Is Ms. Gillian Tett now, at long last, beginning to understand what is happening?

Sir, Gillian Tett, writes about “how inefficient central banks’ pump priming has been when it comes to delivering capital to the parts of the economy which need it badly – and which are essential to long term growth”, “US venture capital falls short on love in buying frenzy” May 24. 

Clearly I am not PhD-ish or bank-executivish enough for Gillian Tett to read my letters, but that is precisely what I have been telling her and some of her colleagues for years, namely that capital requirements for banks based on perceived risk hinders banks to deliver credit to the parts of the economy which most needs it and which are essential to long term growth.

Perhaps this might be a reminder for her that, now and again, it is convenient for everyone, including anthropologists, to walk the streets of the real economy, and not only those of Davos and alike.

What UK (and Europe) needs, is a massive capital injection into the banking system

This is in reference to “Osborne is too complacent about Britain’s economy” Martin Wolf, May 24.

Sir, first, in the UK, if a bank would give a loan to a Solyndra, the solar power company that recently went bankrupt in the US, it would need to hold, according to Basel II, 8 percent in capital. But, if the bank instead lent that money to the UK government, and so that a UK government bureaucrat could relend it to a Solyndra then, according to Basel II, the bank needs to hold no capital at all against that. That is a huge distortion that needs to be eliminated, and to be replaced by a general capital requirements against any asset, 8 to 10 percent.

Second, because of such regulatory distortions UK banks (as all European banks) have ended up with a dramatic gross, not risk-weighted, shortfall of capital, and which now not only stops them from being able to lend but even forces them to contract. And so, when Martin Wolf writes about “the private sector has a huge structural excess of income over spending” my recommendation, instead of those huge government investment programs Wolf suggests, would be to launch a massive bank capitalization program, offering special tax incentives for all “private excesses” which are converted into bank equity.

How much capital? Whatever is needed for the banks to hold 8 to 10 percent of it, against all assets, including government debt. At that moment the general risk-profile of banks would also change dramatically. At that moment banks can start to contribute to help the real economy to grow.

Why is it that some insist that all rescue actions is to be carried out by governments? Could it be that this crisis is being exploited to advance some political agenda through the backdoor?

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

Get over it. Set a high credible capital requirement for banks and ask for it to be met within a very short time.

Sir, you finish your “Noise and truths in the IMF’s verdict” May 23 writing: “Inadequately capitalised lenders will continue limit lending. This in turn, will hamper growth. For all the brouhaha about changing tack on fiscal policy, Britain’s priority should be to fix its banks”.

Absolutely right… and we all have known that for many years…right?

To fix the banks you need to set a high but achievable goal, let us say 8 to 10 percent of capital for all bank assets, and ask for it to be complied with in a very short time. It would also be recommendable to help out in the process of raising all that bank capital, by for instance offering some special tax incentives.

What you cannot do is to meekly be tip-toeing around the issue, because before bank investors are absolutely sure that the capital raised will be the capital needed, and that it will dramatically reduce the risk-profile of banking, they will not volunteer to try it out.

FTT is no longer a “Robin Hood tax”, now just another “King John tax”, to be collected by another Sheriff of Nottingham

Sir, Alex Barker and Philip Stafford report that “Brussels looks at incentives to ease collection of ‘Robin Hood’ levy” May 23, and I do think some clarification is in order. 

There was a time, many years ago, when some thought that the financial transaction tax was going to be used to redistribute wealth from the richest to the poorest countries. And so those days, branding FTT as a “Robin Hood” tax made some sense. Not any more, now it is a quite ordinary and traditional “King John” tax to be collected by a Sheriff of Nottingham. 

I do not mind the distribution from the rich to the poor… what I do mind is that in the collection and distribution process, most funds transferred end up in pockets other than those of the poor.

PS. Against tax-havens, nothing is as powerful as tax-heavens 

If climate change believers do not abandon their holier than thou attitude, climate skeptics will always win.

Martin Wolf writes about China that “Its leaders feel rightly, that there is no moral reason to accept a ceiling on the emissions allowed for each Chinese individual far lower that the level Americans insist upon for themselves”, “Climate skeptics have already won” May 22.

And of course, if the climate change challenge, instead of being placed in terms of a shared human responsibility, where even the poorest of the poor, as a human, has the right to feel the same responsibility as the rich, and this is instead phrased as an issue of quotas and fairness, which only divides, the climate skeptics will win… almost by walk-over.

Also, at least in the US, it is clear that the climate change challenge has been politically captured. It is almost as “if you are not a progressive-democrat, you have no right to be concerned with climate change” or “if you are concerned with the environment you have no right to be a conservative-republican”. Before climate change is freed from that sequestration, there is no chance of a united front, and again the climate skeptics win.

Wolf mentions eight possibilities to curb emissions and buy some time and I fully agree with all of them, most especially with the “go nuclear” one, our only bridge between now and when something better for the environment is found. That said I would like to make the following comments:

First, with respect carbon taxes it is important to be consistent and transparent. That little dirty trick used by some European countries of taxing gas-petrol to assist the environment, while at the same time giving out subsidies to coal, cannot be allowed.

Second, in finding the best way of financing for creating and saving energy I have often mentioned that if we can use credit ratings to determine the capital requirements for banks, something which for no purpose at all distorts , why do we not distort somewhat with a purpose and do the same based on sustainability ratings?

But, first and foremost, in terms of advancing on climate change issues, we really need to get rid of all those holier than thou attitudes, which instead of making us plant a tree, so often makes us feel like going out and chopping one down.

What did Mohamed El-Erian really hear? Should we buy or should we sell gold?

Sir, with interest I read Mohamed El-Erian’s “We should listen to what gold is really telling us” May 21.

Unfortunately I could not understand what Mohamed El-Erian really heard... should we buy or should we sell gold at current prices?

Has Robin Hood sold out and now been co-opted by King John as a neo-Sheriff of Nottingham?

Sir, Ralph Atkins and Alex Barker quote Simon Chouffot saying “You can draw parallels between the Sheriff of Nottingham and financial services, and Robin Hood redistributing gains back to those who needed it.”, “Robin Hood tax: A long shot”, May 21.

Sorry but I am utterly confused, I always saw the Sheriff of Nottingham as the tax collector for bad King John, and Robin Hood as providing good people a safe-haven in the Sherwood Forest.

Besides setting the target for bank capital, we need to think about how to get there.

Sir, Anat Admati and Martin Hellwig write that “capital ratios in Basel III rely on a complex, distortive and manipulable system of risk-weights”, “Banks are not a special case on debt-equity ratio” May 21.

They are absolutely correct, on all three counts, and that is applicable to Basel II too. But what I would like to mention is the curious fact that the “distortive” element, and which to me is the most serious flaw of Basel regulations, as it affects not only the banks but the whole market too, has received the least of attention.

There is no doubt that we need to go down the route of substantially increasing the capital requirements of banks, whether to the 8-12 percent level I favor, or the 25-30 percent level Admati and Hellwig favor. But, when considering the fact that bank capital is going to be extremely scarce while travelling on the route to the final bank capital that is needed, we should not forget that the distortive effects of the risk-weights will be more important than ever.

In this respect I opine that regulators, more than thinking about how to force bank capital increases, need to think in terms of how to help these increases to happen as fast and as smooth as possible. There might be many other ways, but personally I favor either large public sector capital injections in the banks accompanied by clear rules as to how current shareholders could repurchase that capital in order not to be diluted, or some strong tax incentives awarded to any bank that achieves a capital increase which in the short term meets the final long term target.

Would a private bank depositor insurer allowed the European banks to do what they did? No? So?

Sir, Wolfgang Münchau writes “It doesn’t make much sense but I am a Eurofanatic” May 20.

It makes me truly wonder why if so he does not want to put forward the fact that the current problems of Europe, and especially of the Eurozone, were not caused by Europe or the Euro, but essentially by faulty bank regulations.

I would just ask Münchau the following: “Do you believe a private bank deposit insurer would have ever permitted banks to lend to Greece holding only 1.6 percent in capital, something which implies mindboggling authorized 62.5 to 1 leverage and as the Basel Committee did?” I am sure his answer would be definite "No way José!" So?

I do like Europe, I do support Europe, but what I do not like is how it is being run by what seems to be a quite lousy and conceited bureaucracy. Perhaps if that changed, Münchau could feel that being a eurofanatic made much more sense.

PS. Just as a reference I include a link to my version of “Who did the eurozone in?”

Again, we would do better with capital requirements for banks based on sustainability of earth and job creation ratings

Sir, I often wonder about how strange it is that those who most present themselves as being very concerned with the health of our planet, and should therefore one would presume be the ones most concerned with making sure that scarce financial resources are used as effectively as possible to save the earth, then end up being the most willing to just throw money at the problem.

I say this because Martin Wolf in “Why the world faces climate chaos”, May 15, argues that “If we are to take a prudential view of public finances we should surely take a prudential view [on saving for humanity] the only home it is likely to have”. As I see it those two prudential views go hand in hand, as we do need a prudential view on public finances in order to assure having some resources for all the prevention, adaptation and mitigation which will be required.

Two fundamental problems the world faces everywhere now, is the deteriorating environment of the earth and the lack of jobs for our youth. And in this respect for almost a decade now I have been arguing the following:

If we have capital requirements for banks which clear for the information provided by credit ratings, even though that information has already been cleared for elsewhere, and thereby only produces dangerous distortions, why then do we not have instead capital requirements for banks that are based on sustainability of earth and job creation ratings?

The above would allow banks to play a significant role in solving both problems, without us having to leave the financing of environmental or job creation projects in the hands of government bureaucrats or short terms political interests. Unfortunately there are some who prefers the government to solve it all… seemingly that is on their agenda.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has told me not to send him anything more about these “capital requirements”… he already knows it all, at least so he thinks.

We need to see the hiding-behind-regulatory-risk-weighting index of the banks

Sir Patrick Jenkins and Daniel Schäfer at the end of their “Banks in cash calls to meet Basel III” state the caveat with respect of the numbers shown that “Regulators [will] either raise risk-weightings and/or give more emphasis to nominal balance sheets.” Indeed, but it can also be, like the current crisis has clearly evidenced, that the risk-weights could also simply turn out to be very wrong.

And that is why I consider the illustration that shows Basel III core tier one capital ratios of 12 large banks to be quite opaque. As a minimum, next to each Basel III ratio they should have given us each banks capital to nominal balance sheet ratio.

That way, by dividing the first ratio by the second (or the other way round) we can build an index which allows us to identify how each bank hides behind risk-weights, whether these are calculated by themselves or by the regulators.

Was the Basel Committee, and the Financial Stability Board, created in order to bypass democracies?

Sir, what would be the possibilities of passing a law, in any European parliament, which would dramatically increase banks expected risk-adjusted returns on equity when lending to a sovereign or triple-A rated borrowers, and thereby stop banks from lending to those perceived as more risky, like small and medium businesses and entrepreneurs, or having these pay higher interest rates to make up for a regulatory competitive disadvantage; and all justified with the argument of making banks safer? None I would say… especially if a parliamentarian reminded law makers of the fact that no bank crisis ever has resulted from excessive lending to those perceived as risky, they have all resulted from excessive lending to what was wrongly perceived as absolutely safe.

But that is exactly what the Basel Committee has achieved by imposing their capital requirements for banks based on perceived risk. And this is why I do not agree much with Philip Stephens’ “Do not blame democracy for the rise of the populists” May 10, since democracies should never have allowed their power to be diffused in such a way. Governments and democracies are now in many ways kept hostages by their own creations... and suffering their own Stockholm-syndrome 

Was the Basel Committee and the  created on purpose in order to bypass democracies? I have no answer to that question… sometimes shit just happens. But, who have benefitted from it? Not “the risky”, that’s one thing for sure.

Regulators, and FT journalists, suffer from cognitive overload and malfunctioning prefrontal cortex.

Sir, Christopher Coker’s “Technology is making humans the weakest link in warfare” May 10 is an extraordinarily enlightening article…among other for understanding why bank regulators are seemingly not able to correct what they should correct.

Coker writes “The digital world we have created may be outpacing our neurons’ processing capabilities [cognitive overload], forcing us to log off emotionally. The neurons associated with empathy, compassion and emotional stability are sited primarily in areas of the prefrontal cortex. In evolutionary terms, this is a recently developed part of the brain that is bypassed when we are stressed or overanxious. Emotions such as empathy and compassion emerge from neural processes that are inherently slow. It takes time to understand the moral dimension of a situation.”

Bank regulators, with the introduction of risk-weighted capital requirements for banks, which much favors access to bank credit for “The Infallible” caused, as collateral damage, that the access to bank credit for “The Risky”, like small and medium businesses and entrepreneurs became, in relative terms, much more expensive and harder to access. In other words the gap when accessing bank credit, between “The Infallible” and “The Risky”, increased dramatically.

And, since “The Risky” includes many or perhaps most of those potentially able to create the next generation of jobs, our young ones are paying dearly the consequences of such odious regulatory discrimination.

Having for years been protesting these regulations, I could never understand why bank regulators (or FT journalists for that matter) did not care one iota about something which in my mind could even be labeled as a crime against humanity. Now, thanks to Coker I have at least a clue; they are suffering a cognitive overload, which is causing their prefrontal cortex to stop functioning.

I sure pray they recover soon… or we will have to wait for those regulatory drone-robots which in terms of Coker could at least console us with “reducing the inhumanity so as to balance the loss of humanity”.

Since when can a mistake in a paper be used as evidence of an opposite conclusion?

Sir, Robin Harding reports “Reinhart and Rogoff publish errata to paper on public debt and growth”. May 9. In it Harding writes that the 2010 paper on public debt and growth, by pointing out a significant effect on growth when public debt reached 90 percent of GDP, was widely cited as an argument for fiscal austerity. Since the paper was thought to be correct, I guess that was a quite reasonable thing to do.

What I cannot lay my hands around though is how the existence of a mistake in the paper can suddenly be turned into evidence which supports the opposite conclusion. I say this because I have lately read more opinions advancing that the 90 percent is no limit, than what I ever read about the original paper stating it was.

That said, since all this type of debt-sustainability discussions often sound to me like a torturer debating how much torture his victim can take before fainting… I will, without any religious fervor invested in it, keep on opining that public debt at 90 percent of GDP is high… although that will of course also have to do with who are the holders of that debt, nationals or foreigners, friends or foes.

And also, if the 90 percent to GDP has been reached by incurring in distortions, like requiring banks to have more capital when lending to the citizens than when lending to the government, then my previous “high” becomes a “VERY HIGH”

Higher bank capital ratios without eliminating distortions based on perceived risks, would make banks riskier

Sir, John Plender refers both to the draft legislation advanced by US senators David Vitter and Sherrod Brown, and to Anad Admati’s and Martin Hellwig’s “The bankers’ New Clothes”, in order to point out that “Support is growing for higher bank capital ratios”, May 8.

Plender unfortunately entirely misses what is most important. Many have asked for higher capital requirements but, what sets those he references apart from many others is that they also want to do away with the pillar, and the pride and joy of Basel regulations, namely that the capital requirements are to be based on perceived risk.

Let me ask Plender. Today, according to Basel II, a bank can hold some zero risk weighted sovereign assets against zero capital, while giving a loan to a business requires it to hold 8 percent of it in capital. If tomorrow the risk-weights for some sovereign would remain zero, but banks were instead required to hold 30 percent against a loan to a business, would the distortions be smaller or larger?

Without eliminating regulatory distortions, neither austerity nor profligacy can help Europe

Sir, Martin Wolf writes: “the hope that [the European countries in crisis] will grow their way out of their difficulties, via eurozone demand and internal balancing, is a fantasy, in the current macroeconomic context”, “The German model is not for export” May 8. 

Wolf’s line of argument, again, points to the “austerians”, as he likes to call them, being wrong. I agree with this. But that does not mean that their opposites, let’s call them the “profligates”, would be right either.

Europe, to stand a chance, and the European youth to find the next generation of jobs, needs to get rid of those distortions which direct bank credit, not based on its productivity, but based on perceived risk-avoidance. And before that is done, I would have to be an “austerian”… since wasting away scarce profligacy space on nothing is just plain stupid.

In fact those regulations are more than stupid they might in fact even signify a crime against humanity.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

It was bank regulators who suffered the mother of all intellectual failures

Sir, John Kay writes that the left, were so horrified that a collapse of capitalism from its own global contradictions, might occur under their watch, that their only thought was to avert it by shoveling public money at the capitalists, “Sinister or silly, protest politicians are united in grievance” May 8. And Kay refers to that as an “intellectual failure”.

That is indeed true, but, as intellectual failures come, much worse was the one which preceded it, namely the regulatory theory that banks would be better off diverting their credits from what though perhaps productive was perceived as risky, and concentrate on earning high returns on their equity by giving credit to what was perceived as “absolutely safe”.

Capitalism might have contradictions but, allowing banks to leverage their equity 62.5 to 1 when lending for instance to Greece, but only 12.5 to 1 when lending for instance to a German medium sized business, has of course nothing to do with that.

In fact those regulations are more than stupid, they might in fact even signify a crime against humanity.

I did not take Simon Kuper for a baby-boomer.

Sir, I have admired many of Simon Kuper articles, and there is no doubt he is a rising star that could help to rejuvenate your paper. That said his “Smile if you live in Europe” May 4, left me a bit surprised, as I did not take him for a baby-boomer content with being able to obtain a certainly splendid caffé macchiato at a very good price.

I say that because when you are young, more than where you find yourself, is where you are heading that matters… and Europe, for the time being at least, is heading down, down, down.

And as I have explained to you Sir some couple of hundred times, that is much a result of silly bank regulations which allow banks to obtain a much larger expected returns on their equity when lending to The Infallible than when lending to The Risky.

And as you must certainly be aware of, the value of any portfolio which does not include a hefty dose of risk-taking, is destined to wither away, and therefore, although quite appropriate for oldies with few years left of living according to actuarial tables, is something highly inappropriate for the young. 

In fact had a certified financial advisor proposed a portfolio to a young person with the ingredients regulators establish for their banks, he would have his certification immediately removed. So no, if in Europe, and if young, don´t smile but kick out the current batch of bank regulators… as fast as you can.

The best way to compete with tax havens and fiscal paradises abroad is to create tax heavens and paradises at home.

Sir, Vanessa Houlder writes that with respect to tax avoidance “Governments are complicit in the problems they are condemning. It is their tax systems that has created incentives for businesses to behave that way”, “Talk is cheap in the clampdown on tax avoidance” May 4. And she is more correct than what she probably knows. I have always held that the best way to compete with tax havens and fiscal paradises abroad is to create tax heavens and paradises at home.

Also considering the enormous growth in fiscal income and the relative poor delivery of services, like the costs of any government financed infrastructure going to the roof, we might be reaching the point in which governments become too-big-to-govern, and in which case some escape valves could prove to be blessings in disguise. For instance, once the air cleans in Greece, private Greek capital safeguarded abroad might prove indispensable for the survival of Greece.

FT, how can you learn if you do not want to listen?

Sir, in your editorial “US spring fails to spread to Europe” May 4, if it could really be called a “spring”, you write “fixing the banks to help the recovery is the lesson Britain and the eurozone must learn from the US.”

The real difference between the US banks and your banks is that the former never fully implemented Basel II and are therefore much less exposed to the distortions the capital requirements for banks based on perceived risks already cleared for elsewhere cause.

But since that is precisely what I have written you more than a thousand lettersabout, but that you have preferred to ignore, I must then ask… how are you suppose to learn if you are not even willing to listen?

Frankly... who has such silencing powers in the Financial Times?

Bank regulators make the prospects of the living-hand-to-mouth especially bleak

Sir, Gillian Tett’s “The cost of living hand-to-mouth” May 5, is splendidly scary, especially when contrasted with all the how the US is doing great hoopla on FT's first page… especially since there is nothing in the “for our business it has become critical to understand the cycle – when pay [and benefit] cheques are arriving” that will increase the relative number of citizens who can afford a planning scenario that goes further than next pay cheque.

Of course, as Ms Tett has preferred to ignore it, even if she writes for the Financial Times, I must remind her again of the fact that if any of these “living hand to mouth” were to have access to bank credit, then the dollars, or pounds, or euros they would pay in interests, would be worth much less to a banker than those dollars, or pounds or euros paid by anyone dressed up as safe. And that is simply so because the regulators allow the banks to leverage much more a “safe” dollar, pound or euro, than a “risky” one.

Of course, as Ms Tett has preferred to ignore it, even if she is an anthropologist, I must remind her that one big reason many have possibilities of planning for a longer horizon, is that so many before them took many risks, assisted by the banks. And therefore, as a result of banks daring taking risks having been ordered out of fashion by too concerned and too dumb regulators, the future of the current living-hand-to-mouth looks especially bleak.

No nation and no economy has become great by playing it safe!!! God make us daring!!!

Distortion is not free, current low public interest rates are an illusion and could be the highest real rates ever

Sir, during the two years I had the fortune to have a voice as an Executive Director at the World Bank, 2002-2004, there were a lot of discussions on the issue of debt sustainability for poor developing countries. I hated those. They always sounded like a torturer calculating how much he could go on before his victim fainted. No doubt much of the ongoing, and I would have to say much less civilized debate between the austerians and the profligarians, reminds me of that.

And I also remember when some years ago some environmental austerians fouled up some research, which was immediately interpreted as a great go ahead by the environmental profligarians.

I do pity Kenneth Rogoff and Carmen Reinhart, for probably having been too interpreted by vested interests, hand having to end up in the eye of the current storm on debt. They do a good job of fixing their positions in “Austerity is not the only answer to a debt problem” May 2. Of course it is not a question of either or… and it is not even necessary for them to call on Keynes to testify in their defense.

That said, what they entirely miss, probably because it has never been an area of research or concern to them, is how current bank regulations, which so immensely favor sovereign borrowings, leads to the illusion of low rates.

Just one example: Banks in Europe lending to Germany do not need to hold any capital, something which implies an authorized infinite leverage of their equity. But, if they lend to a German small or medium business or entrepreneur, then they need to hold 8 percent in capital and can only leverage the risk-adjusted returns of that loan on their equity 12.5 times to 1. 

Anyone who does not understand that translates into a direct subsidy of Germany´s borrowing rate, paid by taxing the more “risky” and the real economy losing out of opportunities, has little idea about how banking and capitalism work. 

If some real game changing opportunities are thereby lost by Germany, it could in fact currently, and quiet unwittingly, be paying they highest interest rates ever on their public borrowings.

On the Battle between “Austerians” and “Profligarians”

Sir, Martin Wolf refers sort of contemptuously to “austerians”, to whom he holds “a financial crisis is a mark of moral turpitude, to be redeemed only by suffering. “Why the Baltic states are no model” May 1.

But Wolf himself could also with moral turpitude equally be accused of being a “profligarian” in holding that a financial crisis should only be redeemed by just letting the party go on… in the best style of an Après moi, le déluge baby-boomer’s perspective.

Before the worst type of austerity is eliminated, namely that which hinders banks to take the real risks the real economy demands, I find myself definitely to be an “austerian”, because otherwise fiscal and monetary profligacy would just be a waste of fiscal and monetary space.

Now, once the regulatory establishment has come to its senses, God willing, and eliminated the current capital requirements for banks based on risk-weighting for perceived risks which have already been weighted, by means interest rates, amounts of exposure and other terms, then I will gladly think of joining the camp of the profligarians. I said “think” because I would need to be sure regulators really understood how dumb they had been, so as to never again repeat similar nonsense.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all... at least so he thinks.

Risk-weighting for risks already weighted for, well that is regulatory zealotry you can write home about

Sir, you write that “the Fed’s monetary policy [is] much more efficient than in those economies where the transmission of central bank money-printing to real economy remains broken” “If the Fed ain’t broke, don’t fix it” May 1.

Indeed but the reason of that is that the US never adopted as fully as Europe did those Basel dictated capital requirements based on perceived risk, that so completely have clogged up the channels whereby bank lending can flow to the real economy.

And when you refer to that US Senators Sherrod Brown and David Vitter want banks to hold more capital you are ignoring that their bill contains the much more important provision of limiting [and hopefully making away altogether] with the obnoxiously dumb risk-weighting, something that is not explicitly mentioned in the Dodd-Frank law.

Sir, you mention the dangers of “zealotry”. Let me inform you that the worst example of regulatory zealotry is precisely the setting of capital requirements based on perceived risks that have already been cleared for.

Sir, as I wrote in a letter published today by the Washington Post, “Europe would also do better with a Brown-Vitter proposal”

The only acceptable antidote against tax-havens should be tax-heavens

Sir, Jeffrey Sachs’ unrestrained attack on tax-havens, shows there are many ways of exploiting tax havens. “Austerity exposes the global threat from tax havens” April 30.

As a citizen, I have for a long time held that the best enemy of tax havens is the existence of tax heavens, by which I mean countries in which a government respectfully earns its fiscal revenues by delivering good government. 

I come from a country, Venezuela, which in the 80s I saw rescued after its governments, after being excessively financed by foreign banks, had submerged into a total crisis, precisely because its citizens had saved abroad, and were able to return resources to their nation when they felt conditions so merited, instead of allowing these resources also to get wasted.

And I sure pray that for instance in Greece’s case, there is also a lot of Greek private capital in safe havens, ready to return to their country. And so, in this respect Sachs should start by making sure we have good and worthy politicians, before closing the escape doors on desperate citizens, which can otherwise most probably lead to having even worse politicians.

Also, over and over again in these debates about tax-havens we read about immense amounts tucked away, implying that if only governments could lay their hand on it, the world would be saved. In this case “Recent estimates by the Tax Justice Network suggest that deposits are in the range of $21tn.” Deposits… what deposits? All that money is placed somewhere and so if it was recovered by governments in its entirety it might very well just mean that $21tn was taken out of private management, like the stock markets, and handed over to perhaps inept and corrupt governments. Would that save the world? Forget it.

Finally, I would wish to remind Professor Sachs that public greed can easily be even much more destabilizing than private greed.

Bank rules already hinder inclusion and widen the gap

Sir, Alfred Hannig in his letter “Rules shouldn’t hinder inclusion” writes about the importance of finding a balance in financial regulations between the need of protecting the banks from systemic risks and the need for the inclusion of those currently without access to the financial system. And he is of course right when holding that “infection in the financial system will not come from financial inclusion” just the same way that a financial crisis will never result from excessive exposures to “The Risky”, these will always come from excessive exposures to what has erroneously been considered a member of The Infallible”.

That said Mr. Hannig should take notice that current bank regulations, with their capital requirement based on “perceived risks” already cleared for by means of interest rates (risk premiums) amounts of exposure and other terms, already attempt against the inclusion of many; and only helps to further widen the gap between the haves, the old, history, the developed, “The Infallible” and the have-nots, the young, the future, the developing, “The Risky”.

More than the public borrowing rate trapped at zero, it is the banks that are trapped into public lending

Sir, I refer to the “Austerity is hurting. But is it working?” debate, April 27.

The Yes camp, represented by Chris Giles advances by far the strongest argument by just stating the fact that with respect to “finances to fight crises or wars. Advanced economies had leeway in 2008; they do not now”.

The No camp, represented by Robin Harding, echoing Martin Wolf, refers again to the boost that fiscal policy could give the economy “when interest rates are trapped at zero”. Again no consideration is given to the fact that the infallible sovereign rate is “trapped” at zero in much by capital requirements for banks that are extremely biased in favor of public borrowings. And again no consideration is given to the fact that the “risky”, like the small and medium businesses and entrepreneurs, therefore need to pay banks exaggerated risk premiums in order to provide the banks with the same return on their equity; that is if they even can get the banks to take notice of them.

If the No camp would try to figure out what would happen if for instance bank were required to hold 8 percent on all assets, including sovereigns, then perhaps they would understand that more than the public interest rate trapped at zero, it is the banks that are trapped into public lending.

And if you do not think there is something wrong with that, you've got to be communists.

Regulators, you can even let Libor be the result of a raffle, but please stop distorting and subsidizing the risk-free rate

Sir, I refer to Tom Braithwaite’s and Brooke Masters’ “Regulators urge speed in replacing the Libor rate” April 26.

By allowing banks to hold much less capital when lending to the “infallible” sovereigns than when lending to “risky” citizens, regulators have completely distorted what is probably the most important reference rate, the borrowing rates of the most solid sovereigns, one of these usually the proxy for the risk-free rate.

And that is why I am amazed about how much attention regulators give to the Libor rate, a rate that really, for its small relative importance, could just as well be the result of a raffle among some quotes, after eliminating some outliers. One day, the winning Libor could be somewhat higher than its true rate, and on that day, Libor based borrowers would pay somewhat more, and investors earn somewhat more; other days the picked Libor could be somewhat lower than its true value and the opposite would hold. But, in the long run, no one is really much harmed.

Could it be that regulators are ashamed of what they have done and are using the Libor incident as a distraction?

Europe what you really need is much less risk-taking austerity

Sir, Philip Stephens refers to the “high public debt suffocates growth” vs. “it is low growth that drives up debt” controversy. It all sounds so Lilliput vs. Blefuscu to me, “The New Deal for Europe: more reform, less austerity” April 26.

What currently suffocates the growth of the real economy are those crazy capital requirements for banks that create enormous incentives for banks to shun all what is officially perceived as “risky” like small and medium businesses and entrepreneurs, and to earn all their return on equity by lending to what is perceived as “absolutely infallible”. And, since in Europe the banks have normally been more in charge of financing the risky than those in the US, where more alternative sources of funds exists, Europe suffers the most.

Stephen refers to the existence of “ossified labour markets that lock out young people and discourage investments and innovations”, and he is right of course, but, when compared to bank regulations which lock out the “risky”-risk-takers in the real economy, their effects are sort of minor.

When banks have effectively been castrated, and are singing in falsetto, even low public debt does not help growth and, since currently the lowest capital requirements for the banks apply when these lend to the public sector, higher public debt level will result. It suffices to read Martin Wolf’s almost monothematic preaching for the public sector to take advantage of low interest rates, so as to borrow and take on large infrastructure projects, without understanding that those low rates are just a mirage, caused by regulatory subsidies paid for by the many extremely onerous missed opportunities in the real economy.

Europe, please inform your overly timid and dumb bank regulators that no major bank crisis ever has resulted from excessive bank exposure to the “risky”, they have all resulted from major exposures to what was dangerously perceived as “absolutely safe”.

But also beware of the much greater risk derived from excessive lack of testosterone and dopamine

Sir, the fundamental problem with good articles like Sarah Gordon´s “Call in the nerds – finance is no place for extroverts”, April 25, is that they tend to analyze risks from the perspective of when risk-taking goes bad, without caring much for when risk-taking goes right.

The problem we are facing now is that bank regulators, with too little testosterone, and too little dopamine, and too little understanding of what they were doing, gave the banks extraordinary incentives to lend and invest in what was perceived as “safe” and to stay away from what was perceived as “risky”… and so the banks did… and loaded up on AAA rated securities, Greece, Spanish real estate and others safes.

Indeed if regulators had incorporated more behavioral analysis then they would not have based the capital requirements for the banks based on perceived risk, like that in credit ratings, but based to how bankers react to perceived risk. And then, instead of more-risk-more-capital less-risk-less capital, they might have applied a somewhat inverse capital requirements, since bank crisis have never ever resulted from excessive bank exposures to something perceived ex ante as “risky.

PS. As gold is mentioned, just as a curiosity let me remind you that in the Report on Global Financial Stability 2012, of April last year, the IMF listed 77.4 trillion dollars in safe assets and therein gold represented 11 percent.

Martin Wolf, monetary profligacy should not be an article of faith either

Sir, Martin Wolf, insists in that because those “for room for maneuver, such as the US and even the UK” because they did not create stimulate enough the economy the “recovery has been even weaker and so the long run cost of the recession far greater than was necessary”, “Austerity loses an article of faith” April 24.

And to back up his arguments Wolf uses foremost the fact that UK, after reaching a net public debt of 240 per cent of gross domestic debt level, something that most probably most public sector lenders were blissfully unaware of, managed to work down the debt load, thanks to the industrial revolution.

Mr. Martin Wolf, let me just ask you the following four questions:

Where is today’s industrial revolution? 

Do you really think that back then the UK had regulators who gave banks extraordinary incentives to avoid taking risks? No matter what Carmen Reinhart and Kenneth Rogoff hold, in this sense, this time is indeed different.

What soaring private and public debt which led to the crisis was not the direct result of minuscule capital requirements for the banks required for the “absolutely safe”?

Finally what are we supposed to recover to, to the skewed economy we had before? Just so that house prices go up and banks earn 30 percent on their equity?

In October 2009, Martin Wolf kindly published in his Economist Forum my “Free us from imprudent risk-aversion” and I still hold, more than ever that it contains the explanation for what brought us the current crisis and what stops us from getting out of it.

Before we correct the incredibly dumb regulatory bias against risk-taking, any stimulus will just eat up any scarce stimulus space we have, for absolutely no good reason at all. 

Would the US not still be treading water had their QE’s been twice as large?

Again, and as I read Mr. Wolf’s arguments, to me, day by day he is becoming, more and more, a worthy representative of those baby-boomers with an “après mois le deluge” philosophy. As a grandfather, I should try to stop him.

With respect to increased capital requirements for banks, what matters most for growth and stability is how it is required.

Sir, I refer to Alex Barker´s and Tom Braithwaite´s “EU and Fed clash over US bank move” April 23. In all the hullaballoo what seems to be ignored, perhaps more by EU than by the Fed, is that with respect to increased capital requirements for banks, what matters the most is how it is required.

If bank regulators require banks to hold more capital, but keep the current risk-weighting system, that just means that The Infallible will be even more favored than The Risky, and since that would only increase the regulatory distortions… the result could only be increased instability.

But, if regulators instead require banks to hold more capital by eliminating the ridicule low risk-weights assigned to The Infallible, then The Risky agents of the real economy, like small and medium businesses and entrepreneurs, will be less discriminated, and therefore the real economy would stand a better chance of recovering… resulting in greater stability.

Capital requirements for banks based on perceived risks… talk about faith in a flimsy theory

Sir, Wolfgang Münchau writes about “The perils of putting one´s faith in a flimsy theory” in order to decry the not really proven possibility that as has been put forward by some, that 90 percent of public debt to gross domestic product would signify a threshold where more debt begins rapidly to negatively affect economic growth, April 22.

But if we are to talk about flimsy theories, and in which a lot of more faith has been invested, I would hold that the pillar of current bank regulations, namely that capital requirements which are much higher for what is perceived as “risky” than for what is perceived as “absolutely safe” could lead to increased financial stability, that one clearly takes the prize.

Again for the fifth consecutive year I questioned these distorting and odiously discriminating capital requirements during the IMF and World Bank meetings in Washington. Again, as always, I got no answer… for the regulators this is a sacrosanct principle that no one should dare to question... and actually they get upset if you do. Me a heretic!

FT, you urgently need to unclog your own thinking process.

Sir you write “Fixing the banks needs prudential plumbing, not bluntly closing the monetary taps”, “Better plumbing, not closed taps” April 19. And that evidences to me you, as so many experts, are as far away from understanding what is happening as one can be.

The problem is that the whole plumbing of the financial system has been clogged up by capital requirements for banks which favor “The Infallible” and discriminate against “The Risky” and so money is not flowing where it should... but only dangerously overpopulating what are perceived as safe havens and which is where all big bank crises occur. Therefore what we need is less stupidly prudential plumbing before opening the monetary taps.

Perhaps reading a set of questions which I am circulating during the World Bank and IMF’s Spring Meetings in Washington, April 19-20, could help to unclog your own thinking process.

Banks should make their profits by being real banks not simply by leveraging what is “absolutely safe”

Sir, Martin Wolf ends his “Britain’s economy should not go back to the future” April 12, writing “The country needs institutions, public and private, better capable of generating widely share growth.”

He is of course right, but what he refuses to acknowledge is how much lousy bank regulations which impose different capital requirements for different assets based on perceived risk has distorted their capacity to allocate economic resources efficiently.

Currently banks are making their profits not as they used to, by taking smart risks, but by leveraging enormously what is perceived as "absolutely infallible", something which as recently seen is also an extremely dangerous experiment. Therefore what is most urgently needed, not only in Britain is for bankers to become real bankers again.

Wolf also mentions some failures in the Thatcher legacy identified by Professor John Van Reenen of the London School of economics. These are “rising inequality, excessive financial deregulation and inadequate investment in both human and physical capital”, and these are all closely connected to the mentioned capital requirements.

If you favor the access to bank credit of those already much favored, the haves, the history, the old “The Infallible” you are discriminating against those already much discriminated against, the have-nots, the future, the young, “The Risky”. And that can of course only lead to rising inequality and inadequate investments. 

But to call this dangerous excessive regulatory prudence an excessive financial deregulation, that is pure nonsense. As I recently wrote to you, Margaret Thatcher would never have approved of these so sissy capital requirements for banks.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more about these “capital requirements”… he already knows it all, so he thinks.

Chris Giles, can we have a little more respect for the “risky” small businesses please?

Sir, is Chris Giles a Basel Committee regulator? I ask this because the contempt he shows small businesses with respect to their access to bank credit “Boosting bank lending will not turn Britain around” April 11, is in line with the contempt with which bank regulators treat these. 

Any interest paid by someone perceived as “risky”, like small businesses often are, are worth less than the same amount of interest paid by someone perceived as “absolutely safe”. This is so because regulators, for absolutely no reason at all, allow the latter interest payments to be leveraged many times more on bank equity than the first. And to me, that is an expression of pure odious contempt… or imbecility. 

Yes, small businesses might account for only 10 percent of business investment, but in many ways they represent the frontiers of the real economy, and they might very well include those who will be the large and infallible companies of tomorrow. 

Chris Giles writes “Encouraging business lending involves a difficult short-term trade-off between the safety of banks and their willingness to lend”. Not at all! Not lending to the businesses and keeping the real economy moving forward that represents de-facto the most fundamental danger to the banks. I simply cannot understand what brings some to believe that banks can stand there shining in the midst of the rubble. 

Also I bet Mr. Giles would not be able to mention one single bank crisis that has resulted from excessive bank exposures to the “risky” small businesses.

Margaret Thatcher, if explained the capital requirements for banks based on perceived risk would ask “Are you nuts? Accept defeat?

Sir, I have read many obituaries of Margaret Thatcher that attributes to her much of the bank de-regulations they blame for the current crisis.

I do not hold to know the whole story but, let me assure you that if someone would have asked her about the possibility of, by means of bank regulations, allowing the banks to earn immensely higher risk-adjusted returns on their equity, by sticking to financing solely “The Infallible” and keeping away from “The Risky”, the Iron Lady would most certainly have asked “Are you nuts? That sounds like a defeat and I do not recognize the meaning of that word" 

And if also told that the most infallible of “The Infallible” was to be the government, and that therefore banks could lend to it without any capital at all, leveraging without limits, she would also most certainly have asked “Are you a communist?

But bankers still have to dance to the same lousy music still being played

Sir, John Plender is close to understanding what has happened when he writes “The Basel capital adequacy regime of the late 1980s was a lowest common denominator exercise… in pursuit of high returns on equity, banks ran down their capital to absurdly low levels”, “Radical reform transformed City’s role in global finance” April 10.

But he is not fully there yet. What was even worse than running down the capital to absurdly low levels was that bank regulators, with their Basel II, in June 2004, allowed this to happen in a way that discriminated based on perceived risks, credit ratings, risks that had already been cleared for by other means, and that completely distorted common sense out of the banks favoring "The Infallible" and discriminating against "The Risky"

And bankers to survive, and not be bought out or simply fired, had to dance to that lousy music while it played… and, unfortunately, since the discrimination based on perceived risk persists, they still have to dance to the same lousy music.

Much more important than guaranteeing sufficient capital, is that bank capital requirements do not distort.

Sir, I am amazed. Brooke Masters, Financial Time’s chief regulation correspondent seems to be surprised with what she writes in “The leverage story that banks want to keep under wraps”, April 9.

Sincerely I had assumed, years after the outburst of the crisis, and after so many explicatory letters I have written to her and other at FT, she would have at least known that the risk-weighting of assets dramatically hides the true extent of bank leverage.

And she writes: “Bankers argue that leverage ratio is a crude tool that penalizes basic low-risk products”, which refers of course to those low-risk products which already benefit from lower rates and ample access to finance. Sincerely I hope Masters will now at least understand sufficiently that the current risk-weighted ratios, penalizes what is perceived as “high-risk”, that which is already penalized with higher interest rates and lower access to bank credit.

Sir, much more important than making sure banks have sufficient capital, is to make sure that their capital requirements do not cause distortions in the real economy, and which dooms it to disasters in which not even perhaps a 99 percent capitalized bank could meet its obligations

More than protecting banks from future crisis, we need to protect our real economy from dysfunctional banks

Sir, Philip Augar, writes “Britain´s regulators were feted for their light touch” “Salz offers a prescription to protect banks from future crisis” April 9.

What? If Augar believes regulations which intrude on the markets through capital requirements for banks which allow banks to leverage 60 times or more on their equity any interest rates paid by “The Infallible” while restricting to a 12 to 1 leverage interest rates paid by “The Risky”, are “light touch” he has just not informed himself of what has been happening.

Augar writes that the most important recommendation by the recent Salz Review, commissioned by Barclays to study its culture and business practices, is the “necessity of creating the right environment for feedback… and to question accepted wisdom constantly”.

Indeed, I have for years been trying to ask regulators about their reasons for capital requirements for banks which are based on perceived risks, when those perceived risks are already cleared for by the banks in the interest rate they charge, the size of the exposure and other terms. And I have never ever received an explanation more than the normal “more risk more capital, less risk less capital that sounds logical” mumbo jumbo.

Those differential capital requirements are distorting all common sense out of the real economy. Let us remember that much more important than to protect our banks from future crisis is to protect our real economy from being assaulted by banks made dysfunctional by regulators.

And so much more urgent than opening up the boardrooms of banks, is opening up The Basel Committee, the mother of all the non-accountable to anyone mutual admiration clubs.

FT, what Europe needs is to stop regulators discriminating against the backbone of its economy

Sir, much of the difficulties for “small and medium enterprises which form the backbone of the eurozone economy” to access bank credit in reasonable terms, has to do with the fact that bank regulators, like Mario Draghi was, foolishly believe they can make the banks safer by requiring these to have much more capital when lending to this risky backbone than when lending to “The Infallible”.

For instance, according to Basel II, if a Spanish bank lends to an AAA to AA rated German company it needs to hold 1.6 percent in capital, but if it lends to an unrated Spanish business then it needs to hold 8 percent. If you believe that this, especially in times of bank capital scarcity, does not affect banks lending decisions, perhaps you should go back to school for a refresher. 

About this regulatory discrimination I have written you hundreds of letters over many years but which for reasons of your own,perhaps quite petty ones, you decided to ignore. Indeed, “Europe needs more creative thinking” April 8, but FT needs also to report opinions in a less discriminatory way.

I assure you Sir that when the story of my travails in convincing FT about what was going on is written, some of you will have egg on your face.

The ECB, to fix southern Europe, and to not mess up the rest more, might need to fire Mario Draghi.

Sir, Wolfgang Münchau writes about the credit crunch many small companies are facing, “The ECB´s priority should be to fix southern Europe”, April 8.

Münchau suggest that ECB, Mario Draghi, should relax collateral requirement for various classes of asset backed securities, backstop a massive lending program by the European Investment Bank to co-finance loans to small and medium sized companies, or undertake directly the purchase of corporate bonds on the primary and secondary market.

May I suggest just firing Mario Draghi and many of his other bank regulatory colleagues? I mean anyone not capable of understanding how allowing the banks to hold less capital when financing “The Infallible” than when financing “The Risky”, discriminates against the latter, especially in times of serious bank capital scarcity, is simply not capable enough to help out.

Would this make the banks more risky? Of course not! What is perceived as risky does never endanger banks, only what is perceived as absolutely safe does that.

Regulators did not trust the market and imposed their own judgments on the banks.

Sir, having Lunch with FT´s Edward Luce, April 6, Michael Sandel, when discussing his book “What Money Can’t Buy: The Moral Limits of Markets” says:“Right at the heart of the market is the idea that if two consenting adults have a deal, there is no need for others to figure out whether they valued that exchange properly. It’s the non-judgmental appeal of market reasoning that I think helped deepen its hold on public life and made it more than just an economic tool; it has elevated it into an unspoken public philosophy of everything”.

"Everything"? sorry, that is not true. Had it been, we would most certainly not be having the current crisis. You see the bank regulators, they did not trust the deals the consenting adult of bankers and borrowers did, and so they imposed their own judgments.

To make sure there was not too much risk-taking going on, they designed capital requirements which allow banks to make a much higher expected risk-adjusted return on equity when doing business with “The Infallible”, than when engaging with “The Risky”.

And of course, under such distorted conditions, banks are overdosing on sovereigns, AAA rated constructions and what else is officially considered safe-haven, and lending too little to “risky” small businesses and entrepreneurs the real forces of the real economy.

Edward Luce most splendidly comments: “There is a thin line between promoting virtue and practicing tyranny.” And I would say that line might be crossed by even trying to define what the virtues should be.

Sir, the arrogance of bank regulators believing they could substitute for the market is just unbelievable. And Sir, excuse me for saying it, but the foolishness of so many, including FT, to believe they can, is just astonishing.

The world (Japan) does not need inflationary expectations it urgently needs more rational bank regulations

While the banks, by means of minuscule capital requirements for what is perceived as absolutely safe, are reigned in from taking on exposures to what is perceived as risky, at the same time central banks allow themselves to run extremely risky monetary experiments. Something is way wrong!

Sir, in “Japan embraces monetary change”, April 5, you hold that though “an impressive package of quantitative easing… may have adverse consequences… there was no alternative.

Wrong! More than anything Japan, UK and all other Basel Committee subjects too, need to rid themselves from silly bank regulations which favor “The Infallible” and therefore discriminate against “The Risky”. Get a grip on yourselves! In the real economy, what is absolutely absent is what is “absolutely safe”.

Any quantitative easing, keeping these regulations in place, only doom the banks to dangerously overpopulate whatever is perceived as “safe havens”, holding too little capital, and thereby making the world a much more riskier place.

Current capital requirements for banks represent, for the risky real economy, the biggest source of deflationary bias.

Sir, Sir Samuel Brittan, in “Forget trying to change Germany – or any other country”, April 5, in reference to what in his opinions are not sufficiently expansionary fiscal and monetary policies, for instance by Germany, writes that “the whole system has a deflationary bias when the world least needs it”. 

I will not argue against that but, let me assure you that the current capital requirements for banks, which so odiously discriminate against all what is not officially perceived as absolutely safe, represents, with respect to the real economy, that in which “absolutely safe” is absolutely absent, the mother of all deflationary biases. 

And if we cannot, as Brittan holds do much about what countries do with their own fiscal and monetary policies, and need to treat those as exogenous events, accepting or not the Basel Committee nonsense, is indeed a quite endogenous decision. The only thing needed is for one or two finance ministers to ask their regulators to explain the why of those capital requirements, and then to be prepared to act decisively upon receiving  any mumbo jumbo answers.

Mr. Barney Frank, when will you help stop that odious and stupid regulatory discrimination against “The Risky”?

Sir, Barney Frank the former chair of the House financial services committee, with relation to the Dodd-Frank Act and its implementation writes “Don´t panic financial reform is coming to America” April 4.

Mr. Barney Frank, lending your support to the pillar of current bank regulations, capital requirements for banks which are much lower for assets perceived as “safe” than for assets perceived as “risky”, this even though those perceptions are cleared for by other means, you are allowing banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible” than when lending to “The Risky”.

And, as a direct result, “The Risky” need pay the banks much more than usual in order to make up for this regulatory competitive disadvantage.

And, as a direct result you are guilty of helping to increase the gap between the haves, the old, the history, “The Infallible” and the have-nots, the young, the future, “The Risky”.

And all for nothing as major bank crises never ever occur as a result of excessive exposures to what is perceived as “risky”.

And so if the Congress, in the land of the brave, with the assistance of bank regulators, in over 124 pages of assorted regulations, cannot understand and put a stop to this favoring of the access to bank credit of those already favored, “The Infallible”, and which thereby discriminates against the access to bank credit of those perceived as “The Risky”, and who even without these regulations already have to pay more because of those perceptions, then I do indeed believe it could be time to panic.

And I say this because it is precisely in troubled times like this, with growing unemployment, that it is so important that regulators help "The Risky", like small businesses and entrepreneurs, to have access to bank credit in the best possible terms, and not to fight against that!

Bank regulators, by entitling “The Infallible”, are not behaving like good citizens, and neither is FT

Sir, in “Barclays and the entitlement culture”, April 4 you write that “banking is crucial for the functioning of the economy and banks should be good corporate citizens” and who can dispute that.

But let me again remind you, for the umpteenth time, that with their capital requirements for banks based on perceived risk, bank regulators are de-facto entitling “The Infallible” and thereby discriminating against “The Risky”, and this does not permitting banks to allocate economic resources efficiently.

And so when I compare how much FT loves to hit out at bankers, with how little it wants to criticize the bank regulators, and who should be good citizens too, you are revealing a bias that also allows us to question your good-citizen status.

There might be many reasons for wanting to feminize banks but, if it is to reduce risk-taking, then down we go!

Sir I refer to Ralph Atkins “If banks really want to be safe they should hire historians”, April 3.

Absolutely! Those historians would be able to inform you that historically the real dangers for banks have always lurked among what is perceived by the bankers to be absolutely safe, and never ever among what they perceive as risky.

Those historians might also add that one of the most important components for the nations and for their economies to develop, and move forward, is the willingness and the capacity of taking smart risks, which is the reason of course why in some churches we can hear psalms praying “God make us daring!”

Those historians might also add that there is no better way of keeping banks safe, than a sturdy and growing economy.

There might be many reasons why you would like to feminize your banks, like some of those referred to by Susan Menke in “The feminization of banking, why we need a kinder gentle banking” July 2011.

But if you want to do it in order to reduce risk-taking like the research of the Bundesbank that Atkins refers to, then you just have just had it from the very start.

In fact, even though perceived risks of bank assets are already cleared for by means of interest rate, amount of exposure and other contractual terms, bank regulators, primarily with Basel II, and following it up with Basel III, decided that those same perceptions of risk should also be reflected in the capital requirements of banks… more-risk-more-capital less-risk-less-capital.

And with that they allowed the banks to earn much higher risk adjusted expected returns on their equity on exposures to “The Infallible” than on exposures to “The Risky”.

And that, which completely ignores that smart daring risk-taking is the oxygen of any growing and sturdy economy, effectively castrated the banks and made them sing in falsetto… and down we go!

We should not go from “pseudoscientific calculation of risk-weighted assets” to Talibanesque capital requirements

Sir, currently there are many papers analyzing the impact of higher capital requirements for banks on their lending rates. Some say it will be minor, others somewhat important.

What is amazing though is that all these papers are written ignoring the fact that based on risk-weights, lower and higher capital requirements which result in differences in lending rates based solely on regulations already exist. These regulatory induced interest rate differential favor much “The Infallible” and thereby discriminate much against “The Risky”; and make it impossible for banks to allocate economic resources efficiently.

Therefore when in John Kay’s “The bungled bailouts that heralds an overdue shift in attitudes” April 4 he writes of “The combination of useless regulation, irrelevant regulations and state guarantees”, I feel I could live with all that, albeit of course much smaller and more disciplined state guarantees, as long as we could get rid of the dangerous regulations which distort.

And without those dangerous distortive regulations, the banks would not need the huge capital that some propose. Frankly ee do not need to go from one “pseudoscientific calculation of risk-weighted assets” extreme to Talibanesque capital requirements, unless of course what we really want is for private banks to disappear, taking refuge in the shadows.

PS. Why has it taken so long for Kay to call the pillar of Basel II regulations “pseudoscientific”? And why is it not in him to admit that I have been calling the Basel bluff for more than a decade now, with more than 1.000 letters to FT, like this letter to John Kay in May 2010. It is a bit petty of him, wouldn’t you say?

Current financial fragmentation is not a “north vs. south”, but an “infallible vs. risky” issue

Sir, when Michel Steen reports “Draghi faces bailout grilling” April 2, he refers to the problem of a “financial fragmentation” which has cleaved the eurozone “into two broad groups – northern countries that enjoy the official low rates and southern ones that, effectively, do not [something] known in monetary policy jargon as the impairment of its transmission mechanism”.

Forget it! This is not a south-north fragmentation. The most fundamental impairment of the financial transmission system occurred when bank regulators decided they could, for the purpose of setting capital requirements for banks, divide borrowers into “The Infallible” and “The Risky”, and all as if the banks were completely infantile and were not already taking notice of the fact that there are some borrowers riskier than others.

Fat chance Mario Draghi and ECB will be able to help “The Risky”

Sir, Ralph Atkins writes about “the challenge the ECB faces in ensuring low official interest rates feed through into lower [bank] borrowing costs, especially for job-creating small businesses in countries such as Italy and Spain”, “Blow to ECB as widening loan rates hit south" April 1.

Current bank regulations allow banks to obtain immensely higher expected risk adjusted returns on assets perceived as “absolutely safe” than on assets perceived as “risky”. The “risky” must therefore pay the banks more than usual in order to make up for that competitive disadvantage in access to bank credit created by the regulators.

Mario Draghi, the ECB president, and who as Chairman of the Financial Stability Board has been closely involved with bank regulations, has never even understood how current capital requirements cause the widening of the spreads between "The Infallible” and The Risky”

And so with respect to the possibilities of the ECB successfully meeting the aforementioned challenge I can only say… Fat chance!

To temporarily lower the capital requirements for all banks on “risky” assets, as a first step, goes in a better direction.

Sir you write “it is deeply problematic that Basel capital rules permit the use of bank´s own models to risk-weight assets, in effect making profit consideration relevant to what risk model banks chose to use”, “A timid step in the right direction”, March 28.

Yes that is indeed a problem, but the real big problem is that the rules determine capital requirements based on perceived risks, which makes profit considerations, meaning return on equity, dependent on risk perceptions which are already cleared for by other means. This, allowing the banks to earn more much when lending to the “safe”, than when lending to the risky is what creates the distortion which causes the banks to lend less or more expensive to the “risky” small businesses or entrepreneurs.

And, before eliminating that distortion, the more pressures you put on banks to increase their capital, the more you will discriminate against the “risky”, meaning against those our real economies most need to get going.

You hold that “regulators must deliver on the promise to stop banks from meeting the capital ratio by shrinking the loan book” but, what about the not lending to the “risky”?

You agree with that new banks should be given a pass on the toughest rules… because they start out with “fresh balances”, but, in fact, those who might be in most need of it are the old messed up banks, so as to help them to, in a healthy way, to better diversify into “risky” assets.

It is amazing how hard it is for the Financial Times to understand and digest the implications that those assets that cause major bank crisis, are always found among those assets which have been perceived as absolutely safe, and never ever among assets perceived as “risky”.

At this moment Sir, I have no doubt that to temporarily lower the capital requirements for all banks on “risky” assets, is a much better direction for a first step.

The Basel Committee’s capital controls, caused the capital controls in Cyprus

John Plender writes “Distortions caused by capital controls is price of stability” March 27. Absolutely, but by the same token let us remember that a dumb search for stability also caused the distortions which resulted in these capital controls.

And I refer of course to those insidious capital requirements for banks concocted by the Basel Committee, and the Financial Stability Board in order to bring more stability to the banking system, all by giving the banks extraordinary incentives to hold exposures to what was perceived as “absolutely safe” and to stay away from what was perceived as “risky”.

The Basel II regulations required for instance the Cyprus banks to hold 8 percent in capital when lending to small Cypriot businesses and entrepreneurs, a reasonable leverage of 12.5 to 1, but required holding only 1.6 percent in capital when lending to Greece, a mindboggling 62.5 to 1 authorized leverage.

We have now read reports which indicates that Bank of Cyprus' chairman Andreas Artemis handed in his resignation, along with four other directors, but the bank's board rejected the resignations. 

And this makes us ask: When are those bank regulators in the Basel Committee and the Financial Stability Board, like Mario Draghi, and who allowed banks from small Cyprus to lend to Greece as much as they did going to resign? I mean so that we too can reject their resignation and sack them.

The world does not need reckless bankers but neither does it need risk adverse bank regulating nannies

Sir, Michael Pettis, in “Why the world needs reckless bankers” March 26 writes: “Long-term wealth creation accrues most to societies in which the financial system most willingly funds risk-taking entrepreneurs. But the more a financial system is willing to finance risky new ventures, the greater the likelihood of banking instability”.

I agree with the first part, and that is why in our churches we often sing “God make us daring!” 

But with the second part Pettis describes a false dilemma, since all bank crises, with the sole exceptions of when fraud is present, have never resulted from excessive exposures to something considered as “risky new ventures” but always from excessive exposures to something erroneously considered as “absolutely safe”.

And so what we most need is to send to their homes, in disgrace, those Basel Committee bank regulators who came up with the silly capital requirements for banks based on perceived risks already cleared for… and thought that they with their “more-risk-more-capital less-risk-less-capital” had it all solved. They only doomed the banks to dangerously with little capital overpopulate the safe havens, and to avoid like never before the “risky" new ventures.

And when Pettis asks for more brutal and ruinous competition among banks I could not agree more. In May 2003, as an Executive Director of the World Bank I told regulators during a workshop on Basel II: “a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

FT, your statement on Cyprus is a disgrace and an insult to our intelligence

Sir, in your “Europe gets real – not before time”, March 26, you write that Cyprus “chose a high-risk strategy of living off a banking system far bigger than the state could support…. A metastasized bank sucked in more funds than it could usually deploy at home… and made a big bet on Greek sovereign bonds… with the complicity of leaders and the acquiescence of a population content to live beyond its means”.

Sir, set in the context of the Basel Committee of Banking Supervision having allowed, by means of Basel II, those Cyprus’ banks to hold Greek bonds against only 1.6 percent in capital, meaning authorizing a mindboggling leverage of 62.5 to 1, your statement is frankly a disgrace and an insult to our intelligence.

And let me remind you that in Cyprus, many of the accounts over €100.000 hold the salaries of those who do not have €10.000 and who of course had not the slightest idea about what lunacy some self-appointed bank regulators were up to… as neither did the sophisticated Financial Times... or did you?