As I see it those we really need to tame are the tamers, and in fact, looking at the global challenges the world needs to confront, perhaps we could benefit immensely from a little bit more of that old fashioned real animal spirit.
As a former Executive Director of the World Bank I know that the columnists of the Financial Times have more voice than what I ever had, and therefore they might need some checks-and-balances. For more see "A Blog is Born" at the very bottom.
Would a child shouting out “the Emperor is naked” have his observation published in FT? Would he now need a PhD for that to happen?
September 30, 2009
Tame the tamers!
As I see it those we really need to tame are the tamers, and in fact, looking at the global challenges the world needs to confront, perhaps we could benefit immensely from a little bit more of that old fashioned real animal spirit.
September 28, 2009
The wrong lessons learned.
Why is that Mr. Wolf? That seems to be the wrong lessons learned. I would hope this realization would lead us in a complete different direction of where the Basel Committee is taking us, and instead make us increase their frequency so as to try to reduce their magnitude.
On our own
Today Münchau, in “At last, recognition of the deep roots of the crisis”, September 28, sounds like an ignored child who finds great consolation in that his mother has at least noticed him. As one of the subjects of Münchau’s jealousy, one who received too much attention as the “world’s most powerful leaders [were] obsessed with the minutiae of banking regulations, let me inform him that the sad truth is that mother’s attention wavers from one to another of her sons, not because of love for both but because she has not the faintest idea of what to do, and prefers thinking of the crisis like a measles that will just go away on its own.
Meanwhile, Brother Wolfgang, the levee is still exposed to disasters, of both kinds, and we are still on our own.
September 26, 2009
There is a not so secret “low-risk” leverage-enrichment facility in Basel.
Henny Sender in “Washington is the cheerleader but sentiment remains fragile” September 26, quotes a private equity executive saying “CDO´s destroyed prudent lending in America. It was like a nuclear bomb to good lenders”. What does prudent lending mean? Shying away from risks? No! Prudent lending means investing according to your risk tolerance and getting the right reward for it. In this respect prudent lending should have its own financial returns and not returns derived from arbitrarily set lower capital requirements.
What is the worth of one dollar invested in an operation perceived as having a higher risk? One dollar! What is the worth of one dollar invested in an operation perceived as having a lower risk? Also one dollar! Then how on earth can anyone sustain that a dollar lent to a BBB+ to BB- rated corporation is worth one dollar, while a dollar lent to an AAA to AA- rated one only represent 20 cents? Well this is exactly what the regulators did with their capital requirements for banks based on default risks and as assessed by human fallible credit rating agencies.
When a bank invests $1.000bn dollars in anything related to an AAA then that is subject to an arbitrary risk-weight of 20% and so the “risk-weighted assets” are reported as only $200bn, leading to low reported bank leverages, and which after a short while fooled even the designers.
And this is what has been produced in the not so secret “low-risk” leverage-enrichment facility in Basel and that has been proven to be so explosive and that I have been describing in http://theaaa-bomb.blogspot.com/
Sir it is so unimaginably risky to fool around with risk. Please consider that even if all the credit ratings had been absolutely precise, the world could still go so very wrong, as nobody in his sane mind will hold that the world’s future lies so much in areas perceived as having low financial default risks, that the investment in these areas have to be given especial incentives.
Friends, we need to urgently rid ourselves of regulators that can only dream about a world without bank defaults and put in their place regulators that dream of a better world, and who know that in order to reach such a world you have to learn to embrace risk… in a prudent way.
The world has had more than enough with this imprudent prudence!
Cheers
Per
September 25, 2009
Why don´t Europeans agree first...they seem worlds apart!
But, Bernard Kouchner, the French minister of foreign affairs in “A tax on finance to help the world´s poor” September 17, he spoke about a tax of 0.005 percent that would “raise €30bn”.
Why don’t the Europeans agree first among them what they want to propose to the world? Now, they seem worlds apart.
That said before any tax of this sort, the world´s poor, and most of the rest of the world, would benefit more from taking away that financial tax that the current capital regulations for banks represent in that, above of what the market already charges for risk differentials, it creates arbitrary costs, far from minuscule, that directly taxes those more prone to be considered as more risky, like the poor and the development countries. http://bit.ly/4yX7k1
September 24, 2009
Mr Zoellick, as the president of the World Bank, has an even more important issue to bring up in Pittsburgh.
Sadly, and though it should be the prime responsibility of a development bank to draw the attention to the issue, he completely ignores to mention that current bank regulations introduce an arbitrary regulatory bias in favor of the rich and the developed, and against the poor and the developing. This is so because the capital requirements are based on perceived risk of defaults as measured by credit rating agencies, and we all know where these perceived risks tend to live.
For example if a bank lends to an AAA rated sovereign it is currently required to hold zero percent in capital and if lends to an AAA rated private corporation only 1.6 percent, but when lending to a BB+ to B- rated sovereign or any unrated corporation it is required to hold 8 percent in equity. The significant different costs derived from these regulations, are to be added or deducted from what the markets would normally charge for financing different risk levels, and as a result these arbitrary regulatory interferences only makes the differences wider.
The World Bank should be the first one interested in putting on the agenda the fact that the world could have been better place had not some bank capital requirements empowered the credit rating agencies so much so that with their AAA could, over just a couple of years, mislead trillions of dollars over a precipice of financing a basically useless house price boom in the US.
The World Bank should also be the first one to remind the world of the fact that risk-taking is indeed the oxygen of any development and that therefore taxing it can prove truly disastrous for the world.
The regulators, thinking themselves Gods, misinform the markets and the experts
Andrew Kuritzkes and Hal Scott in “Markets are the best judge of bank capital” September 24 quite correctly state that “We need to complement regulation with more effective market discipline. This requires better information”.
But, in their discussion of bank leverage and even though they mention the possibility that “capital requirements are imperfectly linked to bank-risk taking” they seem unable to realize that the reason the capital requirements relative to risk-weighted assets turned out to be so faulty, had nothing to do with the basic 8 percent level established, and all to do with the risk-weights used.
The use of arbitrarily set regulatory risk weights, like those which give only a 20% weight to an AAA asset misinformed the market and experts like Kuritzkes and Scott, making them all unable to understand what was going. The sooner we free ourselves from regulators playing Gods calibrating risks, as if they possess the whole truth on risk, the better.
Is it not more important to make sure we would want to send our banks flowers?
Of course all that sounds so very neat and tidy and reasonable but frankly, before discussing their funeral arrangements should we not give a little bit more thought on how the banks are supposed to live their lives? I mention this since in all the 347 pages of the bank regulations known as Basel II there is not one single phrase, much less a paragraph that has anything to do with establishing a purpose for our banks.
http://www.bis.org/publ/bcbs128.pdf
September 21, 2009
Mr Caruana and his fellow regulators deserve months of humbling community service and being banned for life from any regulatory activity.
Mr. Caruana is well aware that when the Basel Committee demanded from the banks a capital requirement of only 1.6 percent, which is equivalent to authorizing a leverage of 62.5 to 1, when the banks were involved with a client or a security rated AAA by the credit rating agencies, they set off a world-wide race in search of the AAAs; and which, over just a couple of years, led trillions of dollars over the precipice of the subprime mortgages in the US, and created misery for hundreds of millions of people all over the world.
The least Mr Caruana and his fellow regulators deserve, is six months of a very humbling community service and, of course, being banned for life from any regulatory activity.
September 17, 2009
Is regulation really rocket science?
“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 so when I now read William White´s “Some fires are best left to burn out”, September 17 I can´t but agree and since I see that he is a former economic adviser at the Bank for International Settlements, the home of the Base Committee, I would ask him whether he does not believe the regulators should not have been aware of all this, in a timely fashion… is regulation really such a rocket science?
Mr Bernard Kouchner, you better beguine by taking away the tax on the world’s poor.
That said let me be absolutely clear that the world´s poor, and most of the rest of the world, would benefit much more from taking away that financial tax that the current capital regulations for banks represent in that, above from what the market already charges for risk differentials, it creates arbitrary costs, far from minuscule, that directly taxes those more prone to be considered as more risky, like the poor and the development countries.
And so, Mr Bernard Kouchner, I would much prefer you forget your well-intentioned tax and instead eliminate your non-intentional tax.
September 16, 2009
John Kay is utterly lost!
It was not the risky which provided the explosive material for this crisis but the not-risky, something that Mr Kay proposes we pursue even more, burrowing ourselves into narrow banks, so that once again we can feel the bliss of believing we are safe… so that once again we place ourselves further away from the risks we need to take in order to move forward.
No, Mr. Baby-boomer Kay, move over and let the future take over, even if it entails risks.
Madame Guillotine could be better than assisted euthanasia
September 14, 2009
Even governments represent counter-party risks
This is indeed truly dangerous talk when what we need is for our regulators to be much more trigger happy, allowing bad institutions to fail; and when we know that the fees for such eternal life insurance would never be set objectively nor would it be set apart in a reserve, and so that, sooner or later, the final failure of any of these supreme institution, could bring the State down with it.
The economy does not need more government insurances than the ones currently awarded to individual depositors up to limited amounts, and to give more is counterproductive to the well-being of all of us, since an insurance is only worth as much as the insurance company is worth; and we do face a counter-party risk even when dealing with governments.
Not safer, better!
FT don’t be such a wimp. How can we get better regulations of the financial sector without, like the whole Basel regulations, speaking a word about the mission of the banks?
But be careful of not adding to the confusion
The regulators fed up with adding AAapples with Bbbananas as fruits decided to give the first a risk-weight of 20 percent and the latter one of 100 percent when calculating the capital requirements of the banks and we ended up with such a confused world that most experts, FT, included had no idea of what bank leverages they were talking about, in fact most still don’t know.
And so whatever we do to measure what we want better, and a lot of improvements are indeed needed in this area, let us see that we just do not add to that confusion the politicians love to hide behind.
September 11, 2009
Markets price risk solely in interest spreads which is why the regulators’ “risk weights” only brings confusion.
Because the market prices risk solely through interest rates spreads, the interference of the regulators pricing it by means of “risk weights”, which lead to different capital requirements, creates much confusion in the risk allocation mechanisms; and we therefore need to eliminate all regulatory risk-discrimination. In other words, between a Tobin tax that can function as a speed bump and provide some “due diligence”, and capital requirements that “forcefully” channel funds into different risk territories I am all for the first and all against the latter.
As a consequence the credit rating agencies should revert to their traditional role as risk informers instead of being the risk decision makers the regulators turned them into.
Since Basel has become too one minded to regulate we must break up the regulator too
In February 2000 in the Daily Journal of Caracas, Venezuela, in an article titled “Kafka and global banking” I wrote:
A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.
The risk of regulation. In the past there were many countries and many forms of regulation. Today, in Basel, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.
Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basel, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs.
Sir and I hold that I am still right.
Greed comes in many shapes and forms
September 08, 2009
And my warnings were silenced by the FT establishment
In February 2000 in the Daily Journal of Caracas, Venezuela, in an article titled “Kafka and global banking” I had written:
A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.
The risk of regulation. In the past there were many countries and many forms of regulation. Today, in Basel, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.
Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basel, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs. http://bit.ly/HIi3x
And, in January 2003, the Financial Times published a letter I wrote and which ended with “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.” http://bit.ly/5i1Bu
But then, I was shut up by the Financial Times establishment, who had perhaps decided there were only some macro economic problems and not any problems resulting from bad financial regulations, and wanted to hear no monothematic contradictions on that.
Basel regulations increase the world’s Gini coefficient
It is not a question of just increasing capital requirements, across the board, but of increasing them only for those operations that were benefited with extraordinary low capital requirements.
Currently a normal loan to an unrated client requires the bank to hold eight percent in equity, which is not a low capital requirements at all, and which I bet you has proven to be more than sufficient to cover for any losses sustained in operations with non-rated clients, but, for a loan to an AAA rated client, the banks is only required to hold 1.6 percent in equity. As a result the clients perceived by credit ratings as having a higher credit risk are currently effectively shouldering the responsibility for the banks having capital, and thereby subsidizing those who are perceived as having a lower default risk… as if default risks is all what finance is about.
Let me explain it some harsher development terms. The current minimum capital requirements for banks based on risk assessments increase the world’s Gini coefficient and are only compatible with a world full of risk-adverse baby boomers who want to lie down and die.
September 04, 2009
Mr Geithner, and the rest of you regulators… you are so wrong.
The hard truth Geithner needs to understand, and come to terms with, is that even if the credit rating agencies had been absolutely right in their ratings, the end results for the economy would be wrong; because subsidizing risk adverseness and taxing risk-taking, that is something that only a society that has had enough and wants to lie down and die does... and we can’t expect the whole world to be baby-boomers... can we?
Of course the regulators need to increase the current capital requirements for banks, but only for those operations where they decreased them so dramatically, like for instance allowing a 62.5 to 1 leverage when lending to anyone able enough to hustle up an AAA.
Mr Geithner please give us one single reason for why the regulators should specially favour banks lending to clients rated AAA. To me that is a pure senseless discrimination that will not lead us anywhere except over the next subprime cliff.
Jean-Claude Trichet sooths his own nerves.
Perfection is indeed the enemy of the good
September 03, 2009
Why should our regulators favour our banks to lend to AAA rated clients? Senseless discrimination?
The really hard truth we need to understand and really grapple with is that even if the credit rating agencies had been absolutely right the end results for the economy would be wrong; because the method subsidizes risk adverseness and taxes risk-taking, and that is something that only a society that has had enough and wants to lie down and die does.
No, give me one single economic reason why we should favour banks lending to clients rated AAA? That, to me, is pure senseless discrimination.