August 22, 2014

The weaker their banks the lower the interest rates of their sovereigns; the sick result of risk-weighted capital requirements.

Sir, Claire Jones and Ralph Atkins report “EU borrowing costs hit new lows amid call for ECB intervention” August 22.

And they write for instance that “Portuguese yields fell to a near decade low – despite fears about weaknesses in its banking system”. Is it so hard to understand that precisely because of perceived weaknesses in the banking system sovereign yields must fall… because sovereign debt is precisely what weakened banks with no capital can hold without being required to have bank capital?

That is one of the very sick results of the very sick risk-weighted capital requirements for banks.

PS. FT reporters... dare to ask The Question!

What a waste of a good $17bn fine. Oh, if only it had been collected in voting shares of BofA.

Sir, Kara Scanell and Camilla Hall report that “BofA settles for record $17bn claim” August 22, and I cannot but reflect on what a waste of a good fine that is.

The fine is to be paid by BofA in cash and in consumer relief, all payments of course going against BofA’s capital account… in these days bank capital is already so scarce because bank regulators allowed it to become so scarce.

If we multiply be the 20 times leverage implied by the 5% leverage ratio US regulators have announced, those $17bn as capital could have supported $340bn in loans. Oh if only that fine had been collected in voting shares of BofA at current market valuations.

PS. FT reporters... dare to ask The Question!

August 21, 2014

Europe is about to throw away €489m to obtain fairly insignificant new information about its banks.

Sir, Claire Jones, Sam Fleming and Alice Ross report “Consultants to reap €490m from Europe’s banking audit” August 21.

First, we should not ignore that money, if bank capital, and if leveraged at the 3% leverage ratio allowed for banks in Europe, would permit bank credits to the tune of €16.3bn.

But we should also think about what that money can buy, and in that respect I believe it will buy regulators preciously little.

And I say that because we should not have to take a too close look at the balance sheets of banks to know that, because of the risk-weighted capital requirements they have:

Too little equity as a result of being allowed to have too little equity for much of those exposures that gort into real problems, like AAA-rated securities, sovereign like Greece, and real estate in general; and

Too much dangerously large exposures to what is perceived as absolutely safe, like the “infallible sovereigns, because those are the exposures that require the banks to have the least capital of that scarce capital; and

Perhaps even more dangerous because its implications too little exposures to what being perceived as risky requires banks to hold more capital, like loans to medium and small businesses, entrepreneurs and start ups.

What could the fees for that type of consultancy analysis be? Tops €1m? If so Europe will really be throwing away €489m in order to obtain information that on the margin seems to be quite insignificant.

And that does not even consider the fact that quite often, especially in the case of banks, the bliss of ignorance, is a quite valuable commodity.

Mario Draghi’s “Whatever it takes” should include Draghi going into early retirement.

The pillar of current bank regulations, those concocted in Basel II and surviving in Basel III, the risk-weighted capital requirements for banks, determine: less-risk-less-capital, more-risk-more-capital.

But what is perceived as “risky” is only risky, if it is more risky than what it is perceived to be. And what is perceived as “safe” is not safe, if it is less safe than what it is perceived to be.

And therefore the current capital requirements for banks based on perceived risk is utter nonsense since, if something like that could help our banks to be safer, it should at least be based not on the perceived credit risks, but on the risks of the perceived risks not being correctly perceived.

And, in such case, can someone really determine what is more risky than what it is perceived to be is, or what is less safe than what it is perceived to be is? I guess not.

But no! The Basel Committee regulators felt they had full authority to know best, and here we now have our banks being allowed to hold little capital against monstrously large exposures if these are only perceived as safe, like AAA rated securities, loans to infallible sovereigns like Greece, or real estate financing in Spain; while being required to hold much more capital against an immense number of small loans to SMEs, or entrepreneurs, only because these creditors, individually, are perceived as risky.

And that means that banks can leverage more their equity with “absolutely safe” assets than with “risky” assets; which results in banks being able to earn higher expected risk-adjusted returns on equity when lending to what is perceived as “absolutely safe”, than when lending to what is perceived as risky.

And that has of course completely distorted the allocation of bank credit to the economy… and therefore utterly diluting the significance for the economy of QEs, fiscal deficits, low interests, or any other similar stimulus.

And one of those most responsible for causing these distortions which are murdering any hopes of a sturdy economic growth in Europe, and the creation of jobs for our young, is of course the former chairman of the Financial Stability Board, Mr. Mario Draghi.

And therefore Sir, when Richard Portes now suggests that “Draghi has to do, as well as say, whatever it takes” August 21, I feel that “whatever it takes” should include Mario Draghi going into early retirement… and of course taking some other of his failed bank regulating colleagues with him.

And, if you consider that to be inappropriately harsh, then would you at least require him to publicly confront and answer this criticism of the risk-weighted capital requirements.

PS. It is a real tragedy hearing so many opining on current bank regulations, and being convinced we are now much better off with Basel III, without them having read, much less understood, what is said in that monument to mumbo jumbo document that is “The Basel Committee on Banking Supervision´s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005”. I am sure Draghi did not understand it… or at least I hope he did not… as otherwise that would be so much worse.


PS. If we do not at least learn to hold especially accountable those whose regulations have a global reach, then we are really setting us up for total disaster.

August 20, 2014

Most of the concern with derivatives derives only from the fact that “derivatives” sounds so deliciously sophisticated.

Sir, Tracy Alloway and Michael Mackenzie when reporting on the “Dangers to system from derivatives´ new boom", August 20, might not understand the most important differences between underlying markets and the derivatives traded based on these.

In a derivative, there is a buyer and a seller, and so whatever happens someone wins and someone loses and in essence it’s a wash out… of course as long as all can live up to their commitments.

But, in a real market loss, like that of a lower value of a stock, a lower value of a painting, or a lower value of a real estate, there is at that time only a loser… and no winner… that is unless you count he who might have way back earlier sold the stock.

And in this respect the trading in derivatives will depress much less the market than a depression of the values of the underlying vanilla assets.

The big fuss that is raised around the issue of trading of derivatives, again, besides the possibility of one side of the trade not living up to his commitments, has much more to do with the fact that “derivatives” sounds so deliciously sophisticated.

It is bank regulators who cuddle up to politicians and governments.

Sir, John Plender begins his “Eurozone debt problems in need of a fresh start” of August 20 with “Rarely can bond markets have taken politicians so comprehensively off the hook.”

What? Please? If there is anyone taken politicians so comprehensively off the hook – and delivering “the decline in government bond yields” which has “reduced the cost of servicing excessive public sector debt”, that is the bank regulators who decided banks had to hold much less capital (equity) when lending to governments than when lending to the “oh so risky” citizens.

And quite recently one of you in FT argued in an email to me, that it should be so since “the risk in lending to a government able to print its own money (like the UK) IS CLOSE TO ZERO” meaning with that we should trust the infallible politicians because the controlled the printing machine. Well no way Jose!

The squeeze between the leverage ratio, and the risk-weighted capital requirements for banks, intensifies the regulatory distortions.

Sir, Adam Posen opines that the Fed should “Keep rates low until the hidden jobless return to work” August 20.

I have not any strong opinions on where rates should be but, when Posen writes “After the global financial crisis, no one can dispute that central banks have to take financial stability into account when making policy”, then I must speak out again.

As I see it, it was precisely when trying to consider financial stability, and to that effect coming up with the risk-weighted capital requirements for banks, that regulators distorted the credit allocation of banks. And that made banks invest too much in safe assets, like for instance AAA rated securities, sovereigns like Greece, and real estate in Spain, causing a crisis; and way too little in lending to medium and small businesses, entrepreneurs and start-ups, causing joblessness.

And so for me more important than anything on the interest rate front, is eliminating the distortions that are impeding job creators to have fair access to bank credit.

And the saddest part of it all is that none of the regulators, in US and in Europe, seem to understand that while they are prudently imposing a minimum floor of capital by means of a leverage ratio, the constraints imposed by the risk-weighted minimal capital roof, become more severe and the distortions intensify… something which really kills the creation of jobs.

Do not reduce what is an economic crime against humanity to merely being a “petrol subsidy”

Sir, Daniel Lansberg Rodriguez, I presume my former colleague as columnist in El Universal, as I assume he has been censored too, writes about “slashing petrol subsidies” in Venezuela, “Latin America swaps its populists for apparatchiks” August 20.

Hold it there, “petrol subsidies” is not the correct way to describe selling gas at less than 1 US$ cent per gallon, at less than 1 € cent per 5 liters, less than 1 £ penny per 6 liters of petrol or gas.

To put it in its real current perspective it means that, more than US$ 2.500 are handed over to each one of the more than 5 million cars on the roads of Venezuela, representing a value that by far exceeds what the government pays out in all other social programs put together… if we now can count the gas/petrol give away as a social program.

The International Court of Justice should be able to also handle these economic crimes against humanity.

August 19, 2014

How long are individual countries to accept that risk-weighting capital requirements bullshit from the Basel Committee?

Sir, John Plender writes that “In the eurozone the banking system has become increasingly fragmented… [and that] The new parochialism is reflected in the way European governments have been encouraging banks to shrink their balance sheets while simultaneously demanding that they lend mote to domestic small business” “A threat to prosperity if the world cuts the ties that binds” August 19.

Not sure Plender has got the title right… because the global bank regulation, the “ties that bind”, that are coming out of the Basel Committee imply that the local banks are better off lending to any far away infallible sovereign, or any far away member of the AAA-ristocracy, than lending to their local medium and small businesses, entrepreneurs and start-ups… and, sincerely that does not sound right... for prosperity!

Philipp Hildebrand, unfortunately ECB’s Mario Draghi is too busy covering up for his own mistakes to have time for Europe.

Sir, Philipp Hildebrand writes “QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out”, “The Fed´s regimen will not remedy Europe´s ill” August 19.

And you know that is completely in line with what I have been writing you letters about for about a decade now. And I say this because in my letter of November 18, 2004, one which you did publish, thanks for that, I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world…How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?

Hildebrand also writes “There will be no robust European growth without properly capitalized European banks…Swift action is essential to rectify any capital shortfalls that are discovered [after] comprehensive assessment of eurozone banks”. And he also mentions the “distortions will ultimately lead capital to flow into mispriced financial assets, instead of financing investment in new productive capacity.”

Hildebrand is right but, unfortunately, he ignores or forgets, first, that those comprehensive assessment do not include analyzing what should have been on eurozone balance sheets, like loans to SMEs, and second, that when he writes “Mario Draghi is right to prioritize fixing the banks”, the sad truth is that Draghi, as a former chairman of the Financial Stability Board, is too busy covering up his responsibilities in creating the current mess to have time for Europe.

PS. The day I write the book on how my arguments about how faulty and dangerous risk-weighted capital requirements for banks are were ignored by FT, and by many of its columnists and reporters, your prime line of defense will be exactly the same as the Basel Committee´s, namely people finding it hard to believe some “experts” can be as dumb as that. Am I impolite? Come on, I was extremely polite, outright nice, for years.

August 18, 2014

Do FT reporters really understand that capital, as in capital requirements for banks, refers not to general funds but to equity?

Sir, Christopher Thompson reports “Europe´s banks set for €250bn injection” August 18.

And that money, which according to Mario Draghi could eventually increase to €850bn, is to counter the fact that “Overall eurozone banks have decreased lending to the region´s businesses by €561bn since 2009 according to research by RBS, as they seek to raise capital and cut bloated balance sheets”

And I wonder if it is really understood that what the European banks need for renewing lending, to for instance SMEs, much more than that kind of cheap ECB funding, is the bank equity that regulators require them to hold especially much of when lending to those deemed “risky”, as compared to the equity banks need to hold when lending to those deemed “absolutely safe”.

Could the confusion result from that, for instance FT reporters, think of “capital” more in terms of general funds and not in terms of equity?

Could as it would seem Mario Draghi be equally confused about it, even though he was the chairman of the Financial Stability Board? Holy moly!

Europe, if you want to avoid death by attrition, you need to trust your bankers more than your bank regulators.

Of course it is tragic when banks collapse because of too much risk taking, usually on something they perceive as absolutely safe. Then, there is a big setback and lot of tears. But, in the long run, because your banks have also taken some constructive risks on those perceived as risky, like medium and small businesses, entrepreneurs and start-ups, net of this setback, you have at least moved forward.

But, when your current bank regulators concocted their capital requirements based on perceived credit risk, not only did they assure that banks will take even larger risky exposures on what was perceived as absolutely safe, but also that your banks would not be taking the sufficient constructive risks on the risky, something which therefore sets your economies on the road of attrition. And, so when the inevitable collapse occurs, when once again something perceived ex ante as absolutely safe turns out ex post to be very risky, not only will the pain be larger, but the setback will also be a net setback.

And Sir, set in this perspective, all usual discussions about what the ECB should or should not do which do not include getting rid of the current bank regulations, like that of for instance Wolfgang Münchau’s “Draghi is running out of legal ways to fix the euro” of August 18, are, forgive the expression, like pissing somewhat outside the pot… excuse me I mean outside the chamber pot.

I cry for you Europeans, if you can’t see where the Basel Committee’s and the Financial Stability Board’s obsessive risk aversion substituting for reasoned audacity is taking you.

Let me be absolutely clear, something else bad might have happened to your banks but absolutely not what happened to them, had there been no risk-weighted capital requirements which allowed banks to earn much higher risk-adjusted returns on their equity on assets like AAA rated securities, infallible sovereigns like Greece or real estate like in Spain.

Let me be absolutely clear, had there been no bank regulations the banks would never, at least knowingly, been allowed by the markets to leverage remotely as much as they were allowed to do by the regulators.

August 17, 2014

Friend-of-the-bank’s-owner ratings would be more useful than credit ratings when setting capital requirements for some banks.

Sir I refer to James Crabtree´s lunch with Raghuram Rajan, “Everyone expects you to be a prophet” August 16.

In his famous speech at Jackson Hole 2005 Raghuram Rajan said: “Something as intimate as credit risk is now being traded with strangers. In fact the same way as parent are asked ‘Do you know where your children are?’, bankers nowadays are asked ‘Do you know where your risks are held’”?

That was a somewhat incomplete observation because just as many parents would have answered “with their nannies”, bankers would then need to answer “in the hands of very few human fallible credit rating agencies”, because that was what Basel II approved in June 2004, instructed banks to do.

And of course, as was doomed to happen (see my letter in FT January 2003), soon thereafter some AAA ratings awarded to some securities guaranteed with mortgages to the subprime sector, became the nail in the coffer of those financial markets which even Rajan at that time called to be “in extremely healthy shape”.

And Rajan also concluded his speech admonishing regulators to allow “markets to signal the winners and losers” without reflecting that when it comes to the allocation of bank credit the risk-weighted capital requirements for banks are precisely distorting those market signals.

And I say all this because when now Rajan is quoted saying “Central bankers have had enormous responsibilities thrust on them to compensate, essentially for the failings of the political system”, he and we should not forget that central bankers, in their close nexus to bank regulations, also hold enormous responsibilities for the current failings of the banking system.

But I also say this because when I read Rajan complaining about “Many businesses groups treat public sector banks as their equity kitty”, and which of course is the same as the problem of private owners of banks also treating these as their equity kitty, it occurred to me that friends-of-the-bank’s-owner ratings could prove to be more useful than credit ratings when setting the banks´ capital requirements.

PS. Afterthought. Should not owner-controlled-banks and management-controlled-banks merit different regulations?

August 16, 2014

How do we not forget or ignore the creative sparks of the past?

Sir, Gillian Tett asks “So what inspires the ‘aha’ moment? And can anybody set out to replicate moments like this in other areas?”, “How to ignite creative spark” August 16.

I would say that even as that is an important question, even more important is the one of “How do we not forget or ignore the creative sparks of the past?” 

Frank H. Knight, in 1921, in “Risk, uncertainty and profit” reminded us of that Hans Karl Emil von Mangoldt, in 1855, gave the example of how “the bursting of bottles does not introduce an uncertainty or hazard into the business of producing champagne; since in the operations of any producer a practically constant and known proportion of the bottles burst, it does not especially matter even whether the proportion is large and small. The loss becomes a fixed cost in the industry and is passed on to the consumer, like the outlays for labor or material or any other.”

And yet, around 150 years later, our too creative bank regulators decided something akin to that if a bank was going to produce champagne using “risky” champagne bottles, it needed to hold much more capital (equity) than if it was going to produce milk using safer milk bottles… and all as if the banks did not already internalize in their interest rates, the size of exposures and other terms, the ex ante perceived credit risks of their borrowers.

And so, ignoring von Mangoldt’s spark, meant that regulators forced the banks into a double consideration of perceived credit risks, something which of course distorted all common sense out of the allocation of bank credit in the real economy.

August 15, 2014

Why does FT insist on wasting scarce quantitative easing, before removing the roadblocks in Europe?

Sir, again, sort of for the umpteenth time, you insist in that “Europe now needs full-blown QE” August 15.

Although you do not want to confess it, perhaps because for some really petty reasons, I know you are perfectly aware that the risk-weighted capital requirements for banks, acts like a roadblock that would stop any liquidity provided by quantitative easing, to reach by means of bank credit, those Europe most need to reach, namely medium and small businesses, entrepreneurs and star-ups.

Why would you want to waste what must be some quite scarce European quantitative easing before removing that boulder?

The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.

Sir, I refer to Christopher Thompson´s “CoCo sell-off uncovers high yield bargains” August 15, and which title surprises a bit as I did not know FT provided specific investment recommendations.

But that said, whenever we read about “underlining investor willingness to shoulder more risk in their hunt for higher-yielding bank assets” you can be absolutely sure that all risks have not been disclosed by the seller of that asset… so what the investor is really willing to shoulder is a little bit more of uncertainty or looked at it from the other angle, or just willing to trust his advisor a little bit more.

What has happened to CoCos is clear. Investors had priced in the risk that deteriorating market conditions could force the conversion of CoCos into bank capital… what they had not priced was the fact that conversions could happen as a result of bankers´ and regulators´ whim playing around with the current capital requirements for banks. In fact, regulators had not thought of this, and also just recently woke up to that fact.

PS. In case you do not remember I hereby send you the link to what George Banks had to say about CoCos.

August 14, 2014

Corporations are not part of the community... and should not be allowed to dilute citizens´ tax representation

Sir, Michael Skapinker holds that “Business has lost its place in the community” August 14, and frankly I wonder if business ever had a place in the community. I mean, when a corporation does good things for the community, that is not really out of a sense for the community but because it is building up its image… a sort of clever advertising expense.

No, communities should be about people, and in this respect the tax on corporations should be 0%, because corporations should never have the possibility to dilute the tax representation of the citizens. In other words it is for the owners of the corporations to have a sense of community.

And with respect to Skapinker´s comments on bankers and their manipulations I agree…slap them hard on their fingers. But, Skapinker should not ignore that the manipulation of how bank credit is allocated in the real economy, performed by regulators with their risk-weighted capital requirements for banks, has been and is much more harmful for the society than any of the other bank manipulations currently spoken of… and in this respect Mark Carney´s behavior, as the current chairman of the Financial Stability Board, is “highly reprehensible” too.

August 12, 2014

We must stop building that mountain of dangerous elusive safety that is sure to crumble and fall on us.

Sir, I refer to Tracy Alloway’s and Michael MacKenzie´s “Finance: The FICC and the dead” August 12.

In October 2004, in a formal written statement delivered at the World Bank as an Executive Director, I warned

“I believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

I have of course been much ignored ever since, as it is not considered comme il faut to be too right especially in the company of credited experts.

But Sir, now we are back to that period, and again… and it is not that the waves have disappeared… it is that the wave is building up… Just you wait ´enry ´igggins, just you wait, until it breaks.

When bank regulators with their risk-weighted capital requirements of Basel II basically ordered banks to stay away from what is "risky"… and now make those orders even more imperative with the liquidity requirements in Basel III, and when we now read about asset managers “steering clear of certain bonds, such as asset-backed instruments whose so-called secondary markets are not deep” one thing is clear… and that is… the world is trying to build a more and more, a higher and higher, mountain of safe assets.

Perhaps something on its very top and its very center might survive, but the rest is going to come crumbling down… sooner or later, there is just not enough safety material to go around for that kind of mountain.

They seek it here. They seek it there. Those Basel bank regulators seek it everywhere. Is it in heaven? Is it in hell? That damned elusive bank stability… (which does not even have the decency to rhyme!)

August 09, 2014

SEC, FDIC Worry less about bank´s living wills and more about how banks live!

Sir, Lex reports on the Fed and FDIC wanting “Bank’s living wills”, August 9.

Not only do I find bank living wills somewhat preposterous, as it would be up to the inheritors to decide what to do, not to those administrators of a bank that when a collapse might occur might have de facto been proven very bad.

And, what if the SEC and FDIC do not like the wills… will they pressure the banks so much that they might collapse because of that?

No, much more important than what happens to banks when they are gone is what they do when they are alive and kicking… and now, thanks in much to the distortions created by the regulators with their risk-based capital requirements, the banks are not allocating credit efficiently. And… excuse me, that´s a far more serious problem.

Our teenagers’ vampires might end up sucking our baby-boomer blood

Sir, Ms Gillian Tett commenting on the books current young read, like those with vampires, writes: “teenagers now face a world where boundaries are blurred… lines between childhood and adulthood, good and evil, friend and for, male or female are no longer clear cut”, “Teenage books with added bite” August 10.

That it is indeed scary stuff. Not so much because of boundaries being blurred, but for the fact that since humans cannot travel through life without some kind of boundaries, we are not really clear about what the new boundaries might look like… perhaps books on vampires going after baby-boomers’ blood will hit the charts soon?

But when we on the opposite side of the paper also find Christopher Caldwell having us pray not to fall in hands of a justice which allows “guilty rich people buying their way out of convictions and innocent rich people being shaken down by zealous prosecutors”, something for which we clearly must share somehow some blame for… we also know that such sucking our baby-boomer blood would not be totally undeserved, “Ecclestone’s cash tarnishes the court that sets him free”.

August 08, 2014

Prudence is ok. But prudence on top of prudence is very dangerous too!

Sir, William Rhodes holds that “Without prudence as a value we are all at risk” August 8. Absolutely, that is only as long as we are prudent when being prudent. Let me give you the mother of examples about what I mean.

Bankers already looked at credit risks when deciding interest rates, amounts of exposure and other terms of their financial assets. And they did so in a quite risk adverse way; if we remember Mark Twain’s saying “A banker lends you the umbrella when the sun shines and wants it back when it looks like it is going to rain”.

But then came the regulators and, in the name of their prudence, set also the capital requirements for banks based on the same perceived credit risks… something which suddenly allowed banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible” than when lending to “The Risky”… and which of course resulted in distorting the allocation of bank credit in the real economy.

And so if we begin loading prudence on top of prudence, especially on top of the same prudence, that is when we enter into that Roosevelt territory of having nothing to fear as much as fear itself.

These nanny regulators from Basel, who basically force bankers to eat broccoli when they eat spinach and reward them with ice cream when eating chocolate cake, have now turned our economies into obese monsters, with none of the muscles provided by credits to the risky medium and small businesses entrepreneurs and start ups.

Mario Draghi, Europe’s recovery might be rolling on somewhat… but it’s definitely not on track

Sir, Claire Jones reports “Draghi insists recovery on track”, August 8.

Draghi has clearly no idea of what he is talking about. The European economy might be moving on by some remaining inertia, but it is most definitely not on track… as it has been forced off the tracks by dumb bank regulators with their risk-weighted-capital requirements based on perceived credit risks.

That Europe accepts to have someone so completely unaware of the difficulties these capital requirements cause for medium and small businesses, entrepreneurs and start-ups, to access bank credit in fair terms as president of the European Central Bank, is mind-blowing.

Of course, if Draghi does understand the distortions in credit allocation that are produced, but still think that the economy can be on track… then that would be even more mind-blowing.

By George I think FT’s got it: “A ship in harbor is safe, but that is not what ships are for” John A Shedd, 1850-1926.

Sir you write: “politicians… need banks to lend money and support economic growth (rather than inventing esoteric products to boost their bonuses). A bank that never takes any chances is not doing its job”, “Complicated banks face complex rules” August 8.

And so, are you finally waking up to the fact that banks have other purposes than not just going belly up and costing taxpayers some money? About time, why did it take you so long?

The regulators though still seem to be sleeping on it, as they insist with their risk-weighted capital requirements for banks… which are based exclusively on credit risks already cleared for by other means, and not having one iota to do with any lending money or economic growth purpose... much the contrary as these requirements profoundly distorts the allocation of bank credit.

August 07, 2014

Where would our economies be without chancers, hustlers and other wheeler dealers?

Sir, John Gapper rightly nudges the question of where our economies would be without chancers, hustlers and other wheeler dealers, “Ecclestone is a chancer who has earned a final chance” August 7.

And though we would surely not like to see one of our daughters marrying one of these we regard as social misfits, there is no doubt that without them our economies would go stale.

Think of it. How much capital is currently not in action, giving jobs to many, only because someone convinced its owners of being able to make huge returns with no risks? Are we instead to have all our savings only safely increasing the value of the Picasso’s hanging on our walls? 

But, even so, I abhor the risk-weighted capital requirements for banks based on perceived credit risks. 

With these we are giving special access to bank credit to those who specialize in dressing up as “absolutely safe”… like the infallible sovereign entrepreneurs. 

But why would we want to withhold fair access to bank credit for the “risky” medium and small businesses, entrepreneurs and start-ups, with other type of knowledge and drive? That sounds like an unnecessary limitation which can’t really be good for anyone… in the long run.

There are two entirely different kinds of risks. Investing in “risky”, and excessive investment in “safe”

Sir, Tracy Alloway reports that, as a result of “low volatility” which sets off ‘feedback loop”, “Banks warn of ‘excessive’ risk taking” August 7.

Excessive risk taking comes in two forms. Investing in something ex ante perceived as risky, and the most dangerous one, investing excessively in something, ex ante, perceived as “absolutely safe”.

It is important to make that distinction because while other investors might be running more of the first kind of risk, banks, especially because of risk-weighted capital requirements, are much more exposed to the second kind of risk.

For the society the second kind of risk is of course much more dangerous, since excessive investments in what is perceived as “absolutely safe” will take us nowhere.

August 06, 2014

Two questions Mr. Kay, on “strict liability” and bank regulators.

Sir, John Kay makes a convincing case for applying “strict liability” to bankers, especially when ending with that clarifying principle “if you take the bonus, you take the rap”, “If you do not want to do the time, prevent the crime” August 6.

That said I have two questions to Kay with respect to “strict liability” and their applicability to bank regulators.

First, suppose a regulator knows very well that allowing for lower capital requirements for banks on assets perceived as absolutely safe than on assets perceived as risky could, in the long run, risk the buildup of dangerously large exposures to what is now perceived as safe, but he allows it anyhow because he does not want to be held responsible for any bank failure under his watch…. are we talking about something for which “strict liability” could be relevant?

Second, if you as a bank regulator are explained something, like that which is contained in the Basel Committee on Banking Supervision’s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, and you do not understand it, but yet, without asking for clarification, because you do not want to see as if you do not understand, you approve of any regulations based on that information, and disaster ensues… are we talking about something for which “strict liability” could be relevant?

In the case of bank regulators, should not something like “if you take the promotion, you take the rap” also apply?

Are not living wills for banks’ just a nonsensical show to show off that something is being done?

Sir, Gina Chon and Tom Braithwaite report that Fed and FDIC demand better unwinding plans and are split over possible penalties “US rejects bank’s living wills” August 6.

And FT defines on its site those living wills as “Detailed plans that would enable banks to stipulate in advance how they would raise funds in a crisis and how their operations could be dismantled after a collapse”.

Frankly is not the whole concept of living wills for banks’ designed by the bankers themselves after a collapse just a show to show that the regulators are doing something?

I mean if I was a regulator, and wanted to go down that route, I would at least have a third party to look into what could be done in the case a bank passed away, and now and again confront the managers of the bank with those plans, in order to hear their opinions.

For instance there is a world of difference between a living will where the dead are going to be the own executors of the will, and one in which the dead will be dead and others will take care of the embalming.

And talking about that is it not the Fed or the FDIC that should state what contingent plan they really want… one where the bank is placed on artificial survival mode, and for how long, or one where it is sold in one piece, by pieces or even cremated?

To me it would seem that the Fed and FDIC need to give much clearer instructions about what they want those bankers currently working under the premise the bank will live on forever to do… as I can very much understand them being utterly confused.

August 05, 2014

How long have our economies got left with our banks having been injected with the venom of cowardice?

Sir, Martin Arnold and Tom Braithwaite report “HSBC’s warns of risk-aversion” August 5.

Of course you know very well that I hold that excessive risk aversion is what most threatens our economies but, to read of banker like HSBC’s Douglas Flint expressing concerns about “a growing danger of disproportionate risk aversion creeping into decision making of our business”, without mentioning the largest source of risk aversion for banks, the risk weighted capital requirements for banks, is maddening.

The disproportionate risk aversion of bank regulators, have banks now earning much higher expected risk adjusted returns on their equity on assets perceived as safe, which they can leverage much more, than on assets perceived as risky. And that has injected into our banks the venom of cowardice…

How long our economies can be sustained without medium and small businesses, entrepreneurs or start-ups having fair access to bank credit is hard to say, but one thing is really sure, if that risk aversion persists, our economies will go down down down.

Douglas Flint, as a banker might very well be doing his fair share of dressing up what is risky as more safe but, as a citizen, as a father, possibly even as a grandfather, and as someone who should understand the meaning of risk taking, he should be ashamed of himself. What is in it for our descendants if our generation refuses to take its proportionate and necessary share of risks required for moving the world forward?

And that, of course, goes also for many of you in FT too.

The awful truth is that risk weighted capital requirements for banks, are robbing our young of their horizons.

August 04, 2014

Joseph Stiglitz, like many other professors, has no idea about life on main-street.

Sir, Joseph Stiglitz writes that in Africa “even countries that have introduced reforms and achieved high growth have not generated enough formal sector employment to absorb the growing labour force” and suggests that “the US should encourage foreign direct investments into labour intensive light manufacturing and agro-processing industries” “A new American strategy for business in Africa”, August 4.

Sadly professors, like Stiglitz, often lack one vital qualification when it comes to giving this type of advice… namely any personal real life experience of what it takes to get a business going.

For instance, Stiglitz has probably never accompanied a small entrepreneur to a bank to apply for a loan, and seen how hard that is, and seen how the applicant is often forced to distort facts to even have a chance to get that loan he believes might change his future. And Stiglitz has most certainly no idea of how those travails have been made even harder by the introduction of the risk-weighted bank capital regulations.

And I hold that as a fact because the Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, and of which Stiglitz was its chairman states “Variable risk weights used to ascertain appropriate capital adequacy standards can have strong incentive effects. Regulators need to be aware of distortions in capital allocation when provisioning and capital adequacy requirements do not accord well with actuarial risks”.

And that indicates they have no understanding that these capital requirements distort even though actuarial risks have been perfectly indentified, for the simple reason that these actuarial risks are already being cleared for by interest rates, size of exposure and other terms… and which translates directly into an added regulatory odious discrimination against the fair access to bank credit of those perceived as risky.

If Stiglitz understood how risk-taking is the oxygen of development, and knew how many African countries have or are in the process of implementing a developing strategy that is based on making banks more risk-adverse than they already are, he might cry… but as I said, for that, you must get out and do some walking on main street first.

PS. By the way, as rough as things are on many main-streets right now, I would not be that fuzzy about jobs having to be formal… even informal jobs will do for the time being... who knows, even informal jobs can carry the seed of a formal job.

Does not the price increases suffered by the Gatsby count as inflation too?

Sir, Wolfgang Münchau refers, as so often is done these days, to the problem of low inflation, and which has even caused “Germany´s conservative central bank to call for wages to rise faster than in the past”, “A desperate Bundesbank has abandoned principle” August 4.

But the fact that there is no inflation recorded could also be a result of how we measure it. For instance, if our inflation basket included assets Plutocrats buy, like stocks, prime property, paintings, collectibles and other fancy stuff, we would certainly observe a quite high inflation… something that by the way should be expected considering how money, assisted by quantitative easing and fiscal deficits, has primarily flooded their pockets.

And really, talking about money which has lost purchasing power… what about all those savings that now buy so much less because of the low interest rates?

And so of course there is inflation… but perhaps not where some would like it to be… though I must confess that, inflation for the plutocrats and no inflation for the poorer, does indeed sound like a Piketty designed plan to combat inequality… could it be a targeted financial repression?

No!, as I have mentioned so many times before, much more important is it for Münchau, and for the Bundesbank, to take some time out to reflect on how the European economies are becoming weaker and weaker, as a result of the risk taking austerity imposed by the Basel Committee´s risk-weighted capital requirements for banks.

August 02, 2014

And stopping “crime”, if the area has not been correctly identified, stops paying too

Sir, Tim Harford writing about crimes and incentives after the London riots mentions how “a mugger or a burglar in an area… entirely unaffected by the riots might still feel conscious that the mood of the judiciary had changed”, “When crime stops paying” August 2.

In 2002, just 48 hours after arriving to Washington, I was robbed at knife point, about four blocks away from the Whitehouse. I asked the policeman who helped me out whether it was not safe there, and he replied that since visitors don´t go so often to where these muggers reside, they have to come to where the market is. And as an economist I understood it… but it also comes to show that in terms of law enforcement it is not that easy to pinpoint down which are the really relevant areas.

For instance bank regulators have clearly difficulties with that. As they become obsessed with banks lending too much to where it was risky, they told the bankers that, if they insisted in doing so, they would have to put up a lot more capital, which meant less return on their equity and, consequentially, of course, smaller bonuses.

But unfortunately, when doing so, regulators confused the ex ante and the ex post risks areas, and so this only exasperated what bankers have always done which gets them into trouble… namely to lend too much to something perceived as absolutely safe.

And so regulators, in retrospect, only aggravated the crisis by having the banks being caught by bad news in the ex post area with their pants really down… I mean with especially little capital. And besides, since banks stopped visiting the areas considered ex ante as “risky”, the whole economic region started to suffer and crumble.

PS. I explained to the kind policeman who even instructed a close by liquor-store to “give him something strong”, that unfortunately I was not used to this type of events, since I came from Caracas Venezuela. I immediately felt better… and not just because of the “something strong”.

Currently both bankers and regulators are driving the bank cars simultaneously, using the same instruments and data.

Sir Tim Harford discusses the future of driverless cars in “Pity the robot drivers snarled in a human moral maze” August 2. And he left out some angles that I would have liked him to have explored.

For instance, when he talks of hiccups, human guided cars or computer guided cars accidents would we be talking about the same type of accidents… could not it be foreseeable that a computer glitch resulting accident could cause horrors way beyond what the worst pile up crashes often produced by bad weather conditions do? I mean something like the pile up bank assets crashes caused by having banks following the opinions of only a few credit rating agencies… in this case of agencies that on top of it all are humanly fallible?

And how does Harford´s reference to a person “being so arrogant as to think he could drive without an autopilot”, stand up against the constant badmouthing of bankers who did little but to trust their autopilot installed by their regulators?

But Harford is indeed right on the spot when he ends by mentioning “the question of what we fear and why we fear it remains profoundly, quirkily human” Is not a great example of that the fact that bank regulators who should in all logic fear the most what bankers do not fear, decided to base their fears on exactly the same ex ante perceptions of risks… and concocted their risk-weighted capital requirements?

In fact taking the analogy of driving a car to banking, what we now have is perhaps the worst of all worlds, namely bankers and regulators driving simultaneously using the same instruments and the same data... Can at least somebody please make up his mind about who is in charge, so that it is clear who or what we should blame in case of an accident?

August 01, 2014

As oaths come, a bank regulators´ is much more important than a bankers´.

Sir, Gary Silverman refers to the possibility of bankers, as masters of the universe, having to take an oath of office, “A cynic´s case for the bankers´ oath” August 1.

It could not hurt but, long before that it is more important that bank regulators take one… they are after all public servants… at least in concept.

What could be included in that oath? Perhaps the following could at least be a good start.

“I swear that regulating I will never forget banks have a purpose that goes way beyond guaranteeing their existence. In this respect I accept that helping banks to fail expeditiously, before they grow too large, is part of my responsibilities. I also swear that I will not believe myself to be a master of the universe, and for instance distort the allocation of bank credit through the use of credit risk weights that only very partially reflect the purpose of banks.

I also swear I will remember that all major bank crises have always resulted from excessive exposures to what was erroneously perceived as absolutely safe, so as to never confuse my own ex ante monsters with real ex post dangers”

121 words… too much? Then perhaps at this time, with lack of jobs menacing our children perhaps just having them quote John Augustus Shedd, 1850-1926, would do. “A ship in harbor is safe, but that is not what ships are for

July 31, 2014

FT, How can you allow such a blatant misrepresentation of financial history?

Sir, Alice Ross reporting on the Landesbanks in Germany refers to “the disastrous lead in to the financial crisis that saw ill advised investments in US mortgage backed securities”, and it is just another monstrous example how financial history is being miswritten, “Bank balance” July 31.

And we are also told of how former or current board members… went to trial accused of failing to disclose the risks involved in buying certain asset-backed securities in 2005.

If I had been the defense lawyer at that trial, I would just have called one of any German bank regulators who had been involved with the approval of Basel II in June 2004, and asked the following questions.

Q. Is it not so that a bank was authorized to acquire AAA rated securities against only 1.6% in capital meaning they could leverage their equity 62.5 times to 1.

A. Yes

Q. Is it not so that allowing such a monstrously high leverage signified that the regulators trusted almost unlimited the capacity of the credit rating agencies?

A. Yes.

Q. Would it have been reasonable for a German bank to travel to US and go through the AAA rated securities in detail knowing that the credit rating agencies which the regulators so much trusted had already done so?

A. No.

Q. If those securities had turned out to be worthy of the AAA rating but the directors of one bank had foregone the opportunity to earn its shareholders huge returns on equity while other banks were doing so, would the shareholders not have thought of firing these directors?

A. Yes.

Your honor, for the bank to under those circumstances have purchased those AAA rated securities was not in any way shape or form an ill advised investment. What was though clearly ill advised, were these bank regulations. I rest my case.

Who is going to prosecute the bank regulators?

PS. It was absolutely clear something like this had to happen… You yourself published a letter of mine in January 2003, in which I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

There´s no bank lending to non-financial corporates as it requires the most of what is most scarce in Europe, bank capital.

Sir, Sarah Gordon writes that in Europe “bank lending to non-financial corporates has, almost unbelievably, been contracting for the past five years”, “Easy credit conditions are benefiting only the few” July 31.

What is unbelievable with that? As I have explained in hundreds of letter to you and your reporters for about soon a decade, bank lending to non-financial corporate requires, because of the risk-weighted capital requirements, the most of what is most scarce in Europe, namely bank capital… and so of course there is no lending. It is as easy as that!

And that is why liquidity does not reach where it is most needed. And the real problem is that some, like Mario Draghi, do not want to recognize how stupid these bank regulations are.

July 30, 2014

Mr. John Kay, there is a vital document you must read, in order to understand what is happening.

Sir, it is very hard to understand John Kay´s “Why there is never such a thing as a single true and fair view”, July 30, unless you begin with the premise that Kay does not understand the background or the implications of what he writes either.

For instance Kay says: “If banks had large portfolios of uncorrelated loans, it might make sense to value that portfolio at 99p in the pound: but, as financial institutions discovered yet again in 2008, the outcomes of a portfolio are generally closely correlated”.

Indeed… but Mr. Kay should know by now that bank portfolios had no chance in hell to be uncorrelated, as they had to forcibly be closely correlated to what was perceived as absolutely safe, because of the risk-weighted capital requirements for banks.

How really sad it is that a knowledgeable and influential man like John Kay does not find the time to read the most important document that pertains to current bank regulations, namely the Basel Committee’s “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” of 2005.

Had he read it he would see that in that document the Basel Committee confesses that the risk-weighted capital requirements are “portfolio invariant”… for the extremely poor reason that because otherwise, bank regulators would not be able to handle the equations.

Holy moly!

No Mr. Robin Harding. Fear of risks, dooms the economy to stagnation.

Sir, if I understand it correctly, Robin Harding wants us to pick one of two possibilities. That in which “the interest rates are too low, but the economy is fundamentally healthy, or the bleak one, in which case “central bankers have written the right prescription, but the patient´s condition remains perilously weak”, “Fear of bubbles hides the dangers of stagnation”, July 30.

Not so Mr. Harding! Fears, by regulators, of banks lending too much to what is perceived ex ante as risky, as if such a thing has ever happened, has doomed the world to stagnation. When banks, by means of risk weighted capital requirements are told they can earn much higher risk-adjusted returns on equity when lending to what is perceived as absolutely safe, there will not be the sufficient lending to what is perceived as risky, like SMEs and entrepreneurs, for the economy to grow.

No risk-taking... no growth... it is as simple as that!

Wow! Did someone from Kremlin infiltrate the Basel Committee for Banking Supervision to seed bad advice?

Sir Courtney Weaver and Kathrin Hille report from Moscow that “Yevgeny Fyodorov, a deputy for the pro-Kremlin party United Russia… claimed US consulting and audit firms were working under the orders of their governments and could cause ´real damage´ to the Russian state by purposefully giving out bad advice.” “Duma hits back with proposal to ban Big Four auditing firms”, July 30.

Oh boy! That is precisely what I, in jest, implied in a blog of many years ago, when I suggested that a disappointed and revenge wanting Kremlin retiree, Carlos Molotov Pavlov, had infiltrated the Basel Committee for Banking Supervision in order to seed advice that would bring down the banking system of the west.

FT, Sir I shiver at the thought of what you would think to be “not-light-touch” bank regulations.

Sir, I refer to your “Lloyds and lessons from past scandals” July 30.

Sir we have bank regulators who told the bank: “Here you have ultra low capital requirements for whatever is perceived ex ante as absolutely safe, so that you can make ultra high returns on your equity financing that, and so that you stay away from financing those risky SMEs and entrepreneurs, even though these need and could do the most good with bank credit”.

In other words… the mother of all capital controls.

And in “Lloyds and lessons from past scandals”, July 30, you refer to this as “the ‘light touch’ regulation that characterized the pre-crunch period”? I shiver at the thought of what you would call firm handed regulations.

PS. I was recently censored, in Venezuela. But you know Sir, that is not the first time… so thanks for the preparation :-)

Luke Johnson. Who would be your favorite contender for the title of the mother of all start-up slayers?

Sir I would not argue one iota with Luke Johnson’s “Contenders for patron saint of start-ups” July 30.

That said it would be interesting to see who he opines is the number one contender for start-ups' slayer?

Clearly it has to be one prominent bank regulators, like Mario Draghi, Stefan Ingves, Mark Carney, Jaime Caruana or any other of those who concocted the venom against star-ups we know as the risk weighted capital requirements for banks.

Because of that the start-ups, usually perceived as “risky”, relatively to those perceived as “safe”, now have to pay even higher interest rates, get even smaller bank loans and have to accept even harsher terms than they used to.

And sadly the only result of that mumbo-jumbo regulation is that now our banks run the risks of too much exposure to what seems absolutely safe, while renouncing to the benefits of diversifying when lending to those who seems risky.

There is Sir, as you surely must understand, no future in such silly risk-aversion!

What if an Eric Schneiderman dared to stand up against those causing the greatest unfairness in the financial markets?

Sir, Kara Scannell, James Shotter, Daniel Schäfer and Alice Ross report on how New York attorney-general Eric Schneiderman is investigating unfairness in the financial markets, “Banks hit by dark pools probe” July 30.

But Sir, you know that those perceived as “absolutely safe” from a credit risk point of view, and who are therefore already the beneficiaries of lower interest rates, larger loans and on softer terms, get even lower interests, even larger loans and on even softer terms, because regulators allow banks to hold less capital against assets deemed as absolutely safe.

And you also know that those perceived as risky from a credit risk point of view, and who are therefore already paying higher interest rates, getting smaller loans and must accept harsher terms, are charged even higher interests, get even smaller loans and must accept even harsher terms, only because regulators require banks to hold more capital against assets deemed as risky.

And so I ask you Sir, does not the regulatory distortion produced by the risk-weighted capital requirements cause more unfairness in the capital markets than all the dark pools, and all the high frequency trading, and all the Libor manipulation and all the other misdeeds currently scrutinized put together? Of course it does!

What a shame there are no Attorney Generals willing to stand up to bank regulators discriminating based on perceived risk (in the land of the brave) … even when equipped with such formidable tools as the Equal Credit Opportunity Act – Regulation B. and all other non-discrimination and non-profiling rulings.

July 28, 2014

The collateral damage produced in the economy by faulty bank regulations, was mostly for the lack of a purpose.

Sir, Wolfgang Münchau writes “The west risks collateral damage by punishing Russia” July 28. That could be… but at least that would be the consequence of a purpose.

What is truly sad is to see that all collateral damage in the economy resulting from the distortions originated when favoring with ultra small capital requirements for banks assets perceived as absolutely safe, was more for the lack of a purpose.

John Augustus Shedd, 1850-1926 wrote “A ship in harbor is safe, but that is not what ships are for”

And though that clearly goes for banks too, that was something completely ignored by bank regulators.

Münchau writes “If you want to know how sanctions will affect the global economy, it is best to follow the money”. Indeed, and why does he not follow the money to understand where the global sanctions against the risky having access to bank credit took us? To lending too much to Greece? To investing too much in AAA-rated securities? To financing too much real estate in Spain? I believe so, but since he keeps so mum on it, what does he believe?

July 27, 2014

“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd, 1850-1926.

Sir, (and you other there) why is it so hard for FT and for regulators to understand that what applies to ships also applies to banks? 

The motto of the British Special Air service its “Who dares win”, and your own includes “Without fear”… and yet you find nothing wrong with regulators senselessly making banks avoid risks by allowing them dangerously immense leverages and therefore high risk-adjusted profits on what is ex ante perceived as “absolutely safe”… but which of course presents no absolute certainty about how it will turn out ex post.

The risk weighted capital requirements for banks has effectively destroyed the credit transmission mechanism to the real economy of the banks. Sir, why is that so hard to understand? 

FT, are you really proud of having your bank regulators turning your daring British banks into sissy banks?

PS. “Play the game for more than you can afford to lose… only then will you learn the game” so said also your very own Winston Churchill.

July 26, 2014

The assistance by tech jerks could increase the Piketty inequalities.

Sir, Tim Harford defends the apps for obtaining a “reservation at a popular restaurant… something that have always been valuable but they have been hard to buy and sell” arguing that “none of the people hoping to secure a reservation at a Michelin-starred restaurant is poverty stricken”, “Lessons from tech jerks”, July 26.

Yes indeed but let us not forget that even the one-percenters or less, have to compete for the one-percenters-of-the-one-percenters, and as this new service will extract a higher price, we are again confronting a service that mostly benefits the plutocracy. In fact they will probably pay less for this reservation service that what they currently pay the concierge of the hotel where they reside… and so this can only help to drive up even more the Piketty-inequalities we are told to abhor.

Now on the positive side… when these Michelin-starred restaurants run their own auctioning of reservation system… perhaps they find it profitable to open up for instance early morning shifts… and then some non-plutocrat gourmets and gourmands like me could perhaps have a better chance of finding a seat… and hopefully the real chefs will then perform especially well for their real admirers.

But while, we are on the subject of jerks, let me again remind you that the worst ones are the bank regulators who discriminate against the fair access to bank credit of those who, because they are perceived as risky, are already being discriminated against… the #JerkRegulator

Globally concentrating on the knowledge of the knowledgeable, renouncing to knowledge diversity, represents a huge systemic risk.

Sir, I refer to Gillian Tett “Chess in cyberspace: a smart move?” July 26. I am not a chess player, and I have not really been impacted by Fischer and Spassky playing chess on TV, or by “Deep Blue” beating Kasparov... and so I might be out on a limb here.

I agree with Tett that it is sad that globalization of competition has dramatically reduced the possibilities like singing Queen’s “We are the Champions” with true emotion, as clearly “We are the local champions” does not have the same ring to it.

But, it is when Gillian Tett describes how “parents are tapping the most brilliant brains in places such as India, Bulgaria or Moscow, to deliver online tutorials for their offspring via Skype”, that I get most concerned, because it is another example of a global concentration on the knowledge of the knowledgeable, which could in the end lead us to miss out on some really important knowledge diversity.

And frankly let us look at what has happened in the area of bank regulations since someone (not me), decided we should concentrate the most brilliant regulatory brains in the Basel Committee, and these most brilliant brains with too much hubris decided they could act as risk managers for the world, and on top of that decided to delegate much of that role into some few brilliant brains of some few credit rating agencies. As had to be expected, catastrophe ensued!

And now our banks are becoming riskier by the day, as their balances become more packed up with fewer and fewer assets deemed as absolutely safe, and without them being allowed the benefits of diversifying among the risky.

A decade ago, I told my colleague Executive Directors at the World Bank that if by lottery they would, with a plumber or a registered nurse substitute for one of us, we would be a much wiser Board. Of course that, in a mutual admiration club, was not too well received… but I still hold it to be true… even to become truer by the day.

July 24, 2014

On risk-weights for banks when financing houses vs. jobs, regulators do not answer, though stiff upper lips starts to wobble.

Sir, Stefan Ingves and Per Jansson, of Sveriges Riksbank, respond quite strongly against some criticism made by Wolfgang Münchau of the monetary policy in Sweden, “Monetary policy has had positive results in Sweden” July 24. 

In their letter they mention that Sweden has been doing relatively fine in terms of reducing unemployment but that household debt and house prices have increased and “create risks of financial instability with serious macroeconomic consequences”.

Although my mother is from Sweden and lives there, I know little about its monetary policy but, since Stefan Ingves is the current chairman of the Basel Committee, and Münchau now has him on the line, would it not be great to ask him the following?

Mr. Ingves the risk-weights for defining the capital requirements for banks for house mortgages is 15% (I have heard some rumors about an increase to 25%) and the risk-weight for lending to an SME is 100%. Does it really make sense allowing banks to leverage 667% more times when financing houses than when financing the creation of the next generations of jobs… meaning banks can obtain a 667% higher risk adjusted return on their equity when financing houses than when financing the creation of the next generations of jobs? Do you not think this distorts the allocation of bank credit in the economy? 

Since jobs seem more important than houses, and SME’s have never caused a bank crisis, which house financing has certainly done, why not the other way round?

Sir, when I have asked bank regulators from many countries a similar question their usually stiff upper lips have begun to wobble… but I have not been able to extract an answer from them. Perhaps Wolfgang Münchau could have more luck.

PS. Remind them of a Swedish psalm... "God make us daring!"

July 23, 2014

A bank’s expected failure going from once in 1000, to once in 200 years, does not sound like an impressive improvement :-)

Sir, Gina Chon refers to Steve Strongin, head of Goldman’s investment research division stating: “In the past the mean time for the failure of a well-capitalized bank was 41 years… Now, with increased capital standards and stress tests scrutinizing how banks would withstand a crisis, it is estimated to be about 200 years”, “Dodd-Frank rules blamed for curbing growth” July 23.

To help you understand what an unbelievable scenario for bullshit that represents, let me mention that in the Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, the confidence level is described as “fixed at 99.9%, i.e. an institution is expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years. This confidence level might seem rather high. However, Tier 2 does not have the loss absorbing capacity of Tier 1. The high confidence level was also chosen to protect against estimation errors that might inevitably occur from banks’ internal Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) estimation, as well as other model uncertainties.”

Chon mentions “A senior Obama administration official said banks had overreacted and argued that a person with a high credit score should be able to obtain a mortgage on decent terms, which was not happening at many banks”. That official should ask regulators to explain that the system in place is first the banks reacting to perceived credit risks with interest rates, size of exposures and other terms… and then having the regulators, for good measure, to also react to the same perceived credit risks by means of setting the capital the bank needs to hold against assets… and, of course, reacting twice to the same risk, must cause an overreaction.

In this respect the Dodd-Frank Act cannot be much blamed for curbing growth that is unless you feel, like I do, that in the home of the brave, that Act should have prohibited the odious system of risk weighing the capital requirements of banks, something which negates the fair access to bank credit to for instance all SMEs.

CMA. Bank regulators have stopped “the risky”, like SMEs, from being able to compete fairly for bank credit.

Sir, John Kay with respect to personal current account banking writes and conclude rightly in that “In banking too much competition is as bad as too little” July 23.

But in reference to banks and competition, I cannot but remind you of that regulators, by allowing banks to have much less capital when lending to “the infallible” than when lending to “the risky”, have hindered all those perceived as risky to be able to compete for bank credit on fair terms. In fact, on those borrowers already burdened by being perceived as risky, they have loaded up tons of extra weights.

And that Sir has an impact that is much worse than anything that could happen on the level of the service of personal checking accounts… and so that is what UK´s Competition and Markets Authority should really prioritize.

July 22, 2014

IMF, forget it! Spain, for the time being, is incapable of ‘turning a corner’… for the better

Sir, I refer to Tobias Buck’s “Export-shaped cloud looms over Spain’s bright outlook” July 22.

In it he refers to that “The IMF this month declared that Spain had ‘turned the corner’”

Forget it! No country that insists on capital requirements for banks which discriminate against the fair access to bank credit for the “risky”, medium and small businesses, entrepreneurs and start ups, can turn a corner… at least not for the better.

About this, on the web, I placed a message in a bottle to King Felipe VI, on his first working day

When a banker reminds you of the importance of the simple things in life, you always worry a bit.

Sir, it is always slightly worrisome when a banker, no matter how correct he might be, starts reminding you about the importance of the simple things in life, like Bilal Hafeez of Deutsche Bank does, “Economists have a lot to learn from the ‘The Big Bang Theory’” July 22.

We might take some comfort in that Mr Haafez is a global head of foreign exchange research, and so seemingly has less to do with the day to day activities of Deutsche Bank :-)

July 21, 2014

When you cut off economic buds from fair access to bank credit you cannot but get slim pickings in the job market

Sir, I refer to James Politi’s report on US jobs “Slim pickings” July 21.

When you have bank regulations which, by means of capital requirements based on perceived risk, discriminate against fair access to bank credit of medium and small businesses, entrepreneurs and start-ups, you stop energizing the labor market, and therefore all you will get is some obese growth… and so of course there will be slim pickings… like mostly low-wage jobs increases. And the same or even worse goes for Europe.

Risk weighted capital requirements undoubtedly distorts the allocation of bank credit to the real economy. To see this problem being completely absent from the discussions at for instance the Federal Reserve, is truly sad.

Perhaps that silence has to do with no one being able to coherently explain a valid reason for those regulations… or, as John Kenneth Galbraith worded it in his “Money” 1975, “There is a reluctance in our time to attribute great consequences to human inadequacy – to what, in a semantically less cautious era, was called stupidity” [all made worse because] “men of reputation naturally see the person who has been right as a threat to their own eminence”.

Mark Carney, FSB, to begin, stop giving the Too-Big-To-Fail banks growth hormones.

Sir I refer to Sam Fleming, Ben McLannahan and Gina Chon reporting “BoE chief leads push to break ‘too big to fail’ impasse at G20”, July 21.

There they report on the efforts of Mark Carney as the current chairman of the Financial Stability Board to try to clinch a deal on bailing in creditors of globally significant, cross border banks that get into trouble”.

Mark Carney, to begin with should start by stopping giving the growth hormones that minimalist capital requirements for what is officially perceived as absolutely safe, represents for the Too-Big-to-Fail banks.

And then I would also suggest they think a little bit more about the implications of the Contingent Convertibles. The CoCos, hard to manage even in the presence of solely a leverage ratio rule, are mindboggling difficult when the capital requirements for banks are risk-weighted.

Perhaps Mr. Carney should read what George Banks had to say about CoCos when asked by his Board of Directors at theDawes Tomes Mousley Grubbs Fidelity Fiduciary Bank

As a sanction why not increase the risk-weight of Russia when calculating the capital requirements for banks?

Sir, Wolfgang Münchau writes that “Europe must impose financial sanctions on Russia” July 21, and among the possibilities for that he discusses the European Bank for Reconstruction and Development to stop lending to Russia.

Why not also, for the purpose of capital requirements of European banks, assign to Russia at least the same risk-weight currently assigned to Europeans small businesses and entrepreneurs, namely 100%. At its current credit rating BBB- Russia earns a 50% risk-weight, which means that banks are allowed to leverage twice as much when lending to Russia, than when lending to those who have done absolutely nothing wrong except being perceived as “risky”... something for which they already pay for dearly.

Besides, for a starter, why on earth would you want European banks lend more to Russia than to European job generators?

Eurozone cannot afford ill-targeted quantitative easing.

Sir, I refer to your “Eurozone needs quantitative easing” July 21. No! It cannot handle more distortions.

Before getting rid of the capital controls that risk-weighted capital requirements for banks represent, and which channels new liquidity to whatever is officially perceived as absolute safe, and not to where the economy most needs bank credit to go, any Eurozone quantitative easing would be plain foolish… and set the eurozone up for something even worse.

And to top it up, you suggest that quantitative easing should be carried out through the purchase of government bonds, as if the zero risk weighting of eurozone government bonds is not distortion more than enough.

Why are bank regulators obsessed with already used perceived credit risks and totally blind to job creation and Mother Earth?

Sir, Lucy Kellaway asks “Why we are more vocal about loo rolls that our jobs” July 21.

In the same vein I have for soon two decades asked why bank regulators are more than vocal, really obsessed, with credit ratings, and complete ignore such things that society would like to have banks financing, like the generation of new jobs or fighting climate change.

The risk-weighted capital requirements are stupid, because bankers already take into account whatever credit risk information is available when they set interest rates and decide on the size of exposures, and so there is no need to clear for the same information twice.

How much more interesting would be to allow for slightly smaller capital requirements, which means bank can leverage more and earn a higher return on their equity, based on something more useful, like potential-of-job-generating-ratings or Sustainability-of-Mother-Earth ratings.