalization needs, and deleveraging”, he still refuses to do a full Monty disclosing the regulatory stupidity, probably because he does not want hurt his buddies, “Banks are on a eurozone knife-edge” April 25. 

Of course, it also reflects the fact that Martin Wolf, the chief economics commentator at FT, from an ideological point of view, much rather prefers government bureaucrats to run the Keynesian deficit spending he favors, than allowing the banks to allocate those resources without the interference of regulating bureaucrats. 

Yes banks are indeed on a eurozone knife-edge, but we surely need to look more into who placed them there and who keeps them there?

The “risky” are the European untouchables.

Sir, John Plender is absolutely correct when he identifies the officially “risky”, the emerging economies of eastern Europe and small and medium sized businesses, already penalized by the Basel capital regime, as the biggest victims of the ongoing deleverage, “Europe faces vicious circle of disorderly bank deleveraging” April 25. 

The World Bank and the IMF during their recent spring meetings were all dressed up in signs that asked about “reducing gaps”. And indeed, one gap that surely needs to be closed, and where the World Bank and the IMF should be at the forefront, is the one odiously increased by senseless bank regulators, between those perceived ex-ante as “not-risky” and those similarly perceived as “risky”. 

Unfortunately no one made a big point of this during these spring meetings as they were all busy talking about the scarcity and the need of “safe-assets”. Clearly, those perceived by the regulators ex ante as “risky”, in Europe, are a new class of untouchables.

England, what a shame!

Sir, what a shame to read that old brave England thinks it too risky to row a boat up the Thames… what is this wimpy England now to do, for instance when the International Monetary Fund (so surrealistically) announces a scarcity of safe assets?

Does Greece need permission to use the Euro?

Sir, El Salvador, Ecuador and some other countries, use the US dollar and I cannot remember them asking the US for any permissions to do so. If Greece goes into total default, perhaps it could still decide to use the Euro, it could be of great interest to them.

The survival of Spain and Italy (and Portugal) is day by day being more in the hands of their respective shadow economies, their respective economia sommersa

Sir, no matter where you look in the developed world, you will find dangerous obese bank exposures to what was or still is officially perceived as absolutely not risky, like what was or is triple-A rated and the “infallible” sovereigns; and for the society equally dangerous, anorexic bank exposures to what is officially perceived as risky, like small businesses and entrepreneurs. Nevertheless the bank regulators insist on discriminating against ex-ante perceived risks. 

In this respect, when Robert Zoellick in “Europe is distracted by endless talk of firewalls” April 17, writes that “the survival of the eurozone now depends on Italy and Spain”, but, instead of trying to figure out how their private banks could help out, he recommends a minor capital injection in the European Investment Bank, I can´t help but to feel that the real survival of Italy and Spain (and Portugal) will, in its turn, depend on what the Italians and Spaniards (and Portuguese) can manage to do in their more real and less distorted shadow economies... their respective economia sommersa.

PS. That is specially so when in the official economy regulators apply perceived credit risk weighted bank capital requirements, which so much favors the access to credit of the sovereign over that of entrepreneurs and SMEs.

FT, you do not support intelligent bank regulations by silencing its stupidities

Banks consider the perceived risks of default of borrowers when setting the interest rates, the amounts of the loans and all other terms. Therefore, to also favor with bank regulations bank exposure to what is officially perceived as absolutely not risky, like triple-A rated and infallible sovereigns, and thereby castigating their exposure to what is officially deemed as risky, like small business and entrepreneurs, dooms the banks to dangerously obese exposures to the “not-risky”, and to the for the economy equally dangerous anorexic exposures to the “risky”. And that, no matter how you look at it, is plain stupid bank regulations.

Since FT has clearly, and I would say deliberately ignored the previous argument, about which I have sent FT over 600 letters the last 7 years, I find it absurd when in “Lost in translation”, April 14, FT expresses that it has “always favored intelligent banking regulations”

For example just earlier this week Martin Wolf wrote, for the umpteenth time, about balance of payment problems in Europe stating “In the years of euphoria before the financial crisis private capital flowed freely [to] Greece, Portugal and Spain”, and again completely ignoring the fact that these capital flows were actually much pushed by the dumb capital requirements for banks, “Why the Bundesbank is wrong”, April 11. 

No wonder Margaret Atwood can express so much bile against powerful uncontrollable and unaccountable private sector Gods of high finance, “Our faith is fraying in the faceless god of money” April 14. No one has cared to inform her that without the stupid bank regulations there would have been no market for those bad mortgages she rightly abhors. No one has cared to inform her that those who really played Gods, and with immense hubris thought themselves risk managers of the world, were the bank regulators, and who now, instead of being held accountable, for instance for Basel II, are in charge of producing its sequel Basel III, which, by the looks of it, will just dig us all deeper in the hole.

How naïve can we allow them to be?

Sir, Robin Harding reports that “IMF warns on threat posed by shortage of safe assets”, April 12, and it amazes me how an organization like that, and bank regulators, fail to understand that just defining an asset as “safe” starts eroding its safety. Has this crisis which resulted exclusively from obese exposures to assets officially considered as absolutely safe gone unsafe not taught them anything? 

Not only did the capital requirements for banks based on perceived risk create an artificial demand for safe assets but now they are stoking that fire when, for liquidity purposes, the “regulations are increasing the demand for safe securities from banks” 

It is truly scary how these experts can be so naïve. Not only do their regulations guarantee the dangerous overcrowding of any safe havens but also, if the demand for safe assets outstrips the supply, they should know the market will deliver Potemkin type safe assets… and that’s life! 

Again, an asset can only remain safe as longs as it is believed it could foreseeable turn unsafe!

What the financial sector needs to be stable is a lot of shake rattle and roll.

Sir, Paul Tucker, a deputy governor of the Bank of England holds that “Stability comes before the good things in life”, April 5. Wouldn´t he, typical bank nanny, many other would hold that stability, like in the grave, comes last in life. 

Jest aside, when he writes that the Financial Policy Committee should not use bank capital weights to try to steer the supply of credit to achieve other objectives than stability, as “this is not an exercise in economic or social engineering”, I would just ask if forcing risk-taking out of our banks is not just an exercise in economic engineering? 

The more you allow the economy and the financial sector to shake rattle and roll, the more stable and productive it will be. It is when regulating busybodies interfere, like with setting the capital requirements for banks based on risk, even though theses perceived risks have already been cleared for with interest rates and others… that they doom the banks to overdose on perceived risks and to end up with dangerous obese exposures to what is or was considered as absolutely not risky, like triple-A rated securities and infallible sovereigns, and with anorexic exposures to what is officially considered as risky, like small businesses and entrepreneurs.

More than a “brave” World Bank we need a World Bank that helps the world to be brave.

Sir, we sometimes hear about that “if the developed rich countries get a cold, the non-developed poor countries get pneumonia”. But what, when the rich countries get pneumonia? 

The regulators who based their capital requirements for banks based on perceived risks, even though theses perceived risks were already cleared for… caused a monstrous crisis by making the banks overdose on perceived risks, and end up with dangerous obese exposures to what is or was considered as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what is officially considered as risky, like small businesses and entrepreneurs. 

As a result, at this moment, I believe it is more important than ever for the World Bank, as the world’s premier development bank, to remind the whole world, especially the rich developed countries, about the importance of risk taking and the dangers of excessive risk-avoidance. 

I say this because I am not really sure that Jose Antonio Ocampo is referring to this “brave” in his “My pitch to build a brave new World Bank”, April 5. 

I support the candidacy of Ms. Okonjo-Iweala, but I trust my former colleagues will make the best election based on the merits of all candidates, and Ocampo certainly has many, but, that is as long as Executive Directors remember that when doing that they are, according to the statutes of the bank, responsible as individuals… and so no hiding behind the skirt of “my government told me so” 

Ps. I just saw a letter signed by 100 economists supporting the candidacy of Jose Antonio Ocampo. These days though, it could be more prudent not mentioning the endorsement of economists, those who did little to nothing to prevent the crisis, and instead list the endorsement of 100 unemployed… as that could prove to be more significant

Don´t kill the eurozone dream just because bank regulators failed

Sir, Martin Sandbu is absolutely correct when in “Forget break-up: it just needs more parental love” april 3 he writes “It is not the euro’s fault that investors, policy makers and academics failed to spot the dangers”, though one of the current problems is that at most policy makers and academics do not want to acknowledge that.

When Sandbu writes about crazy capital flow that threw money at American house-buyers with no income or Icelandic banks with no experience or European sovereigns – he is referring precisely to those sectors which were subsidized by bank regulators, because their perceived risk of default was low. Had the bank regulators required the banks to hold as much capital/equity when lending to these as they required the banks to hold when lending to small business and entrepreneurs, some other crisis might have happen, but definitely not this one and definitely not one as large.

PS. Who did the eurozone in?

Yes, bank regulators must be held to account for the crisis

Sir, you are absolutely right in that “There has been no proper holding to account for the crisis” “Reckoning delayed is reckoning denied” March 17, as we have yet to see one single bank regulator parading down a 5th Avenue wearing a cone of shame. 

When the regulators allowed banks to hold extremely little equity when lending or investing to what was officially perceived as not risky, and thereby allowed banks to earn extraordinarily large return on equity, they doomed the banks to for them dangerous obese exposures to triple-A rated paper and infallible sovereigns, and equally for us dangerous anorexic bank exposures to what is officially perceived as risky, like to small businesses or entrepreneurs. 

You might be right in that Wall Street has closed ranks around Goldman against Greg Smith’s j’accuse, but you in FT have also closed ranks around the bank regulators, by silencing my over 600 j’accuse letters. Who knows, you might yourself be held to account for that one day!

Occupy the Basel Committee! http://bit.ly/dFRiMs

What we need to check is the bank regulators testosterone levels to see if it is sufficient.

Sir, I am not sure about the applicability to banks of Gillian Tett´s “Regulators should get a grip on traders´ hormones” March 16, since Mark Twain´s “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” would indicate that the testosterone level of bankers is far from being abnormally high. 

But what might behoove us is to test the regulators hormones. When these decided that even though banks were already clearing for perceived risks of default of borrowers by means of interest rates, amounts exposed and other terms, they should also consider those same perceptions for their capital requirements, they most definitely evidenced what would seem to be a severe case of lack of testosterone. 

As a direct consequence of the risk-adverseness of the regulatory nannies, we are now suffering from obese bank exposures to what was officially perceived as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what was officially perceived as risky, like the small businesses and entrepreneurs.

Lord Turner and his regulatory colleagues are to blame for the current obesities and anorexics of banks

Sir, I refer to Brooke Master’s “Alert on ‘shadow bank’ where she reports on Lord Turner’s recent speech at the Cass Business School in London, and in which he blamed others for “Myopic risk assessment and the delusion of low risk investments”. 

As a regulator Lord Turner should be ashamed of himself. By means of their capital requirements for banks that use weights based on the perceived risk of default; a risk which has already been cleared for by the banks by means of interest rates amounts of loans or investment and other terms, the regulators guaranteed that the banks were to become obese on whatever was officially perceived as not risky, and anorexic on whatever was officially perceived as risky. 

Lord Turner should in front of cameras try to answer the following two questions: 

1. If banks already look at the credit information provided by credit ratings when setting interest rates, amount to lend and other terms, is it intelligent for the regulators to also look at the same credit ratings, or similar risk perceptions, in order to define the capital requirements for banks? Is that not overdoing the nanny part a bit too much? Could that not lead to a dangerous overexposure to whatever is officially deemed as absolutely not risky? Like for instance to triple-A rated securities and infallible sovereigns? 

2. And is not the whole idea of lower capital requirement for banks when the perceived risks are low just a quite dumb idea to begin, knowing, as we do, that big systemic bank crises never ever occur because of excessive exposures to what is believed to be risky, but that they always occur because of excessive exposures to what was wrongfully believed as absolutely not-risky? 

Occupy Basel! Bank regulators should be made to wear cones of shame http://bit.ly/dFRiMs

Deleveraging is so much harder on those officially deemed as risky

Sir, in a world of capital requirements for banks based on perceived risks, the banks achieve the most deleveraging by getting rid of what is officially perceived as risky. For instance for every 100 a bank currently drops of triple-A rated assets it will only free about 1.6 in equity, compared to the 8 in equity it manages to free up by dropping 100 of loans to small businesses and entrepreneurs. 

That regulatory discrimination, based on perceived risks, is absolutely indefensible since markets and banks have already cleared for that by means of interest rates, amounts at exposure and other terms. 

It is truly sad to read Martin Wolf´s “A hard slog in the foothills of debt” March 14, as well as the quoted Mc Kinsey report “Debt and deleveraging”, January 2012, completely ignoring the regulatory discrimination against those officially deemed risky, which was already present when leveraging, but is also now, by far, the ugliest facet of deleveraging.

Professor Stiglitz, why do you not come down to earth and have a look at the so mundane bank regulations?

Sir, Professor Joseph Stiglitz writes that “The American labour market remains in shambles” March 13. Of course, but how could it be otherwise! We are suffering under the thumb of thick as a brick bank regulators who give banks huge incentives to lend or invest in anything officially perceived as not-risky, like triple-A rated securities and infallible sovereigns, and to avoid like pest what is officially perceived as risky, namely those most important new job creators of all, the small businesses and the entrepreneurs. 

In various occasions I have with no luck tried to explain to Professor Stiglitz that excessive bank exposures to what was erroneously ex ante perceived as absolutely not risky, does not really match up with excessive risk-taking, but is more the result of an excessive regulatory induced risk-adverseness. 

Much of our current problems derive from the fact that for the aristocrats of economic, such as Nobel Prize winners, bank regulations are something very mundane, almost low class, and to be treated with the same importance given to an Ikea sofa assembly instruction.

When demand for risk-free bank assets outstrips the supply, banks will load up on Potemkin like risk-free assets.

Sir, David K. Richards in his letter of March 13 “Think again about higher bank credits” blames all bank problem on bad bank assets resulting from “slipshod credit analysis by the rating agencies, by regulators, by securities buyers and by the banker themselves. That is correct but completely ignores that slipshod credit analysis was doomed to happen. 

When the regulators allowed banks to buy triple-A rated securities or lend to “infallible” sovereigns against only 1.6 percent in capital, giving the banks the possibility of leveraging their capital a mindboggling 62.5 to 1, the demand for these assets grew so immense that the market, unable to accommodate that demand with real AAA rated securities or real solvent sovereigns had to, in good old Potemkin style, produce falsely triple –A rated securities and false solvent sovereigns like Greece.

More but also much less risk discriminating banking equity is what really serves us better.

Sir, Prof Anat R. Admati and Mr Neil M. Barofsky hold that “More bank equity serves us all better” March 8, and I would have to agree, unless that more bank equity only means more regulatory discrimination based on perceived risks. 

What would happen if regulators required the banks to hold 20 percent in basic equity but still kept the zero risk weight when lending to the infallible sovereigns that translates into a 0 percent capital requirement, or the 20 percent risk weight when lending to triple-A rated borrowers that obliges only 5 percent? The answer is that the lending to the “risky” small business and entrepreneurs that would require the 20 percent in capital would receive its final deathblow. 

When are the experts to ask themselves why regulators have to discriminate their capital requirements based on the risk perceptions that banks have already used to set interest rates, amounts loaned and other terms?

Bank regulations are possibly the biggest barrier to break through there is.

Sir, Robin Harding begins his “Barriers to break through”, a title which is very adequate to the theme, mentioning someone who wants to drive a taxi in Milwaukee, but that, in order to do so, has to, on top of the cost of the vehicle, pay $150.000 for the license, February 23. 

In precisely the same vein, though much less transparent, all those who are officially perceived as risky, on top of the higher interest rates they already have to pay banks because of that perception, need also to pay the bank an additional margin so as to produce a similar risk-adjusted equity return as those perceived as not risky. 

This is so because the regulator, stupidly ignoring that those perceived as “risky” have never ever caused a major and systemic bank crisis, only those perceived as absolutely not-risky do that, impose higher capital requirements on banks when they lend to the “risky” than when lending to the “not-risky”. And that, in terms of barriers to break through, is as big as they come.

The sad result is there to see. Banks have huge and dangerous overexposures to triple-A rated securities and infallible sovereigns and, equally or even more dangerous, underexposures to small businesses and entrepreneurs.

Do not allow regulators to hide behind “unintended consequences”.

Sir, where do you draw the line between unintended consequences and sheer stupidity? That is the question we should make after reading an article such as “The tough challenges to revive the global economy” written by George Osborne and Jun Azumi, the finance ministers of Britain and Japan, February 23.

Privileging bank lending to what is officially perceived as not risky, by means of extraordinarily low capital requirements, just had to create excessive and dangerous bank exposures to triple-A rated securities and infallible sovereigns. That I repeated over and over again, even while being an Executive Director of the World Bank 2002 -2004. So that should not be allowed to fall into the category of unintended consequences. 

It behooves us to hold regulators very accountable for how they regulate, most especially if they regulate on a global scale. In this respect we must see to that those regulators are not allowed to hide behind “unintended consequences”… or Black Swans for that matter.