March 07, 2014
Sir, Gillian Tett writes about Goldman teaming up with the International Finance Corporation, the private sector lending arm of the World Bank, by putting $50m into a $600m fund that would extend loans to 100.000 cash starved female entrepreneurs, “Goldman discovers that money can buy respect”, March 7.
That represents a 12 to 1 leverage which, when compared to the 33 to 1 leverage Basel III minimum allowed by the 3% leverage ratio, seems extremely small, in relative terms. As I see it there is no doubt that a well diversified portfolio of loans to female (or male) entrepreneurs must be more productive and safer than a portfolio concentrated in loans to some infallible sovereign, to the housing sector or to someone of the AAAristocracy.
In conclusion, Morgan and the World Bank should be able to do much better for women entrepreneurs by lobbying the Basel Committee… though I do understand that the publicity value of such efforts might not be that large.
March 06, 2014
Sir I refer to your “The BoE’s big test is yet to come” March 6.
You write “QE has increased wealth inequality” true, but then, sort of as an excuse, you hold that “some of this inequality is temporary and will be reversed when the monetary support is withdrawn”. A truly astonishing statement that can only be interpreted in the animas of Keynes’ “in the long run we are all dead”.
And then you write: “QE… failed to produce the kind of sharp rebound policy makers had hoped for… The banks have failed to lend to smaller enterprises, which would have helped to spur growth”. True, but then again, as a sort of excuse you hold that “the BoE does not decide what banks… do with their money”. And that Sir you should know by now, at least from my over 1000 letters to FT on the subject, is a completely false statement.
BoE, by approving of different capital requirements for banks for different assets, based on ex ante risk perceptions, allow banks to earn different risk-adjusted returns on equity for different assets… and if you think that does not represent the kind of carrots and sticks that make banks decide what to do with their money, then you might be in need of some time out in order to collect your marbles.
March 05, 2014
Britain, if you had oil revenue power concentrated like in Venezuela, yours could be even more of a ‘malandro’, a hoodlum, nation.
Sir, I refer to 99.99% of what is currently written about Venezuela, like yours “Venezuela: the ‘malandro’ nation” March 5.
If you’d only taken time to really set yourself into the challenges of a country where over 98 percent of all its exports go into government coffers, you would not be writing about a “Hugo Chávez legacy” or the charmlessness of his successor, Nicolas Maduro.
You would probably be writing about the fact that no one, no matter how good intentions he has, no matter how charming he is, no matter how brilliant he might be, should, in the company of some few petrocrats and oilygarchs, have the right to wield such extraordinary powers.
And Andres Schipani titles his report “Venezuela´s poor wait for the revolution to deliver”, which only helps to promote the illusion of something waiting for them at the end of the rainbow. A much better title would be “Venezuela´s ever growing poor keep standing in the wrong line”
No Sir, let me assure you that if your Britain was set up as my Venezuela is, yours might be a much more ´malandro’ nation than mine… suffice to see what happened when some of your kings wielded too much power… and heads rolled!
March 04, 2014
When fighting inequality, in a sustainable way, it is more important to distribute opportunities than to redistribute income.
Sir Jonathan Ostry, a deputy director of the research department of the IMF holds that some recent research indicates that “Redistribution is associated with higher and more durable growth” “We do not have to live with the scourge of inequality” March 4.
Indeed that might be so but, before redistributing income, making sure opportunities are equally distributed, is much more important when fighting inequality, at least in a sustainable way.
For instance there are some ludicrous risk based capital requirements for banks that by favoring the “infallible sovereigns” the housing sector and the AAAristocracy, discriminate against the access to bank credit of “the risky”, mostly the medium and small businesses, the entrepreneurs and start-ups.
Unfortunately, both the World Bank and the IMF have been totally silent on this inequality driver for much too long.
If Ostry really wants to help out, then he should recommend IMF’s research department to look into the reasons for all major bank crisis in history. That research would be extremely helpful, since it would certainly indicate that the Basel Committee for Banking Supervision is going after the wrong “risky”.
March 03, 2014
Unfortunately, the fact that something is correctly stated does not suffice for it to be correctly understood
Sir, John Authers writes “Risk is greatest when there is no perception of risk” March 3. Indeed that is what I have written to you and to Authers innumerable letters over the years. Those perceived as “absolutely safe” are those who pose the largest possibility of dangerous unexpected losses.
And yet, nailing the truth, and even holding that “regulation can easily be counterproductive”, Authers’ still seems incapable, or not wanting, to extract the most important lesson from it.
That lesson is of course that current risk based capital requirements for banks, those based on the perceptions about the risks of expected losses make absolutely no sense at all.
The strange inability to infer the right conclusions from the right facts is also made very clear by how Authers’ ends his article. There he holds that the cure for “the greatest risks come from those things that have no history of problems, and which are not perceived as high risk” is additional “research [in this case] into fund manager’s systemic risks”… and that, Sir, is proposing to dig us even deeper in the hole he now knows we’re in.
Sir, John Paul Rathbone, Andres Schipani and Mark Frank write “Venezuela: In search of a solution” March 3.
I am sorry, that neither Venezuela nor your reporters can identify the real problem, just shows how hard it is to develop a solution to its problems.
Let me just ask… what would you believe the real problem of the Britain would be, if your government was receiving, as income, to dispose of in any way it liked, over 98 percent of Britain’s exports?
What’s the added value of bank regulators who only concern themselves with the risks bankers already perceive?
Sir I refer to Martin Arnold´s “Foreign banks scramble to calculate potential losses if crisis deepens [in Ukraine]", March 3, just to remind you of the fact that these are the type of “unexpected losses” against which bank regulators, in excess of their quite low leverage ratio, do not require banks to have capital against.
In other words poor us, our banks are in hand of regulators who are primarily concerned with the risks we, or at least our bankers, should all be able to perceive. What’s the added value of that?
March 01, 2014
Sir, I refer to Martin Wolf’s lunch conversation with Andrew Smithers, “I don’t have any faith in forecasts” March 1.
In it Wolf quotes Smither saying “There’s a chapter in the new book on what I think economics should be about, which is not forecasts. It’s about not taking the wrong risks. You don’t know what’s going to happen but you can avoid excessive risk-taking and this, unfortunately, has not been the policy of the Federal Reserve”… and I would have to add, and neither of the Basel Committee.
Bank regulators, with their risk-weighted capital requirements, which are not even based on forecasts but on current ex ante perceptions of risks, guarantee excessive risk taking, against very little capital, to what is perceived as absolutely safe.
I am not copying Martin Wolf with this as he has expressed not wanting to hear more from me about risk-based capital requirements… he knows it all, at least so he says, but, since the above is precisely what Wolf seems unable to understand… perhaps you should copy him.
February 28, 2014
Sir I refer to your “Close the account on Swiss secrecy” February 28. If I wanted to be politically correct, I guess I would have to loudly shout out a “Hear, hear!”
BUT, I need to add that in the same vein there is political asylum granted for people being persecuted in their homeland, there should also be asylum rights granted to capital when these are being persecuted, beyond reason. Otherwise the closing down of a possibility to hold secret accounts seems a bit like a wet dream of a Global Sheriffs of Nottingham mutual admiration club.
I have no firm idea of how to go about it, but perhaps there could be a Global Council of Citizens, in front of which a citizen could anonymously make a specific country based appeal. When? Perhaps when taxation becomes too high, let us say over 50%; when the government role in the economy becomes too high, let us say 40% of GDP; or when there are notoriously public displays of government waste.
But of course, the capitals of anyone who has held a government office within a period, like for instance the last 20 years, should possess no such rights.
Really, is there anything to be gained by retaining all capitals of all citizens in a country, if all that means is that the capital gets all wasted?
I remember when my country, Venezuela, in February 1983 woke up to a huge financial disaster, mainly as a consequence of the government having acquired too much debt and keeping the Bolívar from devaluing too long. At that moment most politicians swore that the cause of it all was capital flight, and this even when they all must have known that had there been no capital flight, it would all have been wasted. The truth is that the capital reserves built up abroad by some Venezuelans, by quite a few in fact, then allowed Venezuela to recover fairly fast from the disaster… unfortunately only to start the buildup of the next one.
Also, FT, do you really want to close Switzerland down as a haven for secret capital flight when that might only mean promoting other deeper and darker havens?
PS. Granted you might not really know what it is to be living in countries like Zimbabwe.
PS. I recently ended and Op-Ed in my country with the following PS: “In a country in which all those here described injustices are committed, and many more, and on top of it all they print out monstrous amounts of inorganic Bolivars without caring about the inflation that will cause, one could ask: Is not capital flight sometimes a citizen's moral obligation… towards his own nation?
Sir I refer to Gillian Tett´s proposal of having conflict specialists, sort of “divorce lawyers”, handling some of the issues derived from conflicts arising from regulatory differences in different regulatory jurisdictions, “Regulators may disagree but should say who calls the shots”, February 28.
On one hand banks, naturally, want to make as high return on their equity as possible and, on the other, current regulators want banks to avoid taking any risks.
And the result of all the bickering has been that banks are now allowed to earn huge risk adjusted returns on equity, as long as they lend to what for the moment van be perceived as “absolutely safe”, like any “infallible sovereigns”, the housing sector, and the AAAristocracy… so that banks stay away from lending to those perceived as “risky”, the medium and small businesses, the entrepreneurs and start-ups.
And so I would instead hold that it is more urgent to call in divorce counselors so as to remind the parties of the fact that you cannot possibly discriminate this way in the family, the real economy, without it breaking down.
February 26, 2014
Sir, I refer to James Politi’s and Gina Chon’s “Big banks pledge to fight tax on assets” February 26.
In May 2003, more than a decade ago, as an Executive Director of the World Bank (2002-2004), below is what I told some hundred bank regulators gathered at the World Bank for a Risk Management Workshop.
“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.
Therefore 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.
Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”
And while you're at it, Mr. Dave Camp, US Congress, House Ways and Means Commitee, look into this too
And while you're at it, Mr. Dave Camp, US Congress, House Ways and Means Commitee, look into this too
February 21, 2014
Sir, I refer to Professor Robert H Wade’s letter “In order to rein in inequality, market need to change”, February 21. Therein Wade writes: “any serious attempt to rein in income and wealth inequality in the US, Britain and elsewhere has to change the institutional structure of markets so that they are less efficient at sluicing pre-tax income up towards the top”.
That is correct but let us not ignore that at the core of that “sluicing”, lies the number one source of damnable inequality politics, namely that which impedes equal opportunities for all. And in this respect, nothing is sluicing cheap and plentiful bank credit away from the “risky” medium and small businesses, entrepreneurs and start-ups, towards the “infallible sovereign and the AAAristocracy, than the current risk-weighted capital requirements for banks.
And that these capital requirements do by allowing banks to hold much less capital against assets deemed “safe”, than against assets deemed “risky”, which of course means that banks will earn much higher risk-adjusted returns on equity when lending to what is perceived as “safe”, than when lending to what is perceived as “risky”.
And all that odious regulatory discrimination for nothing, since never ever has a crisis of the bank system resulted from excessive exposures to what was ex ante perceived as “risky” these always have resulted from excessive exposures to what ex ante was perceived “absolutely safe” but that, ex post, turned out to be risky.
Sadly though, that regulatory discrimination seems to be of no concern whatsoever for most current “inequality fighters”… (like Professor Joseph Stiglitz)
February 19, 2014
FT’s silence makes it unwittingly a lobbyist for “The Infallible” accessing bank credit on preferential terms
Sir, I refer to Sarah Gordon’s Analysis on a serious lack of bank-credit to SME’s in Europe, “Give them some credit” February 19. And how bad things are is not really clear, because for instance “Published interest rates do not take into account potential borrowers who have been offered loans with high interest rates that they then decline, those who have been refused credit, or those who have simply become discouraged and stopped asking.”
Gordon writes “Banks have become more risk-averse since the crisis, not just to protect their bruised balance sheets but also to meet demands from regulators to improve capital buffers”. And the article also quotes Daniel Cloquet, director of entrepreneurship and SMEs at Business Europe, stating “At the moment, the capital requirement rules basically favor [banks holding] government debt.”
So clearly one of the main obstacle for the SMEs accessing bank credit, something about I have been writing you innumerable letters, are the risk-weighted capital requirements. By favoring so much bank lending to the “The Infallible”, like to some sovereigns and the AAAristocracy, these discriminate against the bank borrowings of “The Risky”.
But even though Gordon refers to a serious of other initiatives to help financing SMEs, some of which, like online crowd-funding mechanisms sound truly marginal… again there is not a word about the need of changing the risk-weighted capital requirements, so as to eliminate the distortions they produce in the allocation of bank credit to the real economy. And, this even though FT must be aware by now that never ever has a systemic bank crisis resulted from excessive exposures to SMEs and similar.
And so I have to conclude that for one reason I cannot really comprehend, the Financial Times does not really care about that capital requirement banks makes it harder for SMEs, and similar “risky”, to access bank credit.
And the truth is that FT’s silence on this issue makes it effectively a lobbyist for “The Infallible” accessing bank credit on preferential terms. I assume it is not on purpose.
February 17, 2014
Bank regulators, Basel Committee, Financial Stability Board, listen to Violet Crawley “Don’t be defeatist, it’s so middle class.”
Sir, Lawrence Summers writes “Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve results. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences”, “America risks becoming a Downton Abbey” February 17.
He is right. One reason for growing inequality is that notwithstanding banks already lend less, at higher interest rates and in tougher terms, to those perceived as risky, regulators decided to intervene by requiring banks to also hold much more capital when lending to “risky” medium and small businesses, entrepreneurs and start-ups, than when lending to an “infallible sovereign”, or to the AAAristocracy.
And regulators did that because they were too scared of risk as such and because they never got down to understand: first, that for the banking system, what is truly dangerous is what is perceived as absolutely safe and can therefore generate too big exposures; and second, for the real economy, what is most dangerous long terms is not taking the necessary risks.
And so, if I was to bring Downton Abbey into this issue, that would be by quoting Violet Crawley with her straight to the point “Don’t be defeatist, it’s so middle class.”
February 15, 2014
No Mohamed El Erian, nowadays, extraordinarily dumb bank regulators, are making it all so much worse.
Sir, Mohammed El Erian in reference to banks betting on risky emerging markets holds that “In some ways today’s financial sector is little different from the one I first got to know decades ago… Yet not everything has gone full circle. Regulators and shareholders no longer allow banks to make such risky bets, even though they hold more capital” “Emerging world fashions that change with the seasons” February 15.
What? He must mean regulators no longer allow banks to make such risky bets… because banks are allowed to hold so much less capital when lending to something perceived as “absolutely safe” and therefore have to go where they can earn so much higher risk-adjusted returns on equity.
Banks have always lent primarily to what they have perceived as safe and tried to avoid what seems too risky. The difference nowadays is that regulations are helping banks to build up even larger and more dangerous exposures to what is ex ante perceived as absolutely safe but that could, foreseeable, become very risky ex post… and, when that happens, bank will then be guaranteed to find themselves naked with no capital to defend themselves with.
In other words, not everything is the same, extraordinarily dumb regulators are just making everything so much worse.
February 14, 2014
Sir, the LEX Column, February 14, when referring to French banks, writes about how hard it is to provide a shareholder’s return when “pesky exceptionals keep butting in”.
But, the reality of “pesky exceptionals”, is the primary reason for which banks need to hold capital because if any ordinarily perceived risks are not adequately managed then the responsible banker should be fired or the bank must fail… or both.
Unfortunately that is precisely the big mistake of Basel Committee’s bank regulations… the capital requirements were set not based on the possibility of unexpected “pesky exceptionals”, but based on the ordinary perceived risks of the expected losses.
In other words, with Basel II, we had the misfortune to run into exceptionally pesky regulators; who we now have unfortunately allowed to keep on working on Basel III. In this respect not holding regulators accountable, is also turning us into pesky exceptionals.
Sir, I refer to Gillian Tett’s “Titans of finance have moved on from banks” February 14.
There she writes: “What is really striking is the volume of non-bank financing that is quietly being supplied with minimal regulatory scrutiny… Non-banks are swelling in size because they do not face the same regulatory burden as banks, allowing them to turn a profit on business that banks now find uneconomic.”
That is one way of phrasing it which does not really convey the truth. Banks, allowed to leverage 40-60 times their equity when lending to infallible sovereigns, housing and the AAAristocracy, can hardly be said subjected to a lot of regulatory scrutiny. Quite the contrary, the real market anchored effective scrutiny of the non-banks, is surely larger than that of the regulators scrutiny of the banks.
And neither is it the regulatory burden that makes some bank lending un-economic. It is more the regulatory unburdening, low capital requirements, which has allowed banks to make extremely high risk-adjusted returns on equity when lending to previously mentioned “infallible”; and this has created the incentives for banks to completely abandon lending to the “risky”, like the medium and small businesses, the entrepreneurs and start-ups.
That the growing presence of non banks “worries regulators”, should come as no surprise, since they clearly do not give a iota about if banks allocate credit efficiently to the real economy. No, with bank regulators like the current ones, the real economy is doomed to depend much more on non-banks.
Getting rid of stupid risk-weighted bank capital requirements, that is a dog hair to write home about.
Sir, I refer to Martin Wolf´s “Hair of a dog risks a bigger hangover for Britain” February 14.
There Wolf writes: “It is widely believed that it is safer to rely on private borrowing as a source of demand. An expansion of private borrowing to buy evermore expensive houses is deemed good, but an expansion of government borrowing to build roads or railways, is not. Privately created credit-backed money is thought sound, while government-created money is not. None of this makes much sense.”
What is he talking about? Those whose beliefs are the most relevant in these matters, the bank regulators, they very strongly believe, as they express in the risk-weights which determine the capital requirements for banks, that lending to the government, the infallible sovereign, is enormously safer when compared to lending to anything private, including houses.
Of course, that said, bank regulators also strongly believe, in that much egged on by politicians, that lending to buy houses, is enormously safer when compared to lending to any “risky” medium and small business, entrepreneurs and start-up… those who could help to create the jobs that could pay for the costs of living in the houses.
Do I mind governments building roads and railways? Of course not, but I sure do mind government and housing (and the AAAristocracy) getting much more and cheaper financing than what would ordinarily be the case, only because shortsighted and monumentally naïve regulators think that lending to be safer than lending to the “risky” real economy.
Want to really get rid of the hangover Mr. Wolf? Well then get rid of the current bank regulators, and of their dumb and distorting risk-weighted capital requirements. That is indeed a dog hair to write home about.
PS. Sir, I leave it in your hand to copy or not copy Martin Wolf with this letter, since I do not wish to receive a letter from him telling me again I write too much, or that he already knows what there is to be known, on issues such as the risk-weighted capital requirements for banks.
February 13, 2014
Richard Lambert, before concerning himself with bankers’ education should think about bank regulators’
Sir, I refer to John Gapper’s “There is no such thing as the banking profession” February 13.
There Gapper writes that an option favored, among others by Sir Richard Lambert, head of UK’s Banking Standards Review, “is to encourage bankers to take professional exams and rebuild their sense of pride and identity. Bad bankers might be struck off by professional bodies”
Good idea, but what about the professional exams for bank regulators which right now seems of even urgent importance.
You know Sir I hold this because bank regulators who decide to use perceived risk of expected losses to set the capital requirements for banks, that which is primarily to cover for any unexpected losses, evidence they do not know what they are doing. With their amateurism they not only created this crisis, by making banks create dangerous exposures to what is “absolutely safe”, but they also keep us from getting out of the crisis, by de-incentivizing banks from lending to “risky” medium and small businesses, entrepreneurs and start-ups.
So please, enroll regulators in a Bank Regulations 101 course… as fast as possible. With their distortions they have put the current generation on the track of becoming a lost one.
February 12, 2014
Tax income from protected intellectual property rights at a higher rate than income from when competing naked in the market
Sir, Martin Wolf writes “Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects”, “Enslave the robots and free the poor”, February 12.
And that as you know, is a theme close to my heart. On it I have written to you, to Martin Wolf and to other of your journalists many letter over the years. In fact only last week I wrote you a letter referring to Martin Wolf's article titled just like this one. I did not copy Wolf, and you might have not either.
Though it might very well have been thought of earlier by someone else I started to formally promote such a tax scheme in 2008, by means of an Op-Ed in El Universal, Caracas, titled “We need a tax intellectual property rights’ income”.
Wolf also writes “We must reconsider leisure… let people enjoy themselves busily”.
And that is another theme that I have often written about, as I feel it is of utmost importance for any society to know what to do well with its structural unemployed. As a example you can read “We need worthy and decent unemployments”
PS. Sir, I leave it in your hand to copy or not copy Martin Wolf with this letter, since I do not wish to receive a letter from him telling me again I write too much, or that he already knows what there is to be known, on issues such as the risk-weighted capital requirements for banks.
February 10, 2014
Daniėle Nouy, new chair of Single Supervisory Mechanism, should hear out those like me who detest current bank regulations.
Sir, I refer to Sam Fleming´s, Alice Ross’s and Claire Jones’s “ECB Super>regulator prepares to be unpopular” February 10.
Of course, as you know from my more than a thousand letters, I much welcome that Daniėle Nouy “As one of the regulators who presided over the setting up of the Basel II accord on bank capital, which stressed risk-weighted assets as the best measure of a lender’s health… now admits her thinking on how banks are assessed has evolved… and now [at least] believes the leverage ratio¸ which compares a bank’s capital with its entire assets, is also a crucial measure.”
And of course, having held that bank regulators should be faster on the trigger, so that adequate pruning was done, I also fully agree with her opinion of “Let weak banks fail”, as reported on the front page by the same reporters.
But, when Ms Nouy there holds that “One of the biggest lessons of the current crisis is that there is no risk-free assets so sovereign assets are not risk free”, I just can’t refrain from asking, why on earth did it take the current crisis to find out that, when history is so full of examples? Sincerely it is hard to believe that regulators were so naïve to believe that… so one has at least the right to suspect some other motivation.
And also, when Ms Nouy speaks about the “health check” of banks “which will include an asset quality review and stress test”, I get the feeling she has not fully realized the Basel Mistake, in the sense of the worst not being what is on the banks’ books, but what is NOT there, like all the loans to the “risky” medium and small businesses, entrepreneurs and start-ups, which were never made, only because of discriminating risk-weighted capital requirements.
I would dare Ms Nouy to sit down one hour with me to give her a piece of my mind on what wrongs the Basel Committee has made, primarily letting expected losses stand in for unexpected losses, and then on what I believe should be done. And she should not be nervous about that, since I absolutely share all her concerns about “it’s not the best moment in the middle of the crisis to change the rules”… though surely transitioning has to be initiated… without making it worse.
February 05, 2014
And citizens could sue agencies for too good credit ratings of sovereigns, which caused governments to borrow too much.
Sir, I refer to Stephen Foley’s and Guy Dinmore’s “Italy eyes €234bn suit after ratings groups failed to value la dolce vita” February 5. It reminded me of an Op-Ed of September 2002 titled “The riskiness of country risk”.
In it I wrote: “What a nightmare it must be to be risk evaluator! Imagine trying to get some shuteye while lying awake in bed thinking that any moment one of those judges, those with the global reach that have a say in anything and everything, determinates that a country has become essentially bankrupt due to your mistake, and then drags you kicking and screaming before an International Court, accused of violating human rights.
What a difficult job to be a rater of sovereign creditworthiness! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. Any which way, either extreme will cause hunger and human misery.”
And so what’s more to say. If the Italian Government sues the credit rating agencies for having given Italy too bad ratings, an Italian citizen might equally sue these for having given Italy too good ratings
And after that, what about suing the regulator who with their risk-weighted capital requirements for banks multiplied immensely any signal emitted by the credit ratings?
Sir, in “The return of yesterday´s men”, February 5, you hold that Jean-Claude Juncker, Martin Schulz and Guy Verhofstadt “will not strike many as representing a genuine choice… for the presidency of the European Commission”. And that is so because these gentlemen represent “a familiar orthodoxy of elite driven integration….that sounds tired and irrelevant to millions of citizens whose lives have been turned upside down by [among other] the collapse of banks”.
Yes, you are most probably correct in your assessment, but why have you not gone out and criticized in a similar way the members of the Basel Committee or of the Financial Stability Board? They with their utterly failed Basel II have had a much more direct role in causing the collapse of banks.
If there had been any type of accountability all these experts would since long be “yesterday’s men”. Instead, they were put in charge of Basel III and, in some cases, like with Mario Draghi, even promoted.
Income derived from protected intellectual property should be taxed at higher rates than income obtained from competing naked.
Sir, Martin Wolf refers to “the role of rental income, particularly from intellectual property” as one explanation of “rising inequality of labor income and of the distribution of income between labor and capital”, “If robots divide us, they will conquer” February 5.
In this respect I would just want to note that for years I have argued that all income which results from an intellectual property that is being protected should be taxed at a higher rate, than any income that is produced by competing in the markets naked.
But I need also to express certain uneasiness with the concept of capital getting more and more rewarded than labor, because the truth is that, currently, because of artificially low interest, very much capital is almost not being rewarded at all. Many pensioners are not receiving what they should be receiving for that capital they worked and saved so hard to obtain.
Finally, with respect to the prospect of robots conquering us, I would hate that to happen, but, on the other hand, these would never ever come up with such crazy notions of basing the capital requirements for banks, those that should primarily be there to cover for unexpected losses, on the perceptions about the expected losses, and much less on these perceptions being correct.
February 04, 2014
Sir, William Rhodes writes that "many other countries are challenged by the weakness of bank lending to productive, employment-generating investments. The banks are in large measure constrained by regulatory uncertainties." "Major central banks must co-ordinate policy", February 4.
Wrong! Banks, when lending to productive, employment-generating investments are in large measure constrained by regulatory certainties... those that order banks to have much more capital against such “risky” lending than against lending to the less productive “absolutely safe”… those which thereby allow banks to earn much higher risk adjusted returns on equity when lending to something safe-not-productive than when lending to something risky-productive
February 01, 2014
Sir, Frank Vogl of The Partnership for Transparency Fund writes: “Citizen-led development to ensure the extremely poor in many communities across the globe can receive state benefits – food rations, basic social security, free healthcare access to free schools, without being forced to pay bribes and without being cheated by lowly government officials – is yielding tremendous results”, “Citizen-led development is yielding results” February 1.
That are indeed great welcomed results…but whatever, please, do not call that “development”. Development is about all those extremely poor ending up not needing state benefits.
The purpose of a bank is not to fight Aids, but to make profits serving the financing needs of the real economy.
Sir, Gillian Tett refers to BoA and Bono cooperating in fighting global aids “An unlikely pact in making sweet music” January 1. And Tett also quotes Paul Polman of Unilever arguing that many corporate workers want to “find a higher purpose than just making money” and that banks such as BoA have strong motives to “engage” in innovative ways.
It all sounds very commendable but, if I was a bank regulator, which I am not, I am not sure I would agree or even allow a bank which depends so much on implicit government guarantees to do such things.
And I say so because the real purpose of a bank is to make profits to its shareholders, while serving in the most effective way possible, the financing needs of the real economy. And the truth is that every dollar BoA or other banks would spend in these ways, out their pre-tax earnings, will diminish their capital, and thereby diminish their capacity to lend to medium and small businesses, entrepreneurs and start-ups… something which would help all… including those fighting against Aids.
How sad that elites meet in Davos and are not capable to discuss much more fundamental issues such as why the regulators, when setting the capital requirements that are supposed to cover for unexpected losses, did so based on perceived expected losses. This which has created total havoc in the allocation of bank credit to the real economy is a much more important issue. Yet it is ignored… most probably as it steps on the toes of all bankers making huge risk-adjusted returns on equity when lending to "The Infallible".
Getting rid of the risk-weighting of the capital requirements... that would indeed represent sweet music to all the unemployed youth.
January 31, 2014
There will not be any normalization of bank credit in Europe until regulators do a 180 degrees volte-face.
Sir, Sarah Gordon writes that “While the region’s [highly credit rated] groups have gorged on cheap credit, its multitude of smaller companies have had to deal with a scarcity of funding”, “Poor corporate credit is holding back Europe’s recovery”, January 31.
Of course, how could it be otherwise, when regulators, especially in times of scarce bank capital, require banks to hold much more capital when lending to those who are perceived as having higher expected losses than to those who possess a high credit rating.
Gordon mentions that because companies are “now driven by the desire to invest. This will inevitably, result in normalization of credit at some point.” Forget it! There will be no normalization of credit until regulators realize that capital requirements for banks should have very little to do with expected losses, and a lot to do with unexpected losses, and therefore get rid of the current system of risk-weighting.
When regulators exorcised primal risk-taking from the banks, they doomed our economies to decadence.
Sir, Edmund Phelps writes that “Nations with once-dynamic economies will be helpless to recover their prosperity as long as they misunderstand what causes economic progress”, "Free innovators from the state’s deadening hand”, January 31.
Indeed before it is realized that primal risk-taking is what leads to innovations and start-ups, and which is what keeps the economy sturdy muscular. Any economic growth based on risk-aversion leads only to economic obesity. Unfortunately, bank regulators, with their loony capital requirements based on ex ante perceived expected losses exorcised such risk taking from the banks.
And Edmund Phelps also correctly states “The state is no better suited to take a big role in the technical innovation than in artistic creation”. But Phelps might not be aware of how bank regulations are stacked in favor of the state assuming such role. Currently when a bank gives a loan to a “risky” innovator, let’s for example call it a Solyndra; it is required to have much much more capital than when lending it to the “infallible sovereign”, and so that instead a bureaucrat can relend that money to an innovator, like a Solyndra.
January 30, 2014
Tobias Buck reports on how “banks from countries such as Spain and Italy borrow money cheaply from the European Central Bank to buy high-yielding sovereign debt from their own governments”, “Spain’s lenders reap profit on Madrid bonds”, January 30. And that the banks can do, because they need to hold no capital against these “infallible sovereigns”.
Frankly, Sir, don’t you recognize insanity when you see it? This is what the banks are doing in countries where the unemployment rates, especially those of the youth, want to make you cry. How on earth are the banks to help these countries to get out of what seems to be a death spiral?
And all because bank regulators do not care an iota about asking themselves what is the purpose of banks before regulating these… and therefore allow themselves to come up with loony risk-weighted capital requirements based on perceived risk of expected losses and which directly discriminates against the access to bank credit of the “risky” medium and small businesses, entrepreneurs and start-ups.
How could Europe have allowed itself to fall in the hands of regulators who do not care about the real economy? And how can FT keep quite on this?
January 27, 2014
Risk weighted capital requirements for banks means some will receive too much credit, too cheap, others too little, too expensive.
Sir, John Plender in “How to spend $2.8tn of corporate cash” FTfm January 27, writes “The financial sector is there to intermediate between those with surplus funds and those who wish to invest. It can be relied to do so”
Not so fast Mr Plender. The most important financial intermediaries, the banks, are kept from efficiently allocating credit in the real economy, as a result capital requirements based on perceived risk. In fact, since banks can lend to “the infallible” against very little capital, the lending to “the risky”, which requires much more capital, is coming to a halt.
But seemingly the regulators are blissfully unaware of that it is them who are distorting. I say this because Christopher Thompson writes “Non-financial corporate loans in have fallen… creating a headache for regulators keen to encourage lending,, especially to small and medium sized businesses, which provide the bulk of Europe´s employment” “Balance sheets hint at EU bank confidence”, also January 27.
A “headache for regulators”, Europe has indeed fallen in the hands of a real inept bunch of bank regulators. What about the pain of the unemployed?
January 24, 2014
Real banking reform will only happen when regulators understand and acknowledge what they did wrong, and correct it.
Sir, Martin Arnold writes “Regulators are forcing banks to hold much more capital and to reduce their leverage, which is making some areas of business unprofitable. This is pushing some banks to quit those areas”, “Bankers assess once-in-generation reform” January 24.
That is indeed one way to word it, but since the truth is that the profitability of these areas was artificial in that it was based on the fact that they required much less capital than other, there should hopefully be other areas which could regain competitive profitability… like lending to medium and small businesses, entrepreneurs and startups.
The real reforms of banking will, sooner or later, only come when regulators understand and acknowledge the following:
You can´t have capital requirements for banks that are “portfolio invariant”, namely those which do not consider the benefits from a diversification of assets in “the risky” category, or the dangers of excessive concentration of assets to “the infallible”.
The fact that an asset is deemed risky because it has high "expected losses", does not mean one iota that it has the potential of more “unexpected losses”, which is what capital is there for, than what is perceived as “absolutely safe”.
That the efficient allocation of bank credit to the real economy is, medium and long term, of much more significance for the real safety of banks, than what can be achieved by any distorting risk management carried out by regulators-
Unfortunately, before the above is fully realized, things could get much worse.
January 22, 2014
Sir, Martin Wolf writes that contemporary “banks are constrained not by reserves but by their perception of risk and rewards of additional lending”, “Model of a modern central banker” January 22.
That is indeed so, but Wolf forgot to include that banks are also constrained by capital requirements, and by how the regulators’ perceptions of risks are transmitted by means of the risk-weighting of these.
When Wolf comments “An active an enterprising financial system creates risk, often by raising leverage dramatically in good times” he is ignoring the fact that the extreme high bank leverages of now, are actually leverages that were and are authorized by the regulators… and since banking itself is much about leveraging, banks must go to where they can earn the highest-risk adjusted returns on equity… which is usually where the capital requirements are the smallest.
And that created the distortions which not only produced the crisis when allowing investment banks and European banks to leverage immensely on AAA rated securities, and “infallible sovereigns”, but it also hindered the liquidity provided by for instance quantitative easing from reaching those who could do the most with it… like the medium and small businesses, entrepreneurs and start-ups.
Ben Bernanke has most certainly done good things as a central banker, and Martin Wolf has definitely written great pieces as a journalist, but I do believe that history will hold their silence about this source of distortion seriously against them… and this even if they plead ignorance about it.
PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.
January 18, 2014
Excessive exposures to what is “absolutely safe” by regulated banks could be much more dangerous than whatever lurks in the shadows.
Sir Tracy Alloway writes “Shadow banks, we are told, are unregulated institutions that lurk in the dark corners of the financial system – away from the supervised activities of run-of-the-mill commercial banks”, “Competition for banking business lurks in the shadows” January 18.
But perhaps we should keep in mind that those unregulated shadow institutions are not able to leverage remotely as much as the banks who operate in sunlight… so the question of safety is sort of relative.
And Alloway also comments “that there is perhaps an underappreciated danger: that non bank lenders will encourage riskier behavior at larger banks that find themselves compelled to try to compete with the shadows”. But that would only happen if banks are able to dress up that riskier behavior in such as way that it is perceived as “absolutely safe” so that they do not need to hold much capital.
As is, the real risky behavior of banks is building up excessive and dangerous exposures to what is perceived as “absolutely safe”… all a consequence of capital requirements which are portfolio invariant.
Alloway hopes that these “shadow lenders serve a purpose” satisfying “the needs of the real economy”. Indeed let us hope and pray it is so, because as is, the supervised banks, with the risk aversion imposed on them, are kept from doing so.
What contains “expected losses” can also contain the “unexpected profits” we need for increased productivity.
Sir, in “Two challenges for the global economy”, January 18, with respect to a decline in economic productivity, you mention: “The solution lies in structural reforms aimed at allowing the most innovative sectors to expand”. That is correct. What is not correct is to believe that you can so easily, so besserwisser, identify what are the most innovative sectors… and so the market needs to be free to collaborate doing that.
But regulators currently impose on banks risk-weighted capital requirements, which wrongly, and stupidly, assumes that what is perceived to risk more expected losses, also risks more unexpected losses. And that is monumentally wrong. Not only does history show us that the worst “unexpected losses” most often derive from what was considered to have the smallest expected losses… but it also implicitly assumes that what risks a lot of expected losses, cannot contain huge unexpected profits, and that more than pay for any losses incurred.
And that double consideration for perceived risk discriminates all what is perceived as risky from fair access to bank credit… and impedes the markets invisible hand to operate freely.
While that regulatory mistake stays in place, our chances to produce the unexpected profits needed to change the current gloomy productivity outlook are indeed slim.
How on earth can regulators be so daft so as to believe that our future lies in the hands of banks playing it safe?
How on earth can regulators be so daft so as to ignore that asking our banks to play it excessively safe is truly dangerous for the economy and for the banks?
January 17, 2014
OCC, before asking banks to raise their standards of risk management, should stop regulators' distorting parallel risk managing
Sir, Tom Braithwaite and Camilla Hall report that “The Office of the Comptroller of the Currency said it plan to raise the standards it expected for risk management at the largest banks”. “Goldman and City wreck Wall St hopes for escaping doldrums”, January 17.
Before doing that OCC should first consider the distortions the risk-weighted capital requirements for banks cause.
As OCC should know, bankers clear sufficiently well for perceived risks, by means of interest rates, size of exposures and contract terms. But current capital requirements those which the regulators order banks to hold primarily as a buffer against some “unexpected losses”, are based on the same perceptions of “expected losses”.
And so the system now considers twice the “expected losses” and none the “unexpected losses”. And as a result, the regulators have introduced a distortion that makes any high standard risk management that serves a societal purpose absolutely impossible.
And this is especially wrong when the capital requirements are portfolio invariant, because that ignores the benefits of diversification for what is perceived as “risky”, and the dangers of excessive concentration for what is perceived as “safe”.
OCC should understand that it has no problem if banks manage their risks well, only if they don’t, and so it makes absolutely no sense to base the capital requirements for banks, on the same perceptions of risk used by the banks.
OCC should understand that those who most represent “no-expected-losses” are in fact those most liable to produce the largest and most dangerous unexpected losses.
OCC, do the world a favor, throw out the risk-weights a simple straight leverage ratio and allow the bank to be banks again… not credit distributors in accordance with what the risk-weighting which produces different capital requirement tells them.
Sincerely it surprises me that, in the “home of the brave”, with a market that prides itself to be free and to give equal opportunities, OCC allows for capital requirements which allow banks to earn much higher risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky.
The implied discrimination does not seem to be compatible with the Equal Credit Opportunity Act (Regulation B).
January 15, 2014
Sir I refer to Henny Sender’s “Distress appears across Asian funding markets” January 15. In it Sender describes that banks are not in great shape and are too risk adverse to lend to lower rated companies… [aggravated] by regulatory changes which require more capital for anything other than investing in sovereign debt”.
Indeed, but the main constraint to lending to “the risky” is not risk-aversion but the risk adverse capital requirements. It is like telling children who don’t like spinach that if they eat it, they have to eat broccoli too.
And let us be frank… who but communists could believe that a bank system becomes safer by lending to the “infallible sovereign” and not lending to the “risky citizen”?
Of course it is all crazy… and it all derives from the fact that regulators, instead of setting the capital requirements for banks based on “unexpected losses”, as they should, based these on the “expected losses”, those which were already being cleared for by banks by means of interest rates, size of exposure and other terms.
Recently on a blog when asking why regulators were not asked about this mistake, someone replied“there comes a point where the hypocrisy of the situation becomes so intense that it can no longer be addressed”.
Does that apply to you FT?
Sir, Martin Wolf writes “the economic, financial, intellectual and political elites…lulled by fantasies of self-stabilizing financial markets…failed to appreciate the incentives at work and, above all, the risks of a systemic breakdown”, “Failing elites threaten our future” January 15.
That is wrong! That is the Greenspan version. The truth is that regulators interfered with the financial markets by imposing risk-weighted capital requirements for banks based on perceived risk of expected losses, those risks which were already being cleared for by bankers, and not based on the risks of unexpected losses.
Wolf is absolutely right though when he writes that the “divorce between accountability and power strikes at the heart of any notion of democratic government”. A proof of that is how those responsible for the failed Basel II went on to work on Basel III, without missing a beat, without really having to explain themselves, and without changing the basic manuscript. Frankly a self-stabilizing movie industry, would never ever dream of following up a box-office flop like Basel II in that way.
But you Sir, and Martin Wolf, have for many years stubbornly ignored my arguments about the huge mistake, which considering twice same perceived risks represents. And so, when now Wolf writes “If elites continue to fail...The elites need to do better”, may I just remind you that, in my book at least, you and him are part of that elite who are dangerously silencing the mistakes of some favored elites.
PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.
January 14, 2014
Sir, Avinash Persaud argues “central bankers need… a better understanding of what their bond-buying has achieved”, “An expensive way to speak truth to financial markets” January 14.
Absolutely! From all what we read central bankers do not understand yet that those “Cash balances… trapped in a broken system”, are a direct consequence of capital requirements for banks which do not allow for liquidity to go to where it is most needed in the real economy, namely to finance “risky” medium and small businesses, entrepreneurs and start ups.
I fully agree with Persaud in that the first QE could be explained, and even justified, based on the need “to unfreeze markets that were close to seizing up”… but, from there on, no way Jose!
If the distortion produced by the current risk-weighting of bank regulations is not eliminated, so that the invisible hand of the market can resume operations, can you imagine what would happen if the Fed would even try to soak QEs up, I mean with so much hullabaloo already resulting from some tiny tapering?
January 13, 2014
Banks’ RoRWAs is like allowing kids to grade themselves. Shareholders could, at their own risk do so. Regulators should not!
Sir, The Lex Column makes several statements about banks’ RoRWA, the return on risk-weighted bank assets, January 13.
In essence RoRWA is like allowing kids to grade themselves, and their parents, as their shareholders, believing it. And though it does not sound very wise, that is ok since parents, at their own risk, are absolutely free to do so.
But, when teachers, or bank regulators, start using the kids’ own grading system, or the banks’ own risk-weights, then something is bound to go wrong. More sooner than later the whole system will overdoses on the kids and bankers biased perceptions, as these all have a lot of vested interest in having good grades or good RoRWA.
Sir, a bank should be free to calculate his own capital requirements in any which way he likes, and these will be almost entirely be based on expected losses. But a regulator should set the capital requirements based on the “unexpected losses” as these are those that should really be of his concern, but they do not.
Explicitly, for reasons of simplicity, the Basel Committee sets the capital requirements for banks that are there to cover for unexpected losses based on the same risk perceptions used to estimate the expected losses. And, to top it up, these capital requirements are also, explicitly, portfolio invariant… which means that the benefits of diversification is not accounted for, nor are the dangers of any asset concentration.
What a miserable state of affair of our bank regulatory system, if the implications of simple facts like that, cannot even be discussed.
In “Banks win concessions from Basel on leverage” January 13, Sam Fleming and Gina Chon report that if relying on a non-risk weighted capital requirement, such as the leverage ratio, that would tempt banks “to take on riskier loans to earn higher returns”. But again there is no discussion about the wisdom of allowing banks, by means of risk-weights to be able to earn higher risk-adjusted returns on safer loans, and which leaves hanging in the air the question of… who is then going to finance “the risky” medium and small businesses entrepreneurs and start ups?
That one can allow a Mario Draghi to mention “The leverage ratio is an important backstop to the risk-based capital regime”, without anyone asking him, the European Central Bank President, about the distortions in the allocation of bank credit to the real economy risk-weighting produces, is clear evidence that something is rotten in the Union of Europe.
January 11, 2014
Instead of labor and capital struggling against each other, perhaps they should discuss what to do with their intermediaries
“The real disaster lies in youth unemployment” writes John Plender in “Recession has revived labour´s struggle against capital” January 11.
And there is no doubt he is right about it and there is no doubt we have no chance of solving it while we have bank regulators who insist on that “unexpected losses”, those for which they require banks to have capital, are higher for the “risky” than for the “safe”.
Because, by means of Basel´s risk-weights, this translates into the banks being able to earn much higher risk-adjusted returns on equity when they lend to the “safe”, than when they lend to the “risky”.
And that translates of course into that banks will not any longer lend to finance the “riskier” future as much as previous generations of banks did.
And Plender writes: “The real driver of income inequality over the past decade has been top pay – specifically, of chief executives and bankers” and I ask. Could the bonuses of bankers have been as high as they were if bank capital has been required to be as much as it used to be pre-risk weighting days? No way!
And so instead of labour and capital struggling against each other, perhaps they should discuss what to do with the intermediaries… whether these are executives, regulators or politicians.
I mean, do not those who receive low salaries have a lot in common with those who receive low interest rates on their savings?
Sir, in “The regulatory cost of being JPMorgan” you hold “Fines – however large seem an ineffective stick with which to beat miscreants”, January 11.
Absolutely! These bank fines seem to be medieval indulgences, in this case not even paid by the sinners, but by shareholders, tax savings and less credit to the real economy.
January 10, 2014
No Mr. Ralph Atkins. We know precisely that the next financial polar vortex is going to hit… where it always hits!
Sir, Ralph Atkins writes that “six years after the eruption of the financial crisis… we know remarkably little about where the next ice storm might break”, “Investors hunt for the financial polar vortex", January 10.
He is wrong. We know exactly that the next financial polar vortex is going to break out where these always do, namely in a haven that has been perceived as “absolutely safe”, but has become dangerously overpopulated.
And the damages will be worse than ever, because of the manmade fact that, when it hits, just like when the last 2007-08 hit, our banks will have little capital to cover up with, as a direct consequence of those nonsensical risk-weighted capital requirements the Basel Committee concocted.
Sir, Michael Ignatieff writes about “the waning power of ideas” and begs “Free polarized politics from its intellectual vacuum”, January 10. Although, as a self described “radical of the middle”, or “extremist of the center”, I do agree with most of what he writes, I must still confess feeling that the absence of ideas would at least be better that the presence of some really bad ideas.
And a truly bad idea currently present, are the risk-weighted capital requirements for banks, and which allow these to earn much higher risk adjusted returns on equity on exposures deemed as “absolutely safe”, than on exposures deemed as “risky”.
And that makes it of course impossible for banks to allocate credit efficiently to the real economy. And that guarantees that the chances of any major bank crisis, those usually caused by dangerously overpopulating some safe-haven, have been exponentially increased.
Technically the mistake is explained by the fact that regulators estimate the “unexpected losses”, those for which you mainly require banks to hold capital, based on the same perceptions used by the banks to estimate “expected losses”.
And here we have all the free market believers not complaining about that horrible interference with the market that risk-weighting causes … and here we have all progressives not saying a word about the odious discrimination in favor of the AAAristocracy and against the “risky” that risk-weighting causes.
And meanwhile the chances for our youth to find employment in their lifetime are evaporating, thanks to this nonsense of banishing risk-taking from our banks.
January 09, 2014
Sir, in “Europe must avoid false optimism” January 9, you recommend: “Mr Draghi should show more urgency, extending for example new liquidity to the banking sector via a fixed-rate longer-term refinancing operation”. For what purpose Sir?
You must know that given the scarcity of capital in the European banking sector, and the risk-weighting of capital requirements, that liquidity would not flow to where it is most needed, and would therefore only worsen the imbalances, like even strengthening “the lethal embrace between sovereigns and lenders”.
January 08, 2014
Sir, Robin Harding holds that “Inheritance should not be an alternative to hard work” January 6.
The setting is: “The lower the rate of growth, the smaller the percentage of society’s wealth created by those who are alive today, and thus, by definition, the larger the percentage that is passed on from previous generations… higher inheritances certainly exacerbate inequality.”
And that is derived from Thomas Piketty’s “eagerly awaited” “Capital in the Twenty First Century”. The book includes: “if the after tax return on capital is higher than the rate of growth in the economy, then all the heir and heiress need to do is save enough of the income from their inheritance… and their share of society’s wealth will rise”… ergo we must redistribute, and so we need “wealth taxes on a global scale”.
I do not agree with its general premise. An after tax rate of return on capital which is higher than the rate of growth in the economy, is something not really sustainable… unless other factors are in play. And, in this respect, I would just ask Mr. Piketty about what he believes would have happened to after tax returns on capital, without Tarps, QEs and all Fiscal Stimulus since 2007?
And also, what a horrendous vision it implies! That we should now only adapt to a shrinking economy, and give up all illusions about making it stronger and better, and just concern ourselves with that the last tree on our Easter Island we cut down is equitably shared? I can hear Downton Abbey’s Violet Crawley admonishing “Don't be so defeatist, it is so middle class.”
But of course I agree with Robin Harding in that developed (and developing) societies should “opt for the free-flowing meritocracy of the last century, not a return to the dynastic wealth of the one that preceded it.
But that, as I see it, has less to do with inheritance taxes and, at least currently, much more to do with bank regulations. You see the Basel regulators, with their risk-weighted capital requirements, do not want banks to take the risks which come with any “free-flowing meritocracy”, and instead to concentrate their exposures to the illusions of safeness of the “dynastic wealth”.
And by the way, anyone who thinks that the presence of after tax returns on capital higher than the rate of growth in the economy, would be sufficient to keep the value of an individual inheritance… has little knowledge about real life and about capitalism. Oh no! To waste an inheritance is very easy, but to keep the real value of an inheritance is, and should always be, hard work, no matter what average rates are.
January 07, 2014
Did the baby-boomers’ parents’ not take risks, or use reverse mortgages in order to extract everything for themselves?
Sir, Janan Ganesh writes “Bad luck, not policy, is the scourge of the young” January 7. What is this? I’ve seen a photo of him in FT, and so is he here just working for the baby-boomer establishment?
Of course “There is no law of the universe that says each generation most be more prosperous than the last”, but that should not diminish one iota the moral obligation of each generation from trying that to be so.
Currently grey-haired bank regulators base the capital requirement for banks which should take care of the unexpected losses, on the perceptions of expected losses. And with that they have introduced a distortion that guarantees banks will finance mostly what is perceived “safer”, like the known past, and keep out from what is perceived “risky”, like the future.
And does that mean that the young will at least inherit a safer banking sector? Of course not! The risk-weights which determine the capital requirements are portfolio invariant. That means these do not take account of the added risks of asset concentrations, or the dissipation of risks by means of asset diversification. And that means that the risk of the banking system might be increasing exponentially, even while it is being reported as safer.
Yes “Baby boomers enjoyed almost miraculously circumstances” but, to attribute that to luck and not to the daring risk-taking of previous generations is ungrateful, to say the least.
Just look at the financial products offered to baby-boomers. “Reverse mortgages” which allow parents to extract all equity possible from their houses, for their own consumption, and thereby leaving much less for their heirs. Did the baby-boomers’ parents do such things?
If the young would only look up from their virtual world, and react to what is happening in reality, then Paris of May 1968 might just seem in comparison to have been just another hip peaceful gathering of premature baby-boomers.
PS. There is not a day in which I do not thank all my antecessors for all their risk-taking, and not a day I do not fret I am not capable of taking enough risks for my successors.
Sir, I can of course understand insurers like Henry de Castries and Eric Chaney wishing and praying for some safe and liquid assets comparable to US treasuries, and with which they sincerely believe it would be easier for them to responsibly fulfill their undertakings, “How markets can make the global economy safer” January 7.
But, safe assets are not something you just pull out of a hat, and on top of that, safe assets are also something which can turn into very risky assets, with a blink of an eye.
But, if we really want to allow markets to make the global economy safer, we need to stop interfering and distorting these.
For instance when the authors write “On the positive side, financial regulations has been strengthened” they are wrong. That is only repeating what regulators say of their own work. The sad truth is that financial regulations have been even further weakened with the introduction of even more layers that make it even harder to understand what their consequences are. And the risk-weighting of the capital requirements for banks, the mother of all distortions of the allocation of bank credit in the real economy, is still very much alive and kicking.
And when the authors write “The twin sovereign and banking crisis in the eurozone have forced leader to embrace serious reforms” I really do not know what they refer to. In that respect I just know that the embrace between banks and sovereigns is, because of the fact that banks need little or no capital when holding exposure to sovereigns, getting tighter by the hour and soon, if left alone, it will just mean they strangle each other to death.
The authors end asking for “a rebalancing solution based on a pragmatic fusion of policy and markets”… but, might our real problem be an excess of pragmatic fusions?
Gideon Rachman, on our current front of bank regulations in Basel, neither Sarajevo nor Munich mentalities will do.
Sir I refer to Gideon Rachman’s “Time to think more about Sarajevo, less about Munich” January 7.
Right now our banking systems are heading towards a meltdown, caused by excessive and dangerous exposures to what is perceived as safe assets and which therefore allow banks to hold less capital… and, consequentially, our real economy is not capable of helping us out, as its more “risky” participants, are not provided with the bank credits they need for some of them to turn into the saviors of tomorrow.
Rachman quotes Margaret MacMillan in “The War the Ended Peace” lamenting that “none of the key players in 1914 were great an imaginative leaders who had the courage to stand out against the pressures building for war”; and writes that “In 1914 national leaders were so keen to appear strong and to protect their ‘credibility’, that they were unable to step back from the brink of conflict.”
In contrast, in 1938, I guess the problem was that leaders held that everything was fine and dandy.
So Rachman what shall we do? Trust the Sarajevo regulators who arrogantly hold they can fight any bank risks which come up, or trust the Munich regulators who tell us that Basel III has repaired Basel II.
As I see it, neither one will do.
January 06, 2014
If the visible banks are not rationally regulated, there is no choice for the real economy than to run for the shadows.
Sir, the risk weight function which determines the current capital requirements for banks are based on two monumental mistakes.
The first mistake is that for reasons of simplification the Basel Committee oversimplified and decided that the expected unexpected losses of those perceived as safe will be much less than the expected unexpected losses of those perceived as “risky”. And that means that the perceptions of risks will either reward or punish… twice.
The second mistake is that the risk weights are “portfolio invariant” and which means these do not take account of the added risks of asset concentration, or the dissipation of risks by means of diversification. And that means that the risk of the banking system might be increasing exponentially, even while being reported as safer.
And all this leads to banks then earning higher risk-adjusted returns on equity when lending to the “safe” than when lending to the “risky”.
And the direct result is that those perceived as “safe” will have a subsidized access to bank credit, paid by negating the same to those perceived as “risky”.
And that guarantees banks will not be able to assist in helping the economy to get out of a secular stagnation, as alerted by Lawrence Summers in “Washington must not settle for secular stagnation”, or to avoid that weak destabilizing growth to which Edward Luce refers to in “Anglo-Saxon trumpeting will strike a hollow note” January 6.
And, while these regulatory discrimination against medium and small businesses, entrepreneurs and start ups remain in force, then Italy, instead of becoming more like Germany in order to prosper, as Wolfgang Münchau proposes in “What eurocrisis watchers should look for in 2014”, would do well becoming even more Italy and run into the shadows of its economía, finanza e banca sommersa.
January 03, 2014
Sir, Tim Harford extracts similarities to the real economy from Natasha Dow’s “Addiction by Design”, “Casino’s worrying knack for consumer manipulation” January 3. What an extraordinarily interesting and, at least for me, brand new concept.
But when Harford writes “It is hard for a free market-enthusiast like me to look unblinkingly at Las Vegas… and not feel that the invisible hand has slipped”… I must confess a slightly different vision.
For instance, when I look at a roulette table, I see that all bets, though some take you out faster than others, have exactly the same expected value, in Vegas -$0.053 for every $1… and so I conclude that there Lady Luck can work without any interference, after the commissions of the house of course.
But, when I look at banks and see how regulators have set different capital requirements based on ex ante perceived risks, which leads to assets returning different risk-adjusted returns on equity, I am absolutely convinced that the invisible hand is not given the slightest chance to operate its magic.
January 02, 2014
A philosopher’s questions to the Basel Committee on capital requirements for banks and unexpected-losses.
Sir, Alain de Botton makes "The good case for putting philosophers into company boardrooms”. January 2.
In that respect I would hold that philosophers are also urgently needed elsewhere, like in the Basel Committee for Banking Supervision. Let me explain.
In “An Explanatory Note on the Basel II Internal Rating Based (IRB) Risk Weight Functions” July 2005 we read:
“The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”
And the explicit reason for that simplification is:
“This characteristic has been deemed vital in order to make the new IRB framework applicable to a wider range of countries and institutions. Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”
And this leads to:
“In the context of regulatory capital allocation, portfolio invariant allocation schemes are also called ratings-based. This notion stems from the fact that, by portfolio invariance, obligor specific attributes like probability of default, loss given default and exposure at default suffice to determine the capital charges of credit instruments. If banks apply such a model type, they use exactly the same risk parameters for expected losses (EL) and unexpected losses (UL), namely probability of default (PD), loss given default (LGD) and exposure at default (EAD).”
And so, if the Basel Committee had included a philosopher in their team, he might very well have asked the following disturbing and possibly game-changing question.
“Friends, I read here you have decided, primary for reasons of expediency, to make the capital requirements for banks, those that should cover for “unexpected losses”, dependent on the same risk perceptions used to estimate the “expected losses”.
Does that not signify that banks could overdose on perceptions about expected risks, without you regulators doing what you should do about considering the unexpected losses?”
Does that not signify you would be discriminating against “The Risky” those who are already discriminated against because of expected losses, by making them also bear the largest regulatory burden for unexpected losses?