Current bank regulators have no moral right to address the misconduct of other in the financial sector.

The Financial Stability Board (FSB) published November 6 a progress report for the G20 on the FSB’s work on addressing misconduct in the financial sector. The progress report on the Measures to reduce misconduct risk sets out details about the FSB-coordinated work to address misconduct in the financial sector and the timeline for the actions.

For many years argued that the bank regulators themselves carried out the most serious misconduct in the financial sector.

With their portfolio invariant credit-risk weighted capital requirements for banks, imposed without the slightest evidence of having empirically studied why bank crises occur, and without defining what is the purpose of banks, they manipulated the world’s bank credit markets with serious consequences for millions.

Compared to that, the manipulation of of example the Libor rate, although clearly not to be excused in any way, is simply peanuts.

When we consider the millions of SMEs and entrepreneurs who have been impeded fair access to bank credit, and the loss of job creation for the coming generations that must have resulted from that; and the trillions of public bailout/stimulus debts hanging over us, the regulators should better retire in shame than preach about the misconduct of others.

Forget it, I at least trust banks and bankers much more than their current regulators.

I quote from a recent speech by Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism given September 28, 2015, titled Reintegrating the banking sector into society – earning and re-establishing trust 

"Ladies and Gentlemen, esteemed audience,

How can bankers regain the trust that was lost during the crisis? 

How can the banking sector be reintegrated into society? 

There is no doubt that banks, bankers and the whole industry are experiencing one of the worst crises of confidence ever. The turmoil of 2008 and 2009 played a major role in this loss of public trust, but the problem did not end after the most acute phase of the crisis. Even seven years later, confidence in the banking sector is still very low. 

Numerous scandals, like the manipulation of LIBOR rates…have reinforced the perception that wrongdoing is widespread in the banking sector. 

But mistrust is not only confined to banks themselves. Investors and clients also have less confidence in the correct functioning of the banking sector and in the ability of supervisors and regulators to prevent excessive risk-taking. 

We should worry about this loss of trust in the banking sector: 

   It impairs the proper functioning of banks to reallocate resources. 

   It hampers growth. 

   It leads to instability and costly crises. 

But how can trust in the banking sector be restored? Who are the key players in this process? Is it enough to reform the regulatory and supervisory framework, as we have done in recent years?

But are the efforts of regulators and supervisors enough? Can trust be rebuilt simply by having better and more credible rules? 

No! Rebuilding trust in the banking sector requires the active engagement of bankers and their stakeholders. Regulatory and supervisory reforms are necessary, but not sufficient to restore people’s trust in banks. 

My view is that, while regulatory reform and supervisory action were certainly necessary to lay the foundations on which banks can restore trust, regulators and supervisors are not the key players in this process."

My comments: 

Bank regulators told banks: “We allow you to hold much less capital against assets perceived as safe than against assets perceived as risky, so that you can earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky.

That’s it! Just avoid the credit risks and you earn more, not a word about a purpose for banks, like helping to generate jobs for the young or making the planet more sustainable. Anyone regulating without defining the purpose of what he is regulating is as loony as they come.

And to top it up, the regulators assigned a risk weight of zero percent to the sovereigns (governments) and of 100 percent to the citizens and private sectors on which that sovereign depends. Which means they believe government bureaucrats can use bank credit more efficiently than SMEs and entrepreneurs.

And of course those regulations distort completely the allocation of bank credit to the real economy and, by diminishing the opportunities of the risky to gain access to bank credit, increases inequalities.

The manipulation of Libor rates is pure chicken shit when compared to the manipulation of the credit markets done by regulators with their credit risk weighing.

And here many years after it was clearly seen that the regulators efforts to prevent excessive risk taking only produced excessive risk taking in what was perceived as safe, here they are still talking about the need of “the ability of supervisors and regulators to prevent excessive risk-taking”. Without their regulations banks would have never ever been able to leverage as much as they did.

So forget it, I at least trust banks and bankers much more than their current regulators.

Matt Taibbi and other Libor-Scandal exploiters, distracts us from correcting a much worse interest rate manipulation.

The regulators, for absolutely no reason at all, allowed banks to hold immensely less capital when lending to the “infallible”, among these some sovereigns and the AAA rated, than when lending to the “risky”, among these the small and medium businesses and entrepreneurs. 

That completely distorted the access of the real economy to bank credit, as well as the most important reference rate, the borrowing rates of the most solid sovereigns, usually the proxy for the risk-free rates. 

And that has signified an enormous tax, paid directly by all those bank borrowers perceived as “risky”, and indirectly by the society, by means of the many lost economic growth and job creation opportunities. 

For me the real cost of the society of that regulatory manipulation of bank capital, could be about a million times higher than all the costs for the society produced by the Libor rate manipulation 

I explain: one day the quoted Libor could be somewhat higher than its true rate, and on that day, Libor based borrowers would pay somewhat more, and investors earn somewhat more; other days the quoted Libor could be somewhat lower than its true value and the opposite would hold. But, in the long run, not much distortion was created and very few were really harmed. 

I certainly do not condone any Libor rate manipulation and those guilty of it should be punished with prison sentences which requires them having to pay for their own prison costs, but I do object to Matt Taibbi and other’s so scandalous agenda driven attacks on "Gangster Bankers", because that only distracts us from correcting a much worse interest rate manipulation.

PS. Matt Taibbi quotes MIT professor Andrew Lo saying that the Libor Scandal “dwarfs by orders of magnitude any financial scam in the history of markets.” If it is true he said that, then this professor has no idea of what he is talking about. If Professor Andrew Lo were to accept to debate the issue, he might do himself a favor by looking at the following material for a small quiz.

PS. Below two comments on Matt Taibbi’s article which I posted on the RollingStone web. 

1. Anyone capable of explaining the payoff in “The Biggest Price-Fixing Scandal Ever” being some “sushi rolls from yesterday”? 

2. The Libor Manipulation Scandal started because of the reporting of Libor rates which were lower than what they should have been... not higher... and so all borrowers who were on a Libor plus spread basis had to pay banks less interests. Can someone explain the irony of that?

Run for your lives! A baby has peed in the pool!

I really do not care much about The Libor Affair, an interest rate manipulation scandal that has some winning and others losing, not really of much importance in the grand scheme of things.

And so, when compared to other official interest manipulations, like what happens when regulators dole out risk weights based on perceived risks to set the specific capital requirements for banks, The Libor Affair is basically the same as a little baby peeing in a big swimming pool. If chemical elements are used to detect it, and water turns blue, then everyone screams, though in fact no one really needs to care that much about it.

What really should upset us all is The Basel Affair, the greatest and mots dangerous interest rate manipulation ever.