June 12, 2020

The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

May 30, 2020

Free markets were set up to go bad, because of bad bank regulations.

John Thornhill writes: “The global financial crisis of 2008 exploded the ideology that markets always deliver the goods” “Three game-changing ideas to shape the post-pandemic world” Life and Arts, May 30.

Sir, that is the problem, because that is exactly what all those against free markets want us to believe. 

The 2008 crisis resulted from huge exposures to securities collateralized with mortgages to the subprime sector in the USA, turning out risky. 

And those huge exposures were a direct result of: Regulators allowing European banks and US investment banks to hold these securities, if these were rated AAA to AA, which they were, against only 1.6% in capital; meaning banks could leverage their equity an amazing 62.5 times. 

Securitization, just like making sausages, is the most profitable when you pack the worst and are able to sell it of as the best. If you can sell someone a $300.000 mortgage at 11 percent for 30 years, which was a typical mortgage to the subprime sector, and then package it in a security that you could get rated a AAA to AA, so that someone would want to buy it if it offered a six percent return, then you would pocket an immediate profit of $210.000. 

The combination of those two temptations proved irresistible.

May 27, 2020

The doom loop between government and banks was created by regulators.

Sir, I refer to Martin Arnold’s “Soaring public debt poised to heap pressure on eurozone, ECB warns” May 27

For the risk weighted bank capital requirements, all Eurozone sovereigns’ debts have been assigned a 0% risk weight, and this even though none of these can print euros on their own. Would there be a “doom loop” between governments and banks if banks needed to hold as much capital when lending to governments as they must hold when lending to entrepreneurs? Of course not!

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, in May 2011 Sharon Bowles, the then European Parliament’s Chair Economic and Monetary Affairs opined:

I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:

"The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognises the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion which, in my view, is long overdue.

Mario Draghi, ESRB Chair"

Six years later, and now even more “long overdue”

April 01, 2020

Does Martin Wolf’s “The tragedy of two failing superpowers” conform with FT’s beautiful motto of “without favour”?

Wolf opines about Donald Trump in terms of “a malevolent incompetent” and for this looks for the support of that totally unbiased Jeffrey Sachs who writes about “devastatingly of the ill will and ineffectiveness on display”. “The tragedy of two failing superpowers” April 1.

Sir, if this is what it comes down to, let me be clear that I much prefer the support of a highly incompetent but more principled Donald Trump, against our evidently thousand times more malevolent incompetents, like Hugo Chavez and Nicolas Maduro, than the support given to them by “extremely competent” Barack Obama and Jeffrey Sachs.

Wolf then writes: “For those of us who believe in liberal democracy” Really? Are we to believe that anyone who, for purposes of bank capital requirements, agrees with assigning a risk weight of 0% to his sovereign’s debt and 100% to fellow citizen’s debts, something which de facto implies that bureaucrats knows better what to do with credits for which’s repayment they're not personally responsible for than for example entrepreneurs, could be defined as a believer in a liberal democracy? I don’t think so, to me he would just be a disguised communist.


March 25, 2020

Do we have a banking system with banks as they are supposed to be?

Sir, I refer to your “Non-bank lenders will bear brunt of credit crisis”, March 25

John Augustus Shedd (1859–1928) opined: “A ship in harbor is safe, but that is not what ships are for”

But bank regulators paid banks with lower capital requirements to stay safe, thereby overcrowding “safe” harbors. As a result, those who had real reasons to stay in safe harbors, like many non-bank lenders, and were less prepared to do so, like many non-bank lenders, had then to take to the risky oceans.

You opine “we are in a better place today because regulators forced greater protections on the banking system” What greater protection? A measly 3% leverage ratio supposed to cover for misperceptions of risks, like 2008’s AAA rated, and unexpected dangers, like coronavirus? You’ve got to be joking.

You quote Ben Bernanke “If you do not have a banking system, you do not have an economy.” Sir, do we really have a banking system with banks as the bank’s we used to know, or as banks are supposed to be?

I mean, with zero bank capital requirements against loans to the government and eight percent against loans to citizens you do not have a free market economy, you have financial communism.

With lower bank capital requirements for residential mortgages than for loans to the entrepreneurs or SMEs, those who can create the jobs needed in order to service utilities and mortgages, you will not have a functional economy, and houses have morphed from being affordable homes into being the main risky-investment of way too many families.

Sir, for the umpteenth time the Basel Committee’s risk weighted bank capital requirements: guarantees especially large bank crisis, caused by especially large exposures held against especially little capital to assets perceived as especially safe, but one of which suddenly one turns out as especially unsafe.

If John A. Shedd was alive today he might have opined: “A ship is safer on the oceans than staying in  a safe harbor, which might become dangerously overcrowded.”


March 18, 2020

The coronavirus will unleash a horrific Minsky moment in our bubbled-up debt overextended economies

Sir, I refer to Martin Wolf’s “The virus is an economic emergency too” March 18. 

Indeed, more than a week ago I tweeted: “The world is prepared somewhat for the expected, but not enough for the unexpected. That’s why, worldwide, coronavirus will cause larger number of deaths because of its economic consequences, than because of its health implications”.

And for years I have also tweeted, “The current fake-boom, put on steroids by huge central bank liquidity injections, low interest rates, and Basel Committee’s pro-cyclical risk weighted bank capital requirements, will end in a horrific Minsky moment bust, equally put on steroids.”

Sir, bank capital requirements used to be a percentage of all assets, something which to some extent covered both EXPECTED and UNEXPECTED risks. But currently Basel Committee’s risk weighted bank capital requirements, those that operate over the silly low 3% leverage ratio, are solely BASED ON EXPECTED credit risks. So even if Wolf can write “The pandemic was not unexpected”, for banks and its regulators it sure was completely, 100%, unexpected. And all the banks will now soon stand there completely naked.

And what help can banks be expected to give entrepreneurs and SMEs when they are required to hold much more capital when lending to these, than when holding “safe” sovereign debts and residential mortgages? Will banks be able to raise the needed 8% in capital or will regulators lower that requirement?

Wolf writes, again, “Long-term government debt is so cheap”. Sir, when will Wolf dare think about what those rates would be, for instance in Italy, if its banks needed to hold the same amount of capital against loans to their government than against loans to their Italian entrepreneurs?

“Governments can just send everybody a cheque”. Yes, a perfect moment to build up an unconditional universal basic income scheme; but it needs to be well funded, not with public debts expected to be repaid by our grandchildren. Possible sources are high carbon taxes, something which would align the incentives in the fights against climate change and inequality; another possibility is to tax those advertising revenues generated by exploiting our personal data.

PS. As to USA it should immediately eliminate of all health sector discrimination in price, access or quality, between the insured and the uninsured.

PS. As to education all professors and administrative personal should have their salaries reduced, something which should be compensated by participating somewhat in their students’ future income streams.


March 04, 2020

The seeds of the next debt crisis are to be found in the kicking of the 2008 crisis can forward, without correcting for what caused that crisis.

Sir, I refer to John Plender’s “The seeds of the next debt crisis” March 4.

Plender writes: “From the late 1980s, central banks — and especially the Fed — conducted what came to be known as “asymmetric monetary policy”, whereby they supported markets when they plunged but failed to damp them down when they were prone to bubbles. Excessive risk taking in banking was the natural consequence”

Not exactly “risk taking”! The risk weighted capital requirements caused excessive dangerous bank exposures, not to what was perceived risky, like loans to entrepreneurs, but to what was perceived safe, like residential mortgages; or decreed as safe, like the sovereign; or concocted as safe, like what banks’ internal risk models produced.

Plender asks: “Has the regulatory response to the great financial crisis been sufficient to rule out another systemic crisis and will the increase in banks’ capital provide an adequate buffer against the losses that will result from widespread mispricing of risk?”

No, it has not been sufficient. That because the incoherent response to a crisis caused by AAA rated securities backed with mortgages to the US’s subprime sector, was to keep on using risk weighted bank capital requirements based on perceived EXPECTED losses, and not on UNEXPECTED losses.

Plender writes: “The central banks’ quantitative easing since the crisis, which involves the purchase of government bonds and other assets, is, in effect, a continuation of this asymmetric approach”

Indeed, in 2006, when an upcoming crisis was slowly being detected by some, FT published a letter in which I argued for “The long-term benefits of a hard landing”. Sadly, central bankers and regulators wanted nothing of such thing, on their watch, and kicked the 2008 crisis can forward to our children and grandchildren, as hard as they could, and here we are… with world borrowings up to the tilt, and lenders waiting to be blown away by a coronavirus.

PS. At this moment, this letter not included, in my TeaWithFT blog, there appears 2.948 letters sent to you over soon two decades on the issue of “subprime banking regulations”.


March 03, 2020

Any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.

Sir, I refer to Patrick Jenkins “In our warming world, stranded energy assets are a growing concern” March 3. It evidences the difficulties in understanding how bankers adjust to risks, before and after the introduction of risk weighted bank capital requirements.

The current risk weighted bank capital requirements, which are based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived safe, only guarantees too much exposures to what’s “safe” and too little to what’s “risky”. So now banks, while “goose herds and whaling ships” are perceived as safe, run the risk of building up too large exposures that are harder to manage when these begin to look risky. 

Therefore, in the old days, before these regulatory distortions, banks were able to handle much better than now any slowly becoming apparent perceived risks, like with “goose herds and whaling ships”. 

What was more dangerous then, and MUCH more dangerous now, is of course the unexpected… like coronavirus.

Again Sir, for the umpteenth time, before, for around 600 years, banks cleared for perceived risk by means of interest rates and size of exposures. But then the Basel Committee instructed banks to clear for exactly those same risks, in the capital too. Sadly Sir, any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.


February 26, 2020

Do we need bankers, as in good loan officers, or bankers, as in creative financial engineers?

Sir, I refer to your “Europe’s banks are losing the global race for talent” February 25. In general terms, and most especially with “Banks, like the best football clubs, should nurture their young talent”, I agree completely. That said my concern with respect to all banks, not just European, is about what banks would benefit us the most.

For around 600 years banks allocated their credit to what bankers thought would produce the highest risk adjusted net profit margins, something which required them to consider interest rates and operation costs. In those days good loan officers were of utmost importance.

After the introduction of risk weighted bank capital requirements, banks now allocate their credit to what bankers think will produce them the highest risk adjusted net profit margins adjusted to capital requirements, something which now, besides interest rates and operation costs requires them to consider leverage possibilities. In this new kind of banking creative financial engineers have an important role to play.

I am convinced traditional banking not only satisfied much more efficiently the credit needs of our economies but was also much less dangerous in terms of financial stability than “modern” banking. 

But Sir, you don’t have to take my non-PhD opinion on that. In his 2018 autobiography “Keeping at It” late Paul Volcker wrote: “Over time, the inherent problems with the risk weighted bank capital-based approach became apparent. The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011.”

Yes, Europe and the world, of course needs a new generation of bankers, but before that, for our own good, let’s make sure they have the right type of banks to lead.


February 20, 2020

Never create a dependency on something that might not be able to deliver.

Sir, this would be my response to Poland’s prime minister Mateusz Morawiecki’s “Setting an EU budget is about more than arithmetic” February 20.

Prime minister I would agree with most here stated but, if I were a prime minister of Poland, the first question I would make before any budget discussion would be:

Eurozone, how do you intend to disarm that bomb of all Eurozone sovereign’s debts, for purposes of bank capital requirements, having been assigned a zero percent risk weight, even though none of these can print euros on their own will? 

If that bomb is not disarmed, EU might sadly end up as a failed intellectual fantasy, something which could have horrible consequences.

Or Prime Minister, let me put it like this: 

A budget does wittingly or unwittingly always create some kind of dependency, and the last thing a government should do, for the nation or for its citizens, is to create a dependency on something that might not be able to deliver. 

PS. Just think about all that dependency on pensions and social security people have, and that will not be delivered.

PS. I am a Polish citizen who does not speak Polish because of a gender issue. My mother tongue, which I speak fluently, is Swedish.


December 21, 2019

Should financing human rights’ violators help fund US pensions?

I wonder how one can discuss the chances of creditors collecting on Venezuela’s debts, ignoring that their funds have all gone to finance a notoriously corrupt and inept government that has and is evidently committing crimes against human rights?

Odious debts is mostly the direct result of odious credits

With respect to the sanctions of Venezuela by the US Treasury’s Office of Foreign Assets Control, an international bondholder is quoted. “These sanctions were just a disaster, and all this has done is damage holders of the bonds, many of which manage money for US pensioners.” Really in these days when financing of good social purposes is promoted, like to finance the sustainable development goals, SDG’s, should financing human rights’ violators really help fund pensions?

Frankly, “Fidelity, T. Rowe Price, BlackRock and Pimco” as well as Goldman Sachs should all be shamed; and tell us the name of that “one bondholder group holding $8bn of Venezuela’s debt”, because such exposures do not happen without very close and incestuous contacts with the government.


December 19, 2019

Sir FT, do you, or our dear The Undercover Economist Tim Harford, have an explanation for what is a monstrous regulatory mistake?

Sir, I refer to Tim Harford’s “The Changing Face of Economics” December 19.

As an economist, if I were to regulate or supervise banks, I would mostly be concerned with bankers not perceiving the credit risk correctly. Wouldn’t you?

That’s why I cannot understand why so many economist colleagues, when acting as bank regulators, can be so dumb so as to bet our banking systems on that bankers will be able to perceive what is safe correctly. 

Let me explain it having bankers answering the four possible outcomes.

If the ex ante risky, ex post turns out safe = “Great News we helped an entrepreneur to have success”

If the ex ante risky, ex post turns out safe = “You see, that is why we lend them little and charge them high risk adjusted interest rates.”

If the ex ante safe, ex post turns out safe = “Just as we expected”

If the ex ante safe, ex post turns out risky = “Holy moly what do we now do? We lend it way too much at way too low interest rates”

But the regulators in the Basel Committee, in their Basel II of 2004, assigned risk weights of only 20% for what is so dangerous to our bank systems as what human fallible credit rating agencies have rated AAA, and a whopping 150% for what has been made so innocous, by being rated below BB-?

Sir, so do you, or our dear The Undercover Economist Tim Harford, have an explanation for what is clearly a monstrous regulatory mistake? 

Or is it that you, and our dear The Undercover Economist Tim Harford, out of sheer collegiality solidarity, both agree with such dumb regulations?

If so, let me assure you that when I studied economics, it was to learn and understand economics, not to join an economists’ union/mutual admiration club.


PS Tweet: I can understand a child believing that what’s rated below BB- is more dangerous to our bank systems than what’s rated AAA, and therefore assigning a bank capital requirement of 12% to the BB- rated assets, and only 1.6% to those rated AAA. But mature professionals?


December 14, 2019

The bank capital requirements for Greek banks when lending to its government, should be the same as when lending to Greek entrepreneurs.

Sir, Kerin Hope reports: “Christos Staikouras, the finance minister, told the Greek parliament the Hercules scheme would boost the stability of the country’s financial system and open the way for increased lending to fund the real economy”

In my opinion removing non-performing loans do not guarantee increased lending to fund the real economy. For that to happen the bank capital requirements for holding Greek public debt should be the same as when lending to the real economy. As is, all it will do is to allow banks to easier continue funding the Greek government, all in accordance with that implied Basel Committee principle that government bureaucrats know better what to do with bank credit they’re not personally responsible for, than for instance Greek entrepreneurs.

For having assigned Greece’s government a zero risk weight, even though Greece cannot print euros on its own, if I were a Greek citizen, I would try to haul the European Commission in front of the International Court of Justice. That caused and still causes the excessive borrowing by Greek governments not especially known for resisting temptations, something which has mortgaged the future of all Greek grandchildren.


December 09, 2019

Sovereign borrowings are never “for free”. There are always opportunity costs, especially when there’s so much distortion favoring it.

Sir, you hold that “Fiscal stimulus can relieve monetary policy if invested wisely” “Governments must learn to love borrowing again” December 9.

“If invested wisely”, what a caveat, but so could private borrowing and investment help do. That is if they were allowed to access bank credit in a non-discriminatory way. As is much lower statist bank capital requirements when lending to the sovereign, has banks basically doing QEs acquiring sovereign debt, and this also implies bureaucrats know better what to do with bank credit they’re not personally responsible for, than for instance entrepreneurs.

It surprises when you state: “Central banks should not be blamed for loose monetary policy. As long as governments are not willing to expand on the fiscal side, central bankers are legally obliged to make up the shortfall in demand support” Legally obliged? Are you constructing a defense for all those failed central bankers that FT has so much helped to egg on? Because, as you yourself argue, “ultra-loose monetary policy has inflated asset prices and may be slowing productivity growth by keeping uneconomic businesses alive”, they sure have failed.

I also find it shameful to argue: “When governments can borrow for free there is little reason not to invest to the hilt.” What “for free”? The current low cost of government borrowing is the direct result of QEs and regulatory discrimination against other bank borrowers, and that distortion results in huge opportunity costs for the society. Also each new public debt contracted eats up a part of that borrowing capacity at a reasonable cost, which is an asset that should not be squandered away. Reading this editorial, which in summary begs for kicking the crisis can forward by any available means, makes me feel inclined to suspect you have no grandchildren.

Sir, finally, with governments borrowing to tackle “green transition challenges” you are opening up great opportunities for climate change profiteers, which will be exploited, you can bet on that. The more concerned you are with climate change the more concerned you should be with keeping all climate-change-fight financial/political profiteers far away. If not we will not be able to afford the fight against climate change, or to help mitigate its consequences.


December 04, 2019

Bank regulators rigged capitalism in favor of the state and the “safer” present and against the “riskier” future.

Sir, Martin Wolf with respect to needed financial sector reforms mentions “Radical solution: raise the capital requirements of banking intermediaries substantially, while reducing prescriptive interventions; and, crucially, eliminate the tax-deductibility of interest, so putting debt finance on a par with equity.” “How to reform today’s rigged capitalism” December 4.

What has rigged capitalism the most during the last decades is the introduction of risk weighted bank capital requirements which rigs the allocation of credit in favor of the sovereign and that which is perceived, decreed or concocted as safe, and against the credit needed to finance the riskier future, like SMEs and entrepreneurs.

That distortion is no eliminated with general higher capital requirements like the leverage ratio introduced with Basel III, but only by totally eliminating the credit risk weighting.

Wolf expresses great concern “over the role of money in politics and way the media works” I agree. The reason why media in general, and FT in particular, have refused to denounce the stupidity with credit risk weighted bank capital requirements based on that what bankers perceive risky being more dangerous to our bank systems than what bankers perceive safe, is most probably not wanting to trample on bankers’ toes. As is, bankers are allowed to leverage the most; to earn the highest risk adjusted return on equity, on what they think safe. Is that not a bankers dream come true? As is, we are facing the dangerous overpopulation by banks of all safe havens, while the rest of us are then forced out to the risky oceans in search of any returns. 

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


November 30, 2019

Artistic inheritance does not cause excessive centralized powers, as too often natural resources do...though intellectual inheritance could

Sir, Janan Ganesh discussing the possible effect on Europe of its “intellectual and artistic inheritance” refers to the natural“resource curse” in terms of retarding development, as “The temptation is to coast on the proceeds from the natural assets.” Clive James and Europe’s culture curse” November 29,

Indeed, that could play a role but the by far worst part or the “resource curse”, is the fact that its revenues are way too often way too much centralized in way too few hands. 

Take my homeland Venezuela. Had its (geographical) liberator Simon Bolivar not accepted to impose in Venezuela in 1829 Spain’s mining ordinances, which deemed all natural resources under earth to be the property of the King/state, our destiny would have been quite different. As is, as someone from another oil cursed nation mentioned to me years ago, “we do not live in a nation, we live in somebody else’s business”, the redistribution profiteers’.

And this does not apply to the artistic inheritance’s culture curse. The Museum of Louvre might centralize a lot of cultural treasures, but it does not remotely benefit as much from it, as do the citizens of Paris.

Of course, when it comes to an “intellectual culture curse”, which could result from handing over too much influence to too few intellectuals, like to Ph.D.’s and opinion makers, that can contain all the inheritance in a silo, in a mutual admiration club, all bets are off, in Europe and everywhere.


November 27, 2019

Beware when issues, no matter how important, like climate change, become mostly discussed because of their distraction value

Sir, Martin Wolf, after taking on a history tour argues: “A positive-sum vision of relations between the west, China and the rest has to become dominant if we are to manage the economic, security and environmental challenges we face”. That said Wolf frets our chances our small “given the quality of western leadership, authoritarianism in China and rising tide of mutual suspicion”, “Unsettling precedents for today’s world”, November 27.

Indeed, use history to illuminate the present, but never allow it to hide it. In the same vein let’s also include the caveat of not using any of those challenges to distract us from other just as important issues, like the very delicate state of our financial system.

Consider the following facts: 

1. As a response to the 2008 (AAA securities) and the 2011 (Greece) crises, by means of QEs and similar, there were/are huge injections of liquidity. 

2. Since the distortions produced by the risk weighted capital requirements were not eliminated, our banks have dangerously overcrowded all “safe” harbors, like sovereigns and residential mortgages.

3. As a result the rest of market participants had to take to the risky oceans like highly leveraged corporates debts and lending to emerging countries.

4. To top it up plenty of other high debt exposures abound, e.g. student and credit card debts.

5. Finally there are huge unfunded social security and pension plans all around the world.

And I refer to ”distraction” because everywhere we turn, we find regulators and central banks frantically looking for excuses to talk about other things, so as not have to answer some basic questions like:

Why do you believe that what bankers perceive as risky, is more dangerous to our bank system than what bankers perceive as safe?

Do you understand that allowing banks to leverage differently different assets distorts the allocation of credit to the real economy?

Do you understand that the other side of the coin of decreeing a zero risk to sovereigns, just because they can print the money to repay, is that it implies bureaucrats know better what to do with bank credit they are not responsible for, than for instance entrepreneurs?

EU you assigned a zero risk to all eurozone sovereigns’ debts even though none of these can print euros. What do you think would have happened to the USA’s union, if it had done the same with its 50 states, even though none of these can print US$ on their own?

Sir, when an architect takes on a project, he usually signs a contract by which he assumes personal responsibility “for the facility and its systems' ability to function and perform in the manner and to the extent intended” Should not bank regulators sign similar contracts?


November 16, 2019

Current bank regulations are evidence free rather than evidence based

Tim Harford suggests, “Pick a topic that matters to you”, “How to survive an election with your sanity intact” November 16.

Ok. Bank regulations. And Harford argues, “Politics… is now evidence-free rather than evidence-based”. Indeed but so are current bank regulations. 

What has caused all big bank crises was something ex ante perceived very safe that ex post turned out very risky… in other words incorrect risk assessments.

But instead of basing the capital requirements based on this empirical evidence, regulators concocted risk-weighted capital requirements based on credit risks being correctly perceived. And so they assigned a meager 20% risk-weight to dangerous AAA rated, and 150% to the so innocous below BB- rated. 

If I were a regulator I would consider my role to guard against the possibility that bankers could perceive risks incorrectly, instead of, like the Basel Committee has done, betting our bank systems on bankers always being correct. Sir, wouldn’t you too?

Harford suggests, “When someone expresses an opinion, whether you agree or disagree, ask them to elaborate. Be curious.”

Unfortunately, when thousand of times I’ve asked the question “Why do you believe that what’s perceived as risky by bankers is more dangerous to our bank systems than what they perceive as safe?” that has not generated much curiosity. What it has generated is a lot of defensive circling of the wagons. “There again goes Kurowski with his obsession”

Harford also reminds us of Alberto Brandolini’s “bullshit asymmetry” principle, “The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it.” With soon 3.000 letters to FT on the topic of “subprime banking regulations”, I can sure attest to that being true.


November 15, 2019

If Brexit goes hand in hand with a Baselexit, Britain will at least do better than now.

Sir, Martin Wolf titles, [and I add], “Irresponsible promises will hit brutal economic reality" November 15.

Just like the irresponsible and populist promise of “We will make bank systems safer with our risk weighted bank capital requirements" and that is based on that what bankers perceive as risky is more dangerous than what they perceive as safe, brutally hits our real economies.

Wolf quotes the Institute for Fiscal Studies with, “over the last 11 years [before any Brexit], productivity — as measured by output per hour worked — has grown by just 2.9 per cent. That is about as much as it grew on average every 15 months in the preceding 40 years.”

And I ask, could that have something to do with that Basel II that introduced capital requirements that allowed banks to leverage their equity much more with the “safer” present than with the “riskier” future, for instance 62.5 times with what has an AAA to AA rating while only 12.5 times with a loan to an unrated entrepreneur? Of course it has. With it regulators gave banks the incentives to dangerously overpopulate safe havens, and to abandon their most vital social purpose, which is to allocate credit efficiently to the real economy.

So compared to the damage done by the Basel Committee for Banking Supervision any foreseen negative consequences of Brexit seem minuscule.

And with respect to obtaining financial resources for financing the investments in infrastructure that Wolf so much desires, and which would cause larger fiscal deficits he argues “a necessary condition would be the confidence of the world’s savers and investors in the good sense, self-discipline and realism of British policymakers.”

Indeed, what if British policymakers stated. “We abandon the Basel Committee’s regulations. Not only are these with their 0% risk weight to the sovereign and 100% the citizens outright communistic, but these also introduced a risk aversion that truly shames all those British bankers who in past times daringly took risks and with it bettered Britain’s future”. 

Sir, I hold that would be a much-needed example for the whole world of good sense, self-discipline and realism. “A ship in harbor is safe, but that is not what ships are for.” John A. Shedd.

Sir, Wolf seemingly thinks that remaining in a EU in which its authorities assigned a 0% risk weight to all Eurozone’s sovereign debts, even though none of these can print Euros is better for Britain. As I see it, that is a reason for running away from it even more speedily.

PS. Should not bank supervisors be mostly concerned with bankers not perceiving the risks correctly? Of course! So, with the risk weighted capital requirements, what are they doing betting our bank system on that the bankers will perceive credit risks correctly?


November 03, 2019

If US’s 50 states had been assigned a 0% risk weight, as was done in the Eurozone, where would America and the US dollar be?

Sir, Gyorgy Matolcsy opines: “Two decades after the euro’s launch, most of the necessary pillars of a successful global currency — a common state, a budget covering at least 15-20 per cent of the Eurozone’s total gross domestic product, a eurozone finance minister and a ministry to go with the post — are still missing.”, “It is time to recognise that the euro was a mistake”, November 4.

Bad as that is, it’s still much worse. Even if all those “necessary pillars of a successful global currency” were present the euro would still be in serious trouble. This a result of the sovereign debt privilege of the 0% risk weight that for purposes of bank capital requirements was assigned to all Eurozone nations, even though none them can really print euros on their own.

Sir, if all USA’s 50 states had been assigned a similar 0% risk weight, as was done in the Eurozone, where would America and the US$ be?


November 01, 2019

Who is going to fact check the political ads on social media fact checkers? Big Brothers?

Sir, you opine: “The spread of political advertising on social media requires companies fact-check political ads in collaboration with trusted, independent organizations”, “Online political ads are in urgent need of regulation” November 1.

“Trusted, independent organizations”, does that not ring a bell with respect to trusting the human fallible credit rating agencies with so much power to decide on the risk weighted bank capital requirements?

I am reminded of an Op-ed I wrote in 1998 in which I argued, “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared” 

And in it I opined “in matters of financial regulations, the most honest, logical and efficient is simply alert to alert about the risks and allow the market, by assigning prices for these, to develop its own paths”

Sir, if I was concerned then, how much more concerned should I not be with the possibility of social media, fact checkers and Big Brothers entering joint ventures. 

So no Sir! Much better is a continuous reminder that: “Nothing advertised here has been fact checked and so even though it sounds interesting and correct, it is quite possible that it is all fake, even an outright shameful lye”


October 30, 2019

Well-invested small savings surpluses are better than big ones thrown away at fluffy sovereign spending projects.

Sir, Martin Wolf correctly points out “Without the shelter of the eurozone, the Deutschmark would have greatly appreciated in a low-inflation world” “How Germany avoided the fate of Japan” October 30.

Indeed it would have appreciated, but that does not necessarily mean that it would have been bad for Germany… or for the rest in the eurozone.

Wolf holds that Germans need to realize “that the euro is already working to their benefit, by stabilising their economy, despite its huge savings surpluses.”

Q. Without the euro would those huge savings surpluses exist? A. No!

Q. Without the euro could not whatever smaller saving surpluses have resulted much better invested? A. Yes!

Wolf points out: “Even at ultra-low interest rates, domestic private investment in Germany fell far short of private savings. [And] since the government too ran fiscal surpluses, in Germany, capital outflows absorbed all the private surplus [much through] German financial institutions, with their huge foreign assets”

And that’s their problem. Because of risk weighted bank capital requirements that favors financing the safer present over the riskier future, plus that insane debt privilege of a 0% risk weight assigned to all Eurozone’s sovereign debts, even though none of these can print euros, most of those German saving surpluses ended up financing mediocre eurozone governments… and building up such unsustainable huge debt exposures, that it will come back to bite all, the euro, perhaps the EU, and of course Germans too.

The day when Germans citizens realize the real meaning of that their banks need to hold around 8% of capital when lending to German entrepreneurs, but need zero capital lending to eurozone sovereigns, and that they will not be able to collect on those loans, those German citizens are going to be very wütend.

.And Sir, again, for the umpteenth time, Wolf returns to his: “The chance to borrow at today’s ultra-low long-term interest rates is a blessing, not a curse.” 

Wolf just refuses to accept that today’s ultra-low long-term interest rates, is an unsustainable artificial concoction that mainly benefits public debts, in other words, pure unabridged statism, based dangerously on that government bureaucrats know better what to do with credit, for which repayment they are not personally responsible for, than for instance the private entrepreneurs. When it comes to bank regulations a Communist Wall was constructed in 1988, one year before the Berlin Wall fell.


October 29, 2019

What the Eurozone would need a common budget the most for, is to help rescue many of its members from their huge risky 0% risk weighted sovereign debts.

Sir, Martin Arnold reports that Mario Draghi, “the outgoing ECB boss repeated his call for eurozone governments to create a sizeable common budget that could be used to provide greater economic stability in the 19-member currency zone by supporting monetary policy during a downturn.” “ECB chief Draghi uses swansong to call for unity” October 29.

As I see it the eurozone, unwittingly, already had a sizable non transparent common budget, namely that of, for purposes of risk weighted bank capital requirements, having assigned to all eurozone sovereigns’ debts, a 0% risk-weight, even though none of these can print euros on their own.

Some of these sovereigns used that privilege, plus ECB’s QE purchases of it, to load up huge debts at very low interest rates, so as to spend all that money. Now things are turning hard for many of these. Greece was small and walked the plank, and had to mortgage its future. Italy might not be willing to do so. There is a clear redenomination risk, and it is being priced more and more. 

So when Draghi now says “We need a euro area fiscal capacity of adequate size and design: large enough to stabilize the monetary union” it is clear he is very subtle referring to the dangers of the euro breaking down.

But when Draghi mention that fiscal capacity should be designed as not “to create excessive moral hazard”, then its harder to understand how that moral hazard could be worse than that already present in that idiotic 0% risk weighting.

What is clear is that for a eurozone common budget to serve any real purpose, those privileged 0% risk weights have first to be eliminated.

Just like it is hard to see some states with good credit standing accepting a 0% risk weight of other in much worse conditions, it would be difficult to explain for instance to Germans why their banks need to hold around 8% in capital when lending to German private entrepreneurs, but no capital at all when lending to the Italian or Greek governments.

How to do that? Not easy but my instincts tell me it begins by allowing banks to keep all their current eurozone sovereign debts exposures against zero capital, but require these to put up 8% of capital against any new purchases of it. That would freeze bank purchases, put a pressure on interest rates to go up, and allow the usual buyers of sovereign debt to return to somewhat better conditions.

But, of course, that might all only be pure optimistic illusions, and all eurozone hell could break out. 


October 07, 2019

The dangerous distortions in the allocation of credit that risk weighted bank capital requirements cause, is seemingly something that shall not be discussed.

... not even by those former central bankers who refuse to fade away

Sir, with respects to “the attack on the European Central Bank’s by six former central bankers” you write “Only one thing can match the stature of the complainants and that is the hollowness of their complaint.” “The euro’s guardians face a roar of the dinosaurs” October 7.

In their memo we read: “The negative impact of the ultra-low interest environment extends from the banking system, through insurance companies and pension funds, to the entire financial sector. The re-distribution effects in favour of owners of real assets, create serious social tensions. The young generations consider themselves deprived of the opportunity to provide for their old age through safe interest-bearing investments… and also furthers a ‘zombification’ of the economy”

Of course in the short run low and even negative interest rates benefit those who borrow more than those who save but, hopefully, one always hopes that will be made up in the future, by means of increased productivity and economic growth.

Significantly though the “dinosaurs” left out mentioning the distortions in the allocation of credit produced by the risk weighted bank capital requirements, which benefits especially the borrowings of sovereigns, that which FT does not want to discuss either. 

I ask. Where would the Europe/Eurozone’s interest rates on sovereign be if banks, as it was for around 600 years before 1988’s Basel Accord, needed to hold the same amount of capital against loans to the sovereigns, currently 0%, than against loans to unrated European entrepreneurs, currently 8%? Dare try thinking about that. Ask your own journalists to try to answer that question.

And neither do they discuss the special case of the 0% risk weight assigned to all Eurozone sovereigns’ debts, even though none of these can print euros. Could it be because of a bad conscience?

And with respect to the young generation what it really should be up in arms against, are the much lower capital requirements for banks when financing the safer present than when financing that riskier future on which its good outcome the young really depend on.


September 23, 2019

The Basel Committee jammed banks’ gearboxes… not only in India

Amy Kazmin reporting on India quotes Rajeev Malik, founder of Singapore-based Macroshanti, in that “A well-oiled, well-functioning financial system is the gearbox of the economy”, “Financial system is ‘like a truck with a messed-up gearbox’” September 23.

The financial system’s gearbox got truly messed up when regulators decided that banks could leverage differently their capital based on perceived risk… more risk more capital, less risk less capital… as if what is perceived as risky is more dangerous to bank systems than what is perceived as safe.

And Kazmin writes: “The financial companies that had provided much of India’s credit growth in recent years are now struggling with access to funding themselves after the shocking collapse of AAA-rated infrastructure lender, IL&FS, last year.”

Could that have something to do with the fact that since 2004 Basel II regulations banks needed to hold only 1.6% in capital when human fallible credit rating agencies assigned an AAA to AA rating to a corporation?

And Kazmin writes: “With its own voracious appetite for funds to finance its fiscal deficit, New Delhi is now mopping up much of the country’s household savings through a clutch of small schemes such as post office savings that offer higher rates than commercial banks.”

Could that have something to do with the fact that since 1988 Basel I regulations, banks need to no capital at all against loans to the government of India… but 8% when lending to Indian entrepreneurs.

Sir, risk taking is the oxygen of any development so, with such a dysfunctional gearbox, how is India going to make it? None of the richer countries would ever have developed the same with Basel Committee’s bank regulations… and all their bank crises, those that always result from something safe turning risky, would have all been so much worse, as these failed exposures would have been held against especially little capital. 

Here is a document titled “Are the bank regulations coming from Basel good for development?” It was presented in October 2007 at the High-level Dialogue on Financing for Developing at the United Nations. It was also reproduced in 2008 in The Icfai University Journal of Banking Law. 


September 21, 2019

In banking, the worst worse case scenario by far, is something perceived as very safe turning out to be very risky

Sir, Tim Harford writes “We don’t think about worst-case scenarios in the right way.” “To help us think sensibly about it, Gary Klein has argued for conducting ‘pre-mortems’ — or hypothetical postmortems. Before embarking on a project, imagine receiving a message from the future: the project failed, and spectacularly. Now ask yourself: why? Risks and snares will quickly suggest themselves — often risks that can be anticipated and prevented.” “We need to be better at predicting bad outcomes” September 21.

Indeed and what would that pre-mortem suggest as the worst-case scenario for banks regulated by means of risk weighted bank capital requirements?

1. That what was perceived as risky turned out to be risky? No bankers already knew it was risky and, if they anyhow took a chance on it, that would be with a small exposure and a high risk-adjusted interest rate.

2. That what was perceived as risky turned out to be safe? Of course not! What great news, perhaps the bank had helped a successful entrepreneur.

3. That what was perceived as safe turned out to be safe? Of course not!

4. That what was perceived as safe turned out to be risky? Holy Moly! Like those AAA rated securities.

So since that “hypothetical postmortem” was not done, the risk weighted bank capital requirements, besides seriously distorting the allocation of credit to the real economy, also produce especially large exposures to what’s perceived or decreed as especially safe, and is held against especially little capital, risking thereby especially big crises… Good job regulators!


September 18, 2019

For capitalism to refunction, first get rid of the risk weighted bank capital requirements.

Sir, Martin Wolf quotes HL Mencken with “For every complex problem, there is an answer that is clear, simple and wrong.” “Saving capitalism from the rentiers” September 18.

Indeed, and the most populist, simplistic and wrong answer to how our banks should function, are the risk weighted bank capital requirements. These are naively based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe; and, with risk weights of 0% the sovereign and 100% the citizens, de facto also based on that bureaucrats know better what to do with credit they are not personally responsible for, than for instance entrepreneurs.

And so when that what’s “super-safe”, like AAA rated securities backed with mortgages to the subprime U.S. sector exploded in 2008, this distorted bank credit mechanism, wasted away the immense amount of liquidity that were injected, creating asset bubbles, morphing houses from being homes into being investments assets, paying dividends and buying back shares.

“Tall trees deprive saplings of the light they need to grow. So, too, may giant companies”? Yes Mr Wolf, but so too does these stupid bank regulations.

“A capitalism rigged to favour a small elite” Yes Mr Wolf, but that small elite is not all private sector. The difference between the free market interest rates on sovereign debt that would exist absent regulatory subsidies and central bank purchases, and current ultra low or even negative rates, is just a non-transparent statist tax, paid by those who invest in such debt.

“We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits.” Yes Mr Wolf, but that should start by getting rid of the risk weighted bank capital requirements, so that banks ask savvy loan officers to return, in order to substitute for the current equity minimizing financial engineers.

“Corporate lobbying overwhelms the interests of ordinary citizens” Yes Mr Wolf, but silencing the criticism of current bank regulations could also be the result of some journalists having been effectively lobbied. Or not?

"Capitalism"? No Mr. Wolf, what we really have is Crony Statism

My 2019 letter to the Financial Stability Board
My 2019 letter to the IMF


September 16, 2019

Warning! Big Tech might be drawn into a too close too dangerous for us relation with Big Brother.

Sir, Ms. Rana Foroohar writes: “Whatever their size, the winning companies will be those that are profitable. That may sound obvious, but it hasn’t been for the past decade, as easy money has dulled investor senses.” “Activist’s critique of M&A is right” September 16.

But where did that “easy money” come from? Was it not central banks injecting immense amounts of money, and which effects were much distorted by the risk weighted bank capital requirements, which low capital requirements allowed that liquidity to multiply manifold? Has Ms. Foroohar tried to put the breaks on such easy money, or the contrary has she not been egging it on? 

And Ms. Foroohar concludes: “Meanwhile their Big Tech competitors are already being circled by regulators… Attorneys-general from 50 US states and territories in the US have launched an antitrust investigation into Google’s dominance of search and advertising, while New York is leading a probe of Facebook’s monopoly power… in Europe, the EU competition commissioner Margrethe Vestager… has been given a broader remit that includes digital policy.”

Should we cheer that? Absolutely not! For two reasons:

First that it might lead to Big Tech entering into too close too dangerous relation with Big Brother.

Second we, whose personal data is being exploited by Google, Facebook and similar, should be compensated long before redistribution profiteers and neo-ambulance chasers… for instance by having 50% of their ad-revenues to help fund an unconditional universal basic income.


Expert technocrats, like those in the Basel Committee, can be shameless and dangerous populists too.

Sir, Takeshi Niinami writes “Japan’s populism leads to mounting government debt and short-term solutions for immediate issues without a clear long-term vision for recovery. This is not unique to Japan. I believe that the US and EU will begin taking quite a similar path” “Japan has a unique form of populism” September 16.

1988’s Basel Accord gave officially birth to the risk weighted bank capital requirements. This regulation, with its much lower decreed risk weight of sovereign debt than of private debt, set all who applied it on a firm course to too much debt and too little growth. 

Just its denomination “risk weighted”, as if the real risks could be known, is of course just another sort of shameless populism. That the world fell for it, is clearly because the world wanted it so much to be true, that it never found in itself the sufficient will to question its basic fallacy; that it considered that which ex ante is perceived as risky to be more dangerous ex post to our bank systems than what is perceived as safe, something which obviously is not so, as all major bank crises in history evidence. 

As I so often have said, that faulty regulation imposed a de facto reverse mortgage on the economy, which extracted the value it already contained, as banks focused more on refinancing the safer past than the riskier future. By refusing those coming after us the risk-taking that brought us here, the intergenerational holy bond that Edmund Burke wrote about was violently violated.


September 15, 2019

Anything your populist can do mine can do better; mine can do populism better than yours.

Sir, Gillian Tett, when discussing populism and populists writes, “Nor is it obvious that Mr Trump will lose in 2020. If you look at recent opinion polls, these offer as much reason for alarm as for cheer.” “Is the populist wave in the west here to stay?” September 14.

Clearly populism is in the eye of the beholder. For instance, if Hugo Chavez had hosted “The Populist Apprentice” he might very well have told President Donald Trump. “You’re fired!” 

As for me Sir, you know very well I opine that one of the worst and most destructive populism ever, was when the expert bank regulators in the Basel Committee told us that with their risk weighted bank capital requirements, our banks would be safer… not caring one iota about how that would distort the allocation of credit to the real economy and, to top it up, based these on that loony idea that what is perceived as risky is more dangerous to our bank system than what is perceived as safe 


September 14, 2019

What a pity Martin Weitzman did not chair the Basel Committee for Banking Supervision. If he had we would surely not have suffered the 2008 crisis.

Sir, Tim Harford when referring to an economic paper by Martin Weitzman on climate change classifies it as a “this changes everything” paper, leading him to conclude “extreme scenarios matter. What we don’t know about climate change is more important, and more dangerous, than what we do”, “How this economist rocked my world” September 14.

So I must ask why is it possible to understand that and yet so hard to understand the mistakes of bank regulations based on that what’s perceived as risky being much more dangerous to our bank systems, than what might be lurking behind that which is perceived as safe?

“The truly eye-opening contribution” — for Tim Harford — “was Weitzman’s explanation that the worst-case scenarios should rightly loom large in rational calculations.”

In January 2003 you published a letter in which I said, “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. Friends, please consider that the world is tough enough as it is”. 

Sir was it not clear I was warning about big crises resulting from some human fallible credit rating agencies assigning a very safe rating to something very risky? Like that in 2008 caused by the AAA to AA rated securities backed with mortgages to the subprime sector? European banks and US investment banks, loaded up with because with those credit ratings they were allowed according to Basel II, to leverage their capital a mind-blowing 62.5 times.

Ten years later, when it comes to bank regulations, Martin Weitzman’s wisdom about “worst case scenarios”, is still blithely ignored.

PS. In April 2003, as an Executive Director of the World Bank, in a formal statement I wrote "Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"


September 13, 2019

Two regulations will turn the beautiful dream of the European Union into a nightmare.

Sir, Ignazio Angeloni writing that “The ECB houses hundreds of experienced, dedicated [bank] supervisor” blames “fundamental weakness in the underlying laws and the “resolution” framework for dealing with ailing banks” for many of EU’s bank troubles. “A common thread runs through diverse EU financial misfortunes” September 13.

The lack of a good resolution framework is a problem when trying to solve difficulties but much worse is that which causes the problems, in this case two regulations that are endangering Europe and the euro. Seemingly none of EC’s experts were capable of doing anything about it.

First, something that also affects most other economies, the Basel Committee’s risk weighted bank capital requirements. These seriously distort the allocation of credit, and, to top it up, are stupidly based on that what’s ex ante perceived as risky is more dangerous ex post to our bank systems than what’s perceived as safe. 

And second, in this case only a homemade EU concoction, the lunacy of all times of having assigned a 0% risk weight to all Eurozone sovereigns’ debts, even though all that debt is not denominated in  their local/printable/fiat currency.


September 07, 2019

Ms. Gillian Tett, what is that we really have, capitalism or statism?

Sir, Gillian Tett lectures us interestingly with “If you want to understand what is at stake in this debate, it pays to consider the original meaning of the word ‘company’”... “a society, friendship, intimacy; body of soldiers”, “one who eats bread with you” “in other words initially synonymous with social ties”. “Capitalism — a new dawn?” September 7.

Yet, over the years I cannot rememer Ms. Tett saying a word about that our banks are regulated exclusively so as to be safe mattresses in which to put away our savings, without one single consideration given to their vital social purpose of allocating bank credit efficiently to the real economy. “A ship in harbor is safe, but that is not what ships are for”, John A Shedd.

And Ms. Tett also writes “the 2008 financial crisis had undermined faith in unfettered free markets.” What? Like those “unfettered free markets” with Basel II regulations that when in order to borrow from banks, borrowers would have to remunerate an amount of bank capital of 0% if sovereigns, 1.6% if AAA rated, 2.8% if residential mortgages and 8% if unrated entrepreneurs?


Regulators instructed banks to compete with small savers and insurance companies for whatever was perceived as safe.

Sir, Michael Mackenzie writes “the concern that investors will extend their embrace of riskier assets and of private markets that are far less liquid and transparent, in an effort to boost returns over time.” “Contrarians gain confidence amid fog of future predictions” September 7.

Of course, how can it not be? Small savers and insurance companies face huge new competition for what’s perceived as safe as a consequence of regulators, with risk weighted capital requirements, telling banks to stay away from what’s perceived as “risky”, and to maximize their risk adjusted returns on equity with what’s perceived, or decreed, or concocted, as “safe”. 

Out went the savvy loan officers, in came the equity minimizing financial engineers.

So what’s the threat now? A new crisis resulting from excessive exposures to “the safe”, like some 0% risk weighted Eurozone sovereigns deciding it cannot pay back debt that is not denominated in its own printable currency, or regulators waking up to the fact that what is really dangerous to our bank systems is that which bankers might perceive as safe.

Sir, when in 1988 bank regulators assigned America’s public debt a 0.00% risk weight, its debt was about $2.6 trillion, now it is around $22 trillion and still has a 0.00% risk weight. When do you think it should increase to 0.01%? 


August 28, 2019

How can Eurozone’s sovereigns’ debts, not denominated in their own national/printable fiat currency, be considered 100% safe?

Sir, Laurence Fletcher in Tail Risk of August 28, writes: “Yields on German Bunds and other major government bonds have been moving steadily lower, as prices rise. That has burnished their credentials… as a safe haven in uncertain times”

Sir, how can Eurozone’s sovereigns’ debts, which are not denominated in their own national/printable fiat currency, be considered safe? 

The reasons the interest rates on that debt is low is the direct result of regulatory statism.

Risk weighted bank capital requirements that much favor the access to bank credit of the sovereign over that of the citizens.

That the European Commission assigned a Sovereign Debt Privilege of a 0% risk weight to all Eurozone sovereigns, even when these de facto do not take on debt in a national printable currency.

That ECB’s, with its QEs, have bought up huge amounts of Eurozone sovereign debts.


August 22, 2019

With respect to Eurozone sovereign debts, European banks were officially allowed to ignore credit ratings.

Sir, Rachel Sanderson writes, “Data from the Bank of Italy on holdings of Italian government debt, usually the prime conduit of contagion, suggests any Italian crisis now will be more contained than in the 2011-12 European debt and banking crisis, argue analysts at Citi” “Rome political climate is uncomfortable even for seasoned Italy Inc.” August 22.

“But Citi [also] warns of sovereign downgrades. Italy is now closer to the subinvestment grade rating threshold compared with 2011, according to all three main rating agencies.”

But the European authorities, European Commission, ECB all, for purposes of Basel Committee’s risk weighted bank capital requirements, officially still consider Italy’s debt AAA to AA rated, as they still assign it a 0% risk weight.

So in fact all the about €400bn of Italian government debt Italian banks hold, and all what the European financial institutions hold of about €460bn of Italian sovereign debt, most of it, are held against none or extremely little bank capital. Had EU followed Basel regulations they would have at least 4% in capital against these holding, certainly way too little. Lending to any private sector Italian would with such ratings would require 8% in capital… the difference is explained by the pro-state bias of the Basel Committee. 

And that is a political reality that must also be extremely uncomfortable for the not sufficiently seasoned European Union Inc.


August 19, 2019

Risk weighted bank capital requirements are anathema to neoliberalism

Sir, Rana Foroohar writes “we have spent decades of living in the old reality — the post-Bretton Woods, neoliberal one.” "Markets are adjusting to a turbulent world" August 19.

There are many definitions of neoliberal policies out there but they always include a large role for the hands of the free market and the reduction in government spending in order to increase the role of the private sector in the economy.

In 1988, for the banking sector, one of the most important economic agents, credit risk capital requirements were introduced by means of the Basel Accord. It gave incentives that distorted the allocation of bank credit to the real economy. For instance lower risk weights for the sovereign (0%) and for residential mortgages (35%) signifies subsidizing the sovereign and the safer present, by taxing the access to credit for the riskier future, like to entrepreneurs (100%). So I do not know what neoliberalism Ms. Foroohar refers to.

Ms. Foroohar, speculating on the possible “impact of an Elizabeth Warren or Bernie Sanders victory in the US primaries?” mentions a 13D Global Strategy and Research note that holds that such event would “fit perfectly into the cycle from wealth accumulation to wealth distribution”, something that Foroohar also believes “will be the biggest economic shift of our lifetimes.”

Sir, at the very moment income, through the purchase of assets, is transformed into accumulated wealth; there cannot be any significant redistribution of it, which means having to sell many of those same assets, without any significant destruction of wealth. If you’re scared of a deep recession, as we all should indeed be, then the last think you’d want to do is to deepen it with a wealth redistribution cycle.

So we cannot redistribute? Yes, we can, but that’s best done getting hold of the income before it is converted into assets, and then, preferably, sharing it out equally to all, by means of an unconditional universal basic income.


August 15, 2019

Regulators forced banks into what’s perceived safe, thereby forcing the usually most risk adverse into what’s perceived risky.

Sir, Robin Wigglesworth writes “Many investors such as pension funds and insurers [are] pushed towards the only other option: venturing into the riskier corners of the bond market, such as fragile countries, heavily indebted companies and exotic, financially engineered instruments. These are securities they would normally shun — or at least demand a much higher return to buy.” “Negative yields force investors to snap up riskier debt” August 16.

As an example he mentions “Victoria a UK-based company that issued a €330m five-year bond that drew more than €1bn of orders [because] the relatively high 5.25 per cent yield it offered, helped investors swallow misgivings over its leverage.”

Clearly liquidity injections, like central banks’ huge QEs, has helped to move interest rates much lower everywhere, but, as I see it, much, or perhaps most of what Wigglesworth refers to is the direct consequence of the risk weighted capital requirements for banks.

That regulations allowed banks to leverage much more their capital with what’s perceived (decreed or concocted) as safe, than with what’s perceived as risky, which meant that banks can more easily obtain higher risk adjusted returns on equity with the safe than with the risky… and those incentives were as effective as ordering the banks what to do. That made banks substitute their savvy loan officers, precisely those who would be evaluating and lending to a Victoria, with equity minimizing financial engineers.

As a result the interest rates charged to the safe… little by little forced those who did not posses savvy loan officers to take up the role of banks.

Will it stop there? Not necessarily. Banks, and their regulators, are now slowly waking up to the fact that the margins that the regulation benefited “safes” offer, are not enough for banks to survive as banks. 

But how to get out of that mess will not be easy. Solely as an example, when in 1988 bank regulators assigned America’s public debt a 0.00% risk weight, its debt was about $2.6 trillion, now it is around $22 trillion and still has a 0.00% risk weight. How do you believe markets would react if it increased to 0.01%?