April 29, 2015

Who is more risky, a Systemic Important Financial Institution, or a Systemic Important One and Only Regulator?

Sir, Richard Allan, Facebook’s vice-president of public institutions in EU, complains about “having to comply with 28 independent shifting national variants” of regulations, “European discord on the internet is bad for business."

It is not that I claim to know about European regulations that affect Facebook, but, if one is able to justifiably warn about a Systemic Important Financial Institution, a SIFI, then one also has the right to warn about a Systemic Important One and Only Regulator?

And I would leave it there, were it not for Allan writing: “The biggest victims [of national regulations] would be smaller European companies. The next big thing might never see the light of day. We know from experience that getting a company off the ground is hard enough already. And if regulation at the national level is adopted, it could stop start-ups before they even get started. At a time when Europe is looking to create jobs and grow its economies, the results could be disastrous.”

And that made me mad. No national bank regulator would have dared to come up with regulations like the current risk-weighted equity requirements for banks, and that so negatively affects the fair access to bank credit of the “risky”, like the start-ups. For instance the reason for which a Greek bank needs to hold much more equity when lending to a Greek start-up, than when lending to the government of Germany, is precisely the existence of a big monstrous non-transparent and not accountable concoction as is the Basel Committee for Banking Supervision.

In short, if I was a small start-up, I would like the regulator to be small like me, and not one of those biggies who mostly go to Davos and meet with SIFIs and the likes of Facebook.


Regulators believe those perceived as “safe”, will originate less unexpected losses for banks than the “risky”. Loony!

Sir, I refer to your Special Report “Risk Management – Property” April 27.

It mentions the risks of: climate change, cyber security breaches, terrorism, earthquakes… all those risks that are difficult to currently estimate but that can produce extraordinary unexpected losses… including for banks.

But those risks are not considered at all by regulators who, when setting their equity requirements for banks, use the expected losses derived from perceived credit risks as a proxy for the unexpected… more-credit-risk-more-capital and less credit-risk-less capital

It sort of translates in that regulators would seem to believe that risks, like those listed affect more the “risky” like the SMEs, than the sovereigns and the members of the AAArisktocracy. I can’t believe you believe that too.


April 28, 2015

Basing equity requirements for banks based on cuckoo-calls, could be better than using current risk weights

Sir, Satyajit Das writes “Where assets are not adjusted for relative risk, banks are encouraged to increase risk without having to hold additional capital”, “Rules to cut bank risk work in theory but not necessarily in practice”, April 28.

Wrong! Adjusted to relative risk has all to do with expected risks, with unexpected losses, those that bankers should be able to manage or have to fail, fast. Capital requirements should create a shield against the unexpected, something which definitely does not include the expected risks that banks are already clearing for.

For instance, if the probability of a cuckoo calling out more than x times during x month was 8 percent, then that percentage or required equity applied to all bank assets would make more sense that current risk-weights.

As is banks are not taking sufficient risk on what is perceived as risky, like lending to SMEs, but taking excessive risks on what is perceived as “safe”, like lending to the sovereigns or to the AAArisktocracy

The cuckoos in the forest would serve us better than the cuckoos in the Basel Committee.

The single currency is still a great gamble, but Europe don’t blame it for causing the current crisis.

Sir, in November 1998, in an Op-Ed titled “Burning the bridges in Europe”, I expressed serious reservations about the single currency. Among it, because “The Euro… seems to be aimed at creating unity and cohesion. It is not the result of these.”

But I do get upset when I read a letter like that of Sir James Pickthorn “Admit it, FT – the single currency has been the most awful mistake.”

Basel II regulations of June 2004, because of how Greece was rated A+ to A- between November 2004 and January 2009, would have allowed banks to lend to Greece leveraging their equity more than 60 to 1. The capital (equity) requirement was a meager 1.6 percent (the basic 8% times a 20% risk-weight).

And so of course the Greek government was doomed to take on too much public debt. What Greek politician/bureaucrat would have been able to resists the offers of loans? What couple of banks at least would not have resisted the temptation to offer these to Greece, in order to earn fabulous expected risk adjusted returns on their equity?

What would then have happened if there had been no Euro, and Greece had borrowed Dollars, Pounds or Deutsche Marks? The ensuing haircuts would be direct, or indirect by means of Drachma devaluations. Yes the crisis resolutions could perhaps been less traumatic, but the crisis would still have happened.

Get any European country to use its own currency, but keep current distortions of bank credit in place, and they are still all doomed! If someone needs to apologize to Europe, that is the Basel Committee for Banking Supervision. If something will really bring Europe to its knees, it is not the Euro but the risk-aversion implicit in current bank regulations. 


April 25, 2015

Under the rules of the Basel Committee for Banking Supervision, Cirque du Soleil would probably never have existed

Sir, with respect to the enormous success of Cirque du Soleil, Ludovic Hunter-Tileny writes that Mr. Laliberté ascribes his rise to a gambler´s boldness [and] Government grants and a substantial overdraft from a Quebec community bank” “Sun king of circus take the high wire” April 25.

That was in 1984… today after the Basel Committee started to regulate; and concocted equity requirements for banks that are higher for what is perceived as risky than for what is perceived ex ante as safe, meaning banks earn higher risk adjusted returns on equity financing what is "safe" than financing what is "risky", that bank credit would most probably not have been awarded. Please reflect on that.


US Congress, keep the US Export-Import-Bank open, you’ve got much more serious credit distortions to fight.

Sir, with respect to the US closing Exim Bank you write about “the economic equivalent of unilateral disarmament in a world bristling with nuclear weapons” as if the one disarming was doing what’s immoral, “The wobbly economic leadership from America” April 25.

You write “In the past two years, Chinese development banks have lent $670bn in subsidized credit in subsidized credit to help domestic companies win bids all over the world… more than all Exim guarantees since set up in the 30s” and still you argue that Exim-Bank could serve “as a check on crony capitalism practiced by China and others? 

And you write “No private sector bank will finance 15 year emerging market projects” Of course not, why should they when they are allowed to hold less equity when lending to already emerged markets perceived as safer?

Would I close Exim-Bank? No, I have been able to use it very satisfactorily during my life, so that would be something extremely ungrateful of me. But, that said, much more important than keeping it open, is to get rid of the credit-risk differentiated equity requirements for banks, those which distort immensely the allocation of bank credit all around the world. The Basel Committee, that’s what the US Congress should really be working to close down, or at least forbidding it to discriminate between borrowers.


Margrethe Vestdager, Europe’s competition commissioner, dare to confront your technocrat colleagues in Basel Committee

Sir, Mario Monti raves about the policies imposed by the European Competition Commissioner Margrethe Vestdager, “The bold Brussels ‘eurocrats’ who command the world’s respect” April 25.

Indeed, taking on Goggle and Gazprom, is unquestionably a sign of great daring. Still I wonder if Commissionaire Vestdager has what it takes to stop her colleagues, other technocrats/bureaucrats , from hindering competition.

Banks are currently required by the Basel Committee to hold more equity against those perceived as risky than against those perceived as safe. And in doing so they odiously discriminate directly against those who anyhow have less access to bank credit, and anyhow need to pay higher interests, precisely because they are perceived as risky.

In other words the regulators have given those perceived as “safe”, an unfair huge competitive advantage when it comes to accessing bank credit.


Risk of cyber-attack weighted equity requirements for banks make much more sense than the credit-risk weighted

Sir, I refer to Gillian Tett’s “Will cyber attacks mean the light go out?” April 25.

In it Tett describes the possibility of some huge unexpected losses that could happen to banks or to borrowers. And unexpected losses is precisely against which for instance banks, should be required to hold equity.

Instead our current regulators in the Basel Committee require banks to hold equity against the expected losses reflected in the perceived credit risks. As if the unexpected would be a function of the expected? Now how dumb is not that?

But perhaps there is a relation, though not the one the regulators see. The truth is that the safer something seems, the worse could be the consequences of something unexpected.

Natural sources of inequalities are more than enough for us to carelessly layer manmade ones on top

Sir, Tim Harford writes that “Anthony Atkinson is right to say that the evidence doesn’t conclusively rule out… that a 65 percent top rate of tax is likely to be counterproductive”, “The Truth about inequality” April 25. 

For anyone trapped one way or another in the UK, that might be valid. But anyone with a fair or unfair capacity to generate earnings and who is thinking about living in England, that certainly gives him reasons to think again. That some have to pay higher taxes than other could be reasonable, but it is not really about equality either.

I consider that in discussions about inequality it is always important to try to classify its origins as natural or manmade. For instance those perceived as risky from a credit point of view will always have less access to bank credit and will always have to pay higher interest rates. And that is natural, because it is natural that banks should give the loans to those who pay them the best margins after all costs, including credit risk premiums.

But regulators have decided that a bank should also be allowed to leverage its equity, and the support its receive from taxpayers, much more with margins paid by those perceived as safe than with margins paid by those perceived as risky. And that signifies a manmade source of inequality. Those perceived as risky, like SMEs and entrepreneurs, consequentially face even less access to bank credit and even higher relative interest costs. Any society that believes that’s the way to go has clearly gone bonkers.


April 24, 2015

Sometimes good bumper stickers are the best way to begin paving the road to a better world.

Sir, Philip Stephens writes: “the US lacks the resources and political will for ‘generational’ projects to transform the Middle East” “Republicans want a bumper sticker world” April 24.

The US Congress Iraq Study Group Report of May 2006 stated: “There are proposals to redistribute a portion of oil revenues directly to the population on a per capita basis. These proposals have the potential to give all Iraqi citizens a stake in the nation’s chief natural resource"

If that idea would have been implemented, you can bet the Middle East would have seen much good transformation… and not only there, other places, like Venezuela, would have benefitted immensely from such example.

Unfortunately the same Report then wrote: “Oil revenues have been incorporated into state budget projections for the next several years. There is no institution in Iraq at present that could properly implement such a distribution system. It would take substantial time to establish, and would have to be based on a well-developed state census and income tax system, which Iraq currently lacks.”

As if that was any real excuse. Any of the big credit card company could have set up a program that could have reached 50 percent of the Iraqis in 1 year, with the ambition of covering 100 percent in five years. What a missed opportunity for a real silver bullet.

But the US has other strengths… for instance with respect to oil revenue sharing why not ask Hollywood to make an inspirational movie.

It could for instance depict how a hypothetical country, one like Venezuela in which 97 percent of all that nations exports go directly into government coffers, becomes fundamentally transformed for the better, when some a “Hayek platoon” manages to allow the power of oil resources to flow directly to the citizens.

Recently Marco Rubio stated: “More government isn’t going to help you get ahead. It’s going to hold you back. More government isn’t going to create more opportunities. It’s going to limit them. And more government isn’t going to inspire new ideas, new businesses and new private sector jobs. It’s going to create uncertainty.”

And so that idea would seem to fit the political platform of any Republican who aspires the presidency, and, hopefully, also that of some democrats.

And a good bumper sticker: “Citizen’s should not need to live in somebody else’s business – End Natural Resource Curses” could perhaps be a way to begin it all.

And Sir, you know of course that if there is one bumper sticker I would also like to see in the next elections, that is “Stop bank regulators’ odious discrimination… against the ‘risky’ SMEs and entrepreneurs… that is un-American… that does not belong in the Land of the Free nor in the Home of the Brave”.


Jason Furman, things are not starting to go right. With the current distortion of bank credit, that’s impossible

Sir, Gillian Tett quotes Jason Furman, chairman of the US Council of Economic Advisors in that a “Greek exit would be taking a risk with the global economy just when things are starting to go right” “America fears a European sequel to Lehman”, April 24. 

Where does he get that “starting to go right” from? While regulators allow banks to earn higher risk adjusted returns on equity on what is perceived safe than on what is perceived as risky, things simply cannot go right. 

But of course there could be a sequel to Lehman. That, while banks are made to finance too much what is perceived as safe, is guaranteed. Excessive exposures to what is ex ante perceived as safe but that ex post turns out to be risky, is precisely the stuff major bank crises are made off. 

But, following this line of argument, Greece will not cause it. Greece has been perceived as risky, for a sufficient long time, so as to pose a major threat.

PS. I assume of course that the equity banks are required to hold when lending to Greece has been increased… and is no longer zero J


April 23, 2015

A world obsessed with Best Practices may calcify its structure and break with any small wind

In reference to Mr. Flash Crash’s supposedly malevolent disruption of the market in 2010, John Plender writes interestingly about globalization, regulations and fragility “Global financial regulation meets a cul-de-sac” April 23.

In this respect I would like to recall a written statement that I delivered as an Executive Director of the World Bank on April 2, 2003, while discussing its Stategic Framework 04-06. In it I wrote:

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. 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 and we are already able to discern some of the victims, although they are just the tip of an iceberg.

A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind. Who could really defend the value of diversity, if not The World Bank?"


April 22, 2015

Here are two recommendations to Raghuram Rajan on how to get India’s banks to become functional banks

Sir, I refer to David Keohane’s and James Crabtree’s “India’s central bank struggles to ensure lenders pass on interest rate cuts” April 22.

There are references to a “broken down process of monetary transmission through which the wishes of the central bank are transmitted to the real economy”, and to “a banking system frozen by high rates of bad loans”.

The following is what I would advice Raghuram Rajan to do, if he really wanted banks to become functional financing efficiently the real economy.

First, get rid of stupid Basel bank regulations that, with their different equity requirements based on credit risks, so distort the allocation of bank credit. These introduce a regulatory risk-aversion that has no place anywhere, but much less in a developing country, since risk-taking is the oxygen of any development. In its place put for instance an 8 percent equity requirement on all bank assets, and throw out forever, the portfolio invariant credit-risk equity requirements. Of course that could create a big need for fresh bank equity, and so…

Second, in order to take away the dead weight caused by the bad loans, and to help to fill any new bank equity needs, the central banks should proceed like Chile did during its financial crisis. Namely capitalizing all the banks by purchasing their non-performing loans, against the commitment by the banks to repurchase these assets from the central bank with their retained earnings, before any substantial dividend payments to their shareholders could be made.

You would then have well capitalized banks, ready to give credit on non distorted terms to for instance “risky” SMEs and entrepreneurs, and simultaneously been made so much safer that, presumably, they would have to pay less interest rates to depositors, and in the medium or long terms less dividends to shareholders. Not bad for a couple of hours work eh?


Capital, as in bank credit, is not “deregulated to a sensible degree”. It is clearly insensibly misregulated.

Sir, I refer to your “UK’s weak productivity invites a bolder response” April 22.

If a corporate borrower, who for instance has a credit rating of A, becomes downgraded one notch to BBB+, the expected losses naturally go up. But the bank equity requirements, which are to cover for unexpected losses, these also go up; in Basel II from 4 to 8 percent, and that is not natural.

The reason for this double whammy, that in a downturn hits the bank’s capacity to give credit, has to do with the fact that Basel regulations derives the estimation of unexpected losses, from the probabilities of default, in other words from the expected losses.

And of course, as I have told you, not joking more than a 1.000 times, the existence of different bank equity requirements based on different credit risk perceptions, also makes it impossible for banks to allocate credit efficiently to the real economy.

And so much of the fall in productive potential that you attribute to “the economy suffered a shock of demand”, is instead the result of these crazy bank regulations that direct the flows of bank credit to what’s “safe” and away from what’s “risky”. And in consequence your opinion that “capital” is “deregulated to a sensible degree” is just laughable. These are clearly very insensibly misregulated.


April 21, 2015

Greece and Europe, allow your banks to function like banks again…look how Chile did it.

Martin Wolf writes: “It is Greece’s fault. Nobody was forced to lend to Greece.”, “Mythology that blocks progress in Greece” April 22.

Perhaps not forced. But setting up irresistible temptations, like allowing banks to leverage their equity, and the support they receive from society, more than 60 to 1 when lending to Greece, comes extremely close to forcing. Put a plate with a good chocolate cake in front of children, and see what happens.

And then Wolf writes: “The ECB should not lend to clearly insolvent banks”… And I ask, why not? To have ECB competing with pension funds and widows and orphans for whatever little “safe” assets there is left does not make any sense.

Now if the ECB did like Chile did in 1982-83; capitalizing all banks by purchasing their non-performing loans; against an agreement that banks would not pay dividends until they had repurchased these loans from the ECB, then Greek banks would be fit to operate again as banks.

Of course, for the Greek banks to be helpful to the real Greek economy. you would have to get rid of the credit risk weighted equity requirements for banks, those which impede that banks will give credit to those who most could do good by receiving bank credit, like to the SMEs and entrepreneurs.

Whatever, to solve Greece’s problems, more zero risk weighted loans to the sovereign, in order for government bureaucrats to allocate the resources derived from bank credit, will just not cut it… no matter how much haircut on Greece’s debt you accept.

And “the Centre for Economic Policy Research notes that excessive debt hangs over the entire eurozone, not just Greece.”

Yes indeed, and that is why I would suggest applying the Chilean solution all over Europe.

Europe, allow your banks to finance the riskier future, and keep them from only refinancing the safer past.

PS. This was written before I discovered that, in the case of Europe the regulations were even worse than Basel II's. The European Commission adopted Sovereign Debt Privileges which assigned a 0% risk weight to all their sovereigns. That meant banks could lend to Greece without holding any capital at all. Holy moly! To top it up Eurozone sovereigns are indebted in a currency that de facto is not a real domestic (printable) currency for them.

April 20, 2015

Current bank regulators not only do not know what they are doing, they even double down on their ignorance

Sir, Robert Lenzner writes “Seven years after the worst crash since 1929, the alarming fact is that financial regulators still know next to nothing about the true level of risk that big banks are exposed to”, “Hidden dangers that banking regulators cannot understand”, April 21.

Of course they don’t, and I have been telling you so in more than 1.800 letters over the last decade. Any regulator who sets the equity requirements for banks based on the risk of their assets, and not based on the risks that have always caused the banks to fail, has no idea about what he is doing.

And any regulator who allows banks to leverage differently for different assets, and thereby distorts the allocation of bank credit to the real economy, is only doubling down on his ignorance.


Britain’s Royal Statistical Society, for our sake, please give also bank regulators a course in statistics.

Sir, Anjana Ahuja reports that “Britain’s Royal Statistical Society has launched the #ParliamentCounts campaign, offering all MPs a free training course in statistics”, “Our collective innumeracy adds up to a big problem”, April 20.

What a marvelous initiative. I just hope they could follow it up with a similar course for our bank regulators. I say this because the regulators, while trying to make our banks safer by setting their risk-weighted equity requirements for banks, have been looking at the completely wrong series of statistics. Instead of looking at why banks failed, they have been looking at the risks of bank assets, how bank clients fail, and all of us who have some basic knowledge about statistics know very well that c'est pas la même chose.

That lack of elemental statistical knowledge caused bank regulators to set higher bank equity requirements against assets perceived as “risky” when in fact, what is truly dangerous for banks, have always been assets erroneously perceived as absolutely safe.

PS. April 21 I send the Members of the Royal Statistical Society a letter requesting an urgent Statistical Literacy Initiative

Greece, Europe, to keep your banking sector afloat, and in good spirits, look to Chile.

Sir, Wolfgang Münchau writes: “So to default “inside the eurozone” one only needs to devise another way to keep the [Greek] banking system afloat. If someone could concoct a brilliant answer, there would be no need for Grexit.” “A Greek default is necessary but Grexit is not” April 20.

I am sorry. I do not think the problem of banks is limited to the Greek ones. All European banks must surely have problems with excessive long-term exposures at low rates to what is perceived as “safe”, and to which they are seriously undercapitalized because of the risk-weighting… and any little tick up in interest rates could wipe out all their equity.

In my mind what Greece (and the rest of Europe) most need now is an ambitious recapitalization of banks plan that brings their equity up to around 8 percent for all assets… inclusively against sovereign debt. None of that risk-weighted assets nonsense that only confuses.

Chile might be the role model for how to proceed. Banks there were recapitalized by the Central Bank issuing local credit, in order to buy all the nonperforming loans of the banks. And the banks in their turn agreed to repurchase all non-performing loans, plus to pay some interests, out of retained profits... before resuming any dividend payments.

In fact that is what ECB should be doing with its QEs. To have ECB competing with pension funds and widows and orphans for whatever little “safe” assets there are left does not make much sense.


April 19, 2015

To begin ending the too-big-to-fail banks, start by taking away the bowl of growth hormones.

Sir, I refer to your “Misbehaving banks must have their day in court” April 21

In November 1999 in an Op-Ed I wrote: “Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

And in May 2003, in a workshop for regulators at the World Bank, while Basel II was being discussed, I opined: “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.

And so I guess I have been on the forefront of fighting the TBTF banks.

But, during that fight I have become convinced that the most important tool would be to take away from the banks that bowl of growth hormones that minimum equity requirement against assets perceived as safe signify.

And, talking about “a day in court”, I would also haul regulators in front of a judge in order to ask them: “Who gave you the right to discriminate against those perceived as risky, those who, precisely because of that perception, are already naturally discriminated against by banks?


The economists’ UK manifesto, seems to be over 90 percent long on government bureaucrats.

Sir I refer to Tim Harford’s “The economists’ manifesto” April 18.

Nick Stern: “green infrastructure bank…congestion charges…carbon tax”.

Jonathan Haskel: “government funding of science” with government borrowing taking advantage of the ultra-low interest rates.

Gemma Tetlow: “abolish national insurance entirely and replace it with higher rates of income tax”

John van Reenen: “an infrastructure bank to help finance projects by borrowing from capital markets and investing alongside private sector banks”

Kate Barker: “replace council tax with a land value tax”…taxing expensive homes more heavily and “charge capital gain’s tax on people’s principal residence”

Simon Wren-Lewis: “the Bank of England should print the money and hand it to the government on condition it be used for fiscal expansion.”

Diane Coyle: To limit executive pay packages.

Though Nick Stern mentions his proposal is “long on UK strengths such as entrepreneurship” I would hold the Economist’s manifesto package seems to be over 90 percent long on government bureaucrats.

My own recommendation, also as an economist, would be to create some lebensraum for UK entrepreneurs and SMEs, by firing current bank regulators.


Because banks are allowed to hold less equity against assets perceived as safe than against assets perceived as risky.

So banks can leverage more their equity, and the support they receive from society, with assets perceived as safe than with assets perceived as risky.

So banks can earn higher risk adjusted returns on equity with assets perceived as safe than with assets perceived as risky.

So banks will lend too much at too low rates to what is perceived as safe, like infallible sovereigns and members of the AAArisktocracy, and too little at too high relative rates to what is perceived as risky, like SMEs and entrepreneurs.

And so the indisputable fact about current bank regulation is that it distorts all common sense out of the allocation of bank credit to the real economy.

PS. I hear again about ultra-low interests... careful these rates are being subsidized.


April 18, 2015

When the Basel Committee ordered banks to stay in bed, like Brian Wilson did, they decreed “secular stagnation”

Sir, you hold that “Seizing advantage of rock-bottom rates is the best way to raise them” “The worst mistake is to ignore secular stagnation” April 18.

No! When will you understand that those “rock-bottom” rates you refer to are not natural low rates but subsidized low rates? And the best thing to do is simply to remove these subsidies, especially because these are creating havoc in other areas of the economy.

What subsidies? Those that result from allowing banks to hold so much less equity against assets perceived as safe than against assets perceived as risky. Or do you really believe rates for sovereigns would be as low as they are, if banks needed to hold the same equity against loans to a sovereign than against loans to SMEs?

The surest way to secular stagnation for a society, is deciding that it does not want to risk anything of what it already has, in order to bet on what it could have.

And Sir, that is precisely what bank regulators, with their credit-risk-weighted equity requirements for banks, de facto decreed. With these they ordered banks to stay away from the “risky” SMEs and entrepreneurs and keep to the “infallible” sovereigns and to the AAArisktocracy. And banks are of course those who should be in charge of channeling to the real economy most of the savings of the society… included the cash accumulated by the corporate Apples of this world.

In other words Sir, the Basel Committee decreed a secular stagnation. And that was not nice of them!

To get our children and grandchildren out of the hole they find themselves in, we need to get rid of the odious regulatory discrimination against the risky, those who already are naturally sufficiently discriminated against by the banks. 


April 17, 2015

Martin Wolf, current bank regulators show really no interest in your country’s future.

Sir, Martin Wolf writes: “The Scottish Nationalist party does not have an interest in my country’s success. It is interested only in what it can extract from us.” “Long live the United Kingdom — but not at any price” April 17.

But extracting for the benefit of the current generation all it can of what already exists; and by denying the risk taking needed showing no interest in the future, is exactly what current bank regulations do. With their credit-risk weighted equity requirements for banks the regulators have de facto placed a reverse mortgage on the United Kingdom, something that guarantees there will be much less to inherit for its coming generations.

But perhaps Martin Wolf, as a senior citizen, does not mind at all such regulatory risk-aversion… he might rather favor an “Après moi le deluge”.


April 14, 2015

By seemingly in vain trying to convince bank regulators to stop distorting, I do identify with doctor Ignaz Semmelweis

Sir, John Kay writes: “The medical profession is often resistant to innovation, especially innovation that challenges accepted wisdom — in the 19th century the Hungarian doctor Ignaz Semmelweis struggled for decades to persuade his colleagues that the best thing they could do for patients was wash their own hands”, “Pragmatism works best in the reform of economics”, April 15.

I am not a bank regulator by profession, but boy do I identify with doctor Semmelweis’ struggles. For a decade I have tried to persuade bank regulators that the worst thing they could do to promote the instability of banks, and the destruction of the economy, is to distort the allocation of bank credit to the real economy. But, there they are, getting their hands dirty, and still applying their Portfolio Invariant Credit-Risk-Weighted Equity requirements for banks.

Semmelweis did not manage to get his message thru to the medical community during his lifetime, since his observations conflicted with the established scientific and medical opinions of the time. The rejection of his ideas might have caused him to be committed to an insane asylum in which he was supposedly beaten to death.

I take the rejections of my arguments with much humor, and have the full support of family and friends, and so I believe I will be able to escape a similar tragic destiny.


How long would roulette remain a valid game under a Basel Committee for Gaming Supervision?

Sir, roulette is a game where absolutely all bets produce exactly the same expected financial payout; in this case a small loss since the house wins when the zero comes up. What would happen if regulations forced casino to increase the payout for “safer” bets, like betting on a color, than for “riskier” bets, like betting on a number? Easy, the game of roulette (and the casinos) would not be sustainable.

But, to forcefully alter the payouts and introduce a disequilibrium, is exactly what bank regulators have done by allowing banks to leverage much more their equity, and the support they receive from taxpayers, with assets perceived as safe than with assets perceived as risky.

The result will be too much betting on what’s perceived as safe, and too little betting on what perceived as risky; something that of course makes the financial sector and the economy unsustainable.

Unfortunately, the IMF, the Basel Committee, the Financial Stability Board; and experts like Lawrence Summers, Ben Bernanke, Paul Krugman, and Martin Wolf, none of them wants to acknowledge the risk-adverse distortions in the allocation of bank credit to the real economy, that the current bank regulations produce.

And, without considering that, then the whole discussion to which Martin Wolf refers to in “An economic future that may never brighten” April 15, becomes incomplete and unproductive… or in franker terms… nonsensical.


April 13, 2015

Has Europe fallen into the hands of a Chauncey Gardiner like figure?

Sir, I refer to Joel Lewin’s “European QE redraws junk bond frontier” April 14.

Were the implications not so tragic one could have joked about Europe having fallen into the hands of a Chauncey Gardiner like figure; the gardener elevated to Economic-Guru in Jerzy Kosinski’s “Being There”.

ECB’s/Mario Draghi’s seems not to understand the dangers of flooding the markets with QE liquidity, while the channels for that to flow by means of bank credit to where it is most needed, like to SMEs, are clogged. Firmly clogged by senseless credit-risk-weighted equity requirements for banks.

The overflow of liquidity, into more risky bonds, creates clearly serious risks for individual investors. But, for the economy at large, much worse is the dangerous overpopulation of the “safe-havens”; and the even more dangerous refusal to explore the risky bays, where there is a chance to find what could feed the future.

At least a normal gardener would now you need to water the plants, but not too much.


April 12, 2015

Blind to effects of risk weighted equity requirements for banks, Summers-Bernanke do not understand what’s happening

Sir, Wolfgang Münchau refers to discrepancies between Lawrence Summers and Ben Bernanke about the deep causes of the economic slowdown, “Macroeconomists need new tools to challenge consensus”, April13.

Both Summers and Bernanke, like most or perhaps all other famous economists, Münchau included, fail to consider the dramatic consequences of the new bank regulations that came into effect in the early 1990s with Basel I, and which really exploded with Basel II in 2004.

Before the advent of risk-weighted equity requirements, banks could be leveraged differently. But, whatever their leverage was at a particular moment, it was de facto applied to all bank assets, independently of their respective credit risk. That meant banks evaluated credits solely on the basis of the risk-adjusted net margins these were expected to produce; since those margins would contribute in the same way to generate the returns on bank equity. Those were the days of relative fair-access for all to bank credit.

When credit-risk-weighted equity requirements were introduced this resulted in that the risk-adjusted margins produced different risk-adjusted returns on equity, depending on how many times regulators allowed these to be leveraged. And that marked the beginning of the current ear of unfair access to bank credit. Those perceived as “safe” would have better risk-adjusted access to bank credit than those perceived as “risky”.

In practical terms those perceived as “safe” would get too much ban credit at too easy terms, while those perceived as “risky” would get too little bank credit at relatively too harsh terms. 

And of course this dramatically distorted the allocation of bank credit to the real economy and has made many traditional macroeconomic assumption irrelevant. 

And of course any economist unaware of the Great Distortion, or not wanting or daring to consider its implications, has no idea of what is really going on.


Technocrats, pouring QEs over clogged financial transmission mechanisms, set us up for the mother of all hangovers.

Sir, Henny Sender puts her finger on what should be of utmost concern for most delegates to discuss during IMF and World Bank meetings next week, namely that “Weak growth suggests QE might not have been worth the costs” April 11.

And Sender is so right remarking on how “odd… is the absence of a vigorous debate about the costs of these experiments, whether in the US, in Japan or now in Europe.”

With their QEs, unelected technocrats are pushing our economies higher and higher up a mountain of risks, for absolutely no purpose. As I’ve written to you Sir, at least a hundred times, if the liquidity provided by these schemes, are not allocated efficiently to the real economy, then absolutely nothing good can come out of it.

But the same unelected technocrats, simultaneously, by means of credit-risk-weighted equity requirements, have clogged the financial transmission mechanism, hindering bank credit to reach where it is most needed, the SMEs and the entrepreneurs. In other words, we are being set up for the mother of all hangovers. Damn those technocrat clowns!

According to the report by Swiss Re that Sender quotes, “US savers alone have lost $470bn in interest rate income, net of lower debt costs”. That is only one of the first symptoms.


April 11, 2015

Allow the SMEs and entrepreneurs to help build up the economy, and bridges to somewhere will follow.

Sir, Alan Beattie writes “The IMF, transformed from an agent of neoliberalism to a Gosplan-style advocate of public works, also supports a government investment push”, “The less appealing way to abolish boom and bust” April 11.

IMF, in Chapter IV of its recent World Economic Outlook of 2015, titled “Private investment: What’s the hold up” acknowledges: “Firms with financial constraints face difficulty expanding business investment because they lack funding resources to do so, regardless of their business perspectives” (page 11); “financially dependent sectors invest significantly less than-less dependent sectors during banking crisis” (page 15).

Yet the primary “Policy Implications” reached by the study is: “a strong case for increased public infrastructure investments…[and] for structural reforms…for example reforms to strengthen labor force participation and potential employment, given aging populations. By increasing the outlook for potential output, such measures could encourage private investments” (page 18). 

And only then, almost as an afterthought, is it that the IMF puts forward: “Finally, the evidence… suggests a role for policies aimed at relieving crisis-related financial constraints”.

What “suggests a role”?

How on earth can IMF consider public infrastructure investments more important for the economy than relieving financial constrains?

One explanation could be that the study includes only data that “cover public listed firms only” and not data about “unlisted small and medium sized enterprises” (page 13). Clearly, if you do not study those most in need of access to bank credit, then you will of course not be able to measure the real importance of relieving financial constrains.

The second explanation is that IMF’s professionals insist in covering up for the mistakes of colleagues, the bank regulators. That is because relieving the real financial constrains, requires exposing how the current credit-risk-weighted equity requirements for banks odiously discriminates against the fair access to bank credit of those who most need it, like the SMEs and entrepreneurs.

Sir, the most important thing to do is to get rid of the regulatory distortions so as to enable banks once again to allocate their credit more efficiently to the real economy. If that is done, then you might find places whereto bridges should be construed. Otherwise the risk of building too many bridges to nowhere, is just too big for any economy to manage.


If I were a bank regulator, I would at least give Dyson’s engineering a call.

Sir, I refer to John Gapper’s and Tanya Powley’s fabulous interview with James and Jake Dyson “All inventors are maniacs” April 11.

Just thought you might be interested in a post on my subprime-bank regulations blog that I posted last year. It begins with:

“There I was trying to dry my hands wringing them in some tepid air blowing from the round hole of an appliance, thinking about how much more efficient the flat whole hand reaching drier was, when suddenly I thought… if I were a bank regulator I would at least give Dyson’s engineering group a call to see what they would think I should do….

I invite you to read it:


What correlation Andy Haldane? There is not even a regression between perceived risk of assets and major bank crisis.

Sir, Tim Harford mentions that “Andy Haldane, chief economist of the Bank of England, recently argued that economists might want to take mere correlations more seriously”, “Cigarettes, damn cigarettes and statistics” April 11.

I agree and a good place to start would be to even establish whether a correlation exists. Currently regulators have decided that what is perceived as safe from a credit point of view, shall require banks to hold much less equity than what is perceived as risky. That introduces serious distortions in how bank credit is allocated to the real economy.

I presume such equity requirements could only be justified if these helped to make the banks so much safer in such a way, that the benefits that would bring to the economy were larger than the possible negative effects of an inefficient credit allocation. Personally I do not see how that could be.

But no such analysis backs the credit risk weighted equity requirements that currently form the pillar of bank regulations.

Much worse yet, there is not even a regression between the ex ante perceived credit risks of bank exposures and major bank crisis… so there is not even a correlation to look at.

And so yes, Andy Haldane should run that regression, and take the resulting correlation seriously, even if as a regulator he then must eat plenty of humble pie.

I say so because starting from the angle of causation, I expect the correlation Haldane would find would indicate that the safer a bank asset is perceived ex ante, the more danger to the banking system it represents. In other words a 180-degree different relation than what bank regulators actually assume.

Why is it so hard to have regulators following the precept of do no harm?


PS. Follow my adventures battling the Basel Committee for Banking Supervision (and the Financial Stability Board)

April 08, 2015

With the Basel Committee’s injudicious regulations, it is very difficult for a bank to give credit judiciously.

Sir, Henny Sender holds that “Banks must lend more judiciously to prosper in emerging markets” April 8. Who could disagree with that? That applies of course to all markets and not only emerging markets.

But in order to do that, banks need to focus 100 percent on the borrower and not, as now, spend too much time looking at how it can structure the loan so as to be required to hold the least of equity against it.

When we read about Stan-Chart’s “commodity-related exposures” and that “much of the lending uses property as collateral” one gets the feeling that perhaps the “minimize the equity” objective might have triumphed the “know your client” criteria.

And this is but one of the should-be-expected, unexpected consequences of the Basel Committee’s injudiciously distorting credit-risk-weighted capital requirements..


April 07, 2015

Unbelievable that with so much history, Europe, instead of with a “Bang!”, could be going down with a whimper.

Sir, Robert D Kaplan, in “America is growing impatient with Europe’s appeasement”, April 7, states as a matter of fact “Gutsy is not a word one would use to describe Europe’s political class”. Sadly, very sadly, it is very hard to debate that.

And right below, giving credence to such an affirmation, we find Martin Wolf writing in “China will struggle to keep its momentum”, that “The world must pray the Chinese authorities manage this transition successfully. The alternative is not to be contemplated”; which basically reads like an anxious European convinced that his future is all-dependent on China’s.

Really, if Europe thinks it will be better off accommodating to Putin’s Russia; or if it thinks that its economy will be better off depending on China’s; (or if it feels that its bankers should earn their returns on equity solely with what is perceived as safe), then sadly it would seem that Europe is lost before the fight has even begun.

But hidden, somewhere in its gutters, there must be a reserve of European elites who can understand that it is time to stand firm… since it seems unbelievable that with so much history Europe, more than going out with a Bang! could be going down with a whimper.

Aren’t there any Bravehearts or Churchills in Europe anymore?

And, having observed the growing nanny mentality in America, its elite should be careful too. When drones are viewed as more convenient than boots on the ground, many strange things can happen.


Any regulator that would call what is currently happening an unexpected consequence is clearly not fit to regulate.

Sir, I refer to Stephen Foley’s “BlackRock chief warns ripple effect of strong dollar threatens US growth” April 7.

It states that Larry Fink, CEO of BlackRock “highlights the risk that monetary easing has inflated asset bubbles as investors such as pension funds searching for yield in a low interest environment are pushed into riskier classes”. And it quotes Mr Fink with: “This mix of growing assets and shrinking yields is creating a dangerous imbalance”. I am left wondering whether Mr. Fink really knows what is going on.

Does he know that one reason for why pension funds “are pushed into riskier classes”, is that they are pushed out from the perceived safe havens by bankers pushed into safer classes by their regulators with their silly and dangerous credit risk weighted equity requirements for banks? And that is just going to get worse the tighter bank equity gets to be, and when insurance companies also regulated with Solvency II in a similar way?

Indeed, “monetary policy seem insufficiently attuned to the conundrums their actions are creating for investors” But regulators are equally attuned to the conundrums their actions are creating for the fair access to bank credit of “the risky”, like for all the SMEs and entrepreneurs we need to get going when the going is tough.

And regulators please do not call all this an unexpected consequence. If you do it just evidences even more that you are definitely not fit to regulate.


More than the decline of individual countries, we are experiencing the decline of the world in general.

Sir, any country that signs up on the idea of allowing banks to hold less equity when lending to what is perceived as safe, than when ending to what is perceived as risky, has ordained a risk aversion that will cause it to decline. It will not longer finance sufficiently the more risky future, but will try to trot along for a while, by refinancing the safer past. Most of the world is currently implementing this type of Basel Committee regulations, China included.

And so any discussion on the decline of any country, like Gideon Rachman’s “Britain’s risky obsession with America’s wane” April 7, needs to be held against the perspective of a general decline.

For a starter no country with this type of regulations can aspire to reach world leadership based on its own efforts. Any increased leadership it could reach would only be based on someone else losing it faster.

Rachman refers to some having complained about Britain’s abandonment of “kith and kin” in the Commonwealth. Be that as it may it is much worse; like most of the world, it is abandoning its children, by refusing to take the risks needed for them to move forward, hiding in the very short-term safety of safe havens… soon to be dangerously overpopulated.

But again, of what importance can such minutia be to FT?


New Delhi might need some quality-of-air-weighted equity requirements for banks

Sir, you know I am convinced that the pillar of current bank regulations, namely credit-risk weighted equity requirements for banks is extremely stupid, as regulators clear for risks already cleared for by the banks. And so the consequences of that can only be too much credit at too lenient terms to what is perceived as safe, and too little credit at too harsh terms to what is perceived as risky.

If instead those equity requirements cleared for instance for the potential of job creation and or the sustainability of planet earth then we would also distort, but at least we would have injected some purpose to that distortion.

And so when I read Amy Kazmin´s “New Delhi Notebook: Politicians pass the polluted buck while air quality worsens” March 7, I immediately think of recommending the Indian authorities the following:

Set up an environmental rating agency, and allow banks to hold less equity against any loans that have a good environmental rating. That way the banks can leverage more that type of loans and get a higher risk-adjusted return on their equity for a good purpose. Let us never forget that what the bank really leverages is not only its own equity but also the implicit and explicit supports the taxpayers and society in general grants them; and so it is not outrageous to ask for that support to serve a better purpose than only a quite dangerous risk aversion.


When the products of groupthink do not stay in Vegas, and are applied elsewhere, that can be truly sinister.

Sir, Janan Ganesh writes: People that work in the same field develop their own codes and slang. They sleep and socialize with each other. Without intending it, they seal off the world from uncomprehending outsiders. It is a byproduct of specialization and there is nothing sinister about it”. “The average voter is immune to romance and fevered rhetoric” April 7.

Hold it! That depends on whether what the specialists do in their intimacy stays in Vegas or not. For instance, when bank regulators got cozy in their little Basel Committee mutual admiration club, and through an incestuous groupthink came up with their portfolio invariant credit-risk equity requirements for banks, well that turned into something extremely sinister that completely distorts the allocation of bank credit worldwide.


Since it can always pay back through inflation, I bank regulator, decree sovereign debt to have a zero risk-weight.

Sir, Diane Coyle begins “A history of inflation – and a future of deflation” April 7 with describing high inflation as “socially and economically corrosive, redistributing purchasing power away from small savers and those on low wages that do not keep up, and also degrading trust in long-term bargains”. In other words a truly public bad.

But then, because of “the effect deflation would have on real debt burdens” and how this would be “inhibiting a return to growth”, she ends arguing that “A quick and political painless way to reduce debt burdens, private and public, is a bout of high inflation.” Clearly a case of the damned if you do and damned if you don’t.

But, if what is really needed is a 30 percent inflation to cut all debts back to something livable, why not an Emergency Act that decrees a 30 percent haircut applicable to all debts in the society, including that of banks to its depositors. Would that not be a more transparent, less distortive and, hopefully, a politically more painful solution, so that we can get a little bit more accountability into the system?

I mention this because clearly the concept of inflation not being a haircut, although intellectually very repulsive, must be a prerequisite for allowing bank regulators to argue something so loony as a zero percent risk-weight for sovereign debt.


April 06, 2015

Bank regulations, which are just a more subtle form of capital controls, are neither on CFA exams.

Sir, John Dizard writes Investment managers will “wind up shocked, sputtering something about what happened to them could not have been expected because it was a seven, eight or nine sigma event… [since] Capital controls are not on the CFA exam, or accounted for by standard, or even the most sophisticated, probabilistic risk management models.” “A [capital control] plan till you get punched in the mouth” April 6.

Well neither are bank regulations, just another more subtle form of capital controls, part of a CFA exam, which is why subprime mortgage CDS, Cypriot bank deposits, investment-grade EM corporate debt, real estate in Spain and other similar turn out to be shockers.

Had it been on CFA’s curriculum, then anyone could have understood that, allowing banks to leverage up especially much with what was perceived as “safe”, would have to end in tears.

PS. In October 2004, in a letter published by FT I wrote and warned about how “our bank supervisors in Basel are unwittingly controlling the capital flows in the world.”


In 1988, US bank regulators enlisted the “Home of the Brave” to the causes of risk aversion and communism.

Sir, Lawrence Summers writes: “we may be headed into a world where capital is abundant and deflationary pressures are substantial. Demand could be in short supply for some time… the priority must be promoting investment, not imposing austerity”, “It is time the US leadership woke up to a new economic era”, April 6.

That is correct, but, when Summers opines the remedy to be: “The present system places the onus of adjustment on ‘borrowing’ countries. The world now requires a symmetric system, with pressure also placed on ‘surplus’ countries”, I disagree. What the US most needs is to get rid of its regulatory asymmetry, that which is expressed by requiring banks to hold more equity against assets perceived as risky than against assets perceived as safe.

Summers mentions that because China is launching a development bank, and some of US’ allies will join it, that “This… may be remembered as the moment the United States lost its role as the underwriter of the global economic system”. Not true!

It was in 1988, when the US signed up on the Basel Accord that stated the risk weight which determined the equity requirement for banks was to be zero percent for sovereigns, and 100 percent for unrated citizens, that the ‘Home of the Brave’ gave up the willingness to take the risks that had allowed it to become the underwriter of the global economic system.

In essence that was also the date when the US went statist, or, in more direct terms, became communistic.


April 04, 2015

They pay just 0.0025 to 0.02 cents of a dollar per advert to reach me online? No way! I am worth much more!

Sir, I refer to Tim Harford’s “Online ads: log in, tune out, turn off” April 4. It contains some very enlightening data for someone not in the business of targeting ads but only being a target of ads. Harford mentions that the rate for cheap advert may be as low 25 cents of a dollar per 1000 views, while good adverts may pay the publisher 2 dollars per 1000 view.

So that means that someone reaching me with a cheap advert pays for that 1/40th of a cent of a dollar while someone reaching me with a good advert pays 1/5th of a cent of a dollar. What a shocker, I thought getting my attention span was worth more than that. De facto I am a Mechanical Turk working at the receiving end. Not only do I perceive any income for that, zero salary, but, to add insult to injury, they are valuing the access to my attention span at ridiculous low rates.

It is clear that I urgently need someone to develop an App that will only allow ads that produces me an income of X dollars per hour of my attention span to reach me. The provider of that service, in charge of collecting my earnings, would have to work on a commission basis, so that I can be sure we are both targeting the same end results.

Since now and again I would wish to see a little of what is available in the cheap advert markets, occasionally I authorize allotting some of my valuable attention span, on a pro-bono basis.

PS. That X dollars per hour of my attention span will fluctuate according to market conditions.


April 01, 2015

Making clear the role of dangerously lousy bank regulations, would help to bridge many differences in Greece.

Sir, Martin Wolf writes: “The creditor side considers its generosity to profligate Greeks exemplary. The Greeks believe that private lenders were guilty of irresponsible lending, that the “rescue” was not of Greece but of those selfsame careless lenders and, above all, that Greeks have suffered enough. Both positions have merit. But no good will come from hurling such charges at one another”, “A mishap should not seal Greece’s fate”, April 1.

Absolutely! But what could have been happening if for instance a Martin Wolf had used his platform at FT to ask: “But what were European bank regulators doing allowing banks to lend to Greece's  government against basically no capital at all, so that banks had all incentives on earth to lend to Greece excessively?”

Would that have made a difference? I believe so.

As is, in the hurling of accusations between Greece and creditors, no one says a word about the role bank regulators played. They are the ones most to blame… but seemingly they got themselves a lot of protectors.

That is truly sad. The reality is that what Greece most needs now, is to liberate itself from regulations which, by favoring the access to bank credit of those who can only dig it deeper into the hole where it find itself, government bureaucrats, discriminates against the fair access to bank credit of those who can most help it to recover, its SMEs and entrepreneurs.