Jonathan Hill: In order to lower the capital requirements for banks, why must credits be securitized?

Sir, I refer to Jim Brunsden’s and Alex Barker’s “Why Hill is no markets union swashbuckler” September 30.

In it they write: “Europe’s companies remain overwhelmingly reliant on bank funding, which is problematic when lenders are scaling back risk-taking post-crisis. The remedy is promoting access to other sources, notably through selling shares and bonds. Here there is room for growth”.

Not exactly, banks are not “scaling back risk-taking post crisis” they are scaling back on capital requirements based on perceived risks... c'est pas la même chose.

They also write: “The remedy is promoting access to other sources, notably through selling shares and bonds” and Jonathan Hill in his “A stronger capital markets union for Europe” suggests: “To help free up banks’ balance sheets, making it easier for them to increase lending, I am proposing a new EU framework, with lower capital requirements, to encourage simple, transparent and standardized securitization”.

And I must ask Hill: Are not direct bank loans to “risky” SMEs and entrepreneurs simple and transparent enough? Does not securitization increase the complexity and thereby reduce transparency? Does securitization mean the borrowers benefit from better terms or that securitizers obtain better profit margins?

Why does Hill not propose instead to lower the capital requirements for the banks when lending to those who, precisely because they are ex ante perceived as risky, have never caused a major bank crisis?

Could it be because Jonathan Hill believes that securitization magically makes all more secure, or is it that he does not want be blamed by colleagues for spilling the beans on the greatest regulatory absurdity of all times… the portfolio invariant credit risk weighted capital requirements for banks.

That absurdity on which FT having kept so much mum on, also must be praying fervently disappears unnoticed.

@PerKurowski

Why did not Mark Carney warn long ago entrepreneurs and SMEs, they would no longer have fair access to bank credit?

Sir, Pilita Clark reports on how Mark Carney, the current chairman of the Financial Stability Board “warns investors of ‘huge’ hit as climate action ‘strands’ fossil fuel assets” September 30.

Because nervous regulators thought bankers did not see or responded sufficiently to the credit risks that were perceived, they forced banks to hold more capital when lending to the risky, than when lending to the supposedly safe, like to Sovereigns and members of the AAArisktocracy.

And so why then did not Carney long ago warn all aspiring “risky” entrepreneurs to forget their plans, since they could not any longer count on fair access to bank credit?

And is not Carney Canadian? Should he really be talking down the value of “stranded fossil fuel assets” just like that? It sounds a bit irresponsible to me.

And if Carney is so concerned, why does he then not require banks to hold capital based on the risk of the sustainability of planet earth?

For instance, if banks when financing something that supposedly helped sustainability were allowed to hold less capital, and could thereby earn higher risk adjusted returns on equity, that would at least induce them to serve a purpose. Basing it like now solely on perceived credit risk does not. It is both useless and dangerous… dangerous because big bank crisis never result from excessive financing of what is perceived risky, but from excessive financing to what is erroneously perceived as very safe.

Disclosure: My granddaughters are Canadian.

@PerKurowski

When risky things turn out risky, they turn out as expected. It is in what’s “safe” where the real unexpected dangers lurk

Sir Lucy Kellaway when referring to Sergio Ermotti, the chief executive of UBS, telling “all the bankers who work for him that henceforth it was OK for them to make mistakes” writes: “Mistakes are never OK. And they are particularly un-OK in banking” because… “The main point about risks is that they are risky — and risky things have a way of going wrong.” “Listen to brain surgeons, not bankers, for the truth on errors” September 27.

Not so. When risky things turn out risky, they are actually turning out right as expected… it is when safe things turn out risky, that things can really go wrong.

And Kellaway argues: “What Mr Ermotti should have made clear was that sometimes his employees must take risks, and sometimes things will go wrong. When that happens, no one must ever make light of their cock-ups. Instead they should carry the memory of all their mistakes as part of their own internal score sheet of how they have fared as a banker.”

Indeed, but the greatest cock-up in banking history, a cock up so big that it is being frantically ignored, was the one made by bank regulators. It happened when they allowed banks to hold much less capital against assets perceived as safe, meaning against those assets that precisely because they are perceived as safe, represent the biggest danger to the banking system.

Lucy Kellaway, I am sorry, I have no idea why we would need to listen to brain surgeons for the truth on errors… even a bank regulator who knew what he was doing, should know that.

@PerKurowski

Globalizing the conclusions of members of mutual admiration clubs, like the Basel Committee’s, is a huge systemic risk.

Sir, I refer to Gillian Tett’s interesting discussion of Paula Jarzabkowski’s “Making a Market for Acts of God” “The doublethink insurance club”, September 26.

Tett writes: “insurance executives …love to talk about how they are now using diversified strategies that bundle different risks together, and price this according to a global pattern of supply and demand – or a “market”… But there is a rub. As consolidation has taken hold, this has cut sharply the number of players who handle reinsurance products – And [so] while the insurance companies say they want to “diversify” their risks, they are all doing this in exactly the same way –which produces less, not more, diversity.”

Indeed that of diversifying more and more in ever fewer and fewer diversified ways is a clear and present danger in days of increased globalization. The following is what I had to say on that subject in April 2003 at the World Bank, as an Executive Director:

“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 is 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.”

Tett writes “this project touches on a point that matters beyond the insurance world: namely we all have an amazing tendency to fool ourselves… insurance brokers…they are so clubby that they are susceptible to both groupthink and doublethink – and an inability to see the contradictions that underpin their world.”

And if that goes for insurance brokers, then think of what a mutual admiration club of regulators could come up with, when trying to impose the same one and only set of regulations on the banks of the world. Holy moly! Just for a starter, when setting the capital requirements needed to partly cover unexpected Acts of God losses, without blinking, they decided to use the human perceptions of the expected losses… and no member of the Basel Committee club objected... naturally... members are not supposed to do that.

@PerKurowski

Let us hope FTs new found belief in that “Banking cannot prosper within a culture of fear” stays strong.

Sir, Alessandro Ciravegna was not “the only reader of yesterday’s FT who thought they had bought the wrong newspaper” “Regulators must help dispel the paranoia” September 25. I was much surprised too. 

Ciravegna writes “However successful UBS or any other bank may be in beginning to change the climate of paranoia and the culture of risk-avoidance that has now taken hold across the financial services industry, there will be little improvement until regulators and politicians also begin to backtrack.” The sad truth is that to regulators and politicians, until one day ago, we would have needed to add newspapers like FT.

Your “Banking cannot prosper within a culture of fear” editorial of September 24 expresses, though years or decades late, a much-welcomed 180 degrees change of attitude. Let us only hope that change of heart is strong enough, so you can at least live up to one part of your motto.

@PerKurowski

The reason why banks “dance around tough capital rules” is that regulators play the music that invites them to do so.

Sir, I refer to Gillian Tett writing about hedge funds and banks moving into the P2P sector, “The sharing economy is a playground for Wall Street” September 25.

Ms. Tett writes: “banks used structured investment vehicles and collateralised debt… to dance around tough capital rules”.

That ignores that the reason why banks can “dance around tough capital rules” is that there are different capital rules. If for instance banks needed to hold for instance the basic Basel II capital requirement of 8 percent against all assets, there simply would be no music to dance to.

And Ms. Tett writes: “the system needs to provide more credit to the economy, in order to boost growth… If you ask bankers why they are moving into P2P lending, some will point to the high returns they hope to earn (since the average loan commands an interest rate of around 13 per cent, margins are high).”

Does Ms. Tett really believe that loans at 13 percent, in an almost zero rate environment, will help boost growth?

And Ms. Tett writes: “if you think that the main goal of finance should be to create safe, clear rules for capital flows… then the arrival of banks and hedge funds [to P2P sector]… might make you weep”

Ms. Tett still does not understand what is going on. Risk weighted capital requirements give banks the incentive of being able to leverage their equity immensely when lending to those perceived safe; and which forces the “risky” to have to pay both a bankers’ risk premium and a regulator’s risk premium. The natural result is banks will lend dangerously much to the safe and dangerously little to the risky… and that is what should make us weep.

And Ms. Tett writes: “[Banks] also took advantage of cracks in regulatory structures to create products that policymakers could not easily monitor or control (it was unclear, for instance, who was supposed to oversee mortgage derivatives).” 

What cracks? Basel II clearly spelled out that if a security was monitored by one of the few credit rating agencies, and obtained an AAA rating, then the banks could leverage 62.5 times to 1 their equity. 

And Ms. Tett writes: “unlike the pension funds which were exposed to mortgage-backed securities in 2006, for example, the banks and hedge funds understand the dangers of credit losses.”

I am not sure I would agree with that assessment. Too many banks, especially European had no understanding at all of the dangerous amounts of credit losses that could happen if the demand for mortgages to be packaged in securities, exceeded by much the capacity to rationally finance the purchase of houses.

Sir, since January 2007 I have written you around 150 letters in reference to articles by Ms. Tett; and of course copied her. Most of them have to do with explaining why credit-risk weighted capital requirements for a bank is such a flawed and dangerous concept. Even if I assume she has not read one single of those letters, she should have learned more about it after so many years.

Ms. Tett as the expert in anthropology you are: What would have happened with humans had some Basel Committee nannies given them so much incentives to stay safe in their caves and not venture out into the risky world? May I advance the possibility they would have ended up extinguished in their safe caves?

Per Kurowski

@PerKurowski

Is Ermotti suggesting UBS tinkers with risk measuring, like Volkswagen tinkered with pollution emissions measuring?

Sir, I refer to your most important editorial in over a decade, “Banking cannot prosper within a culture of fear”, September 24.  A more correct title would be: “Our economies cannot prosper when bank regulators have been overtaken by a culture of senseless fear”.

You, who proudly proclaims a “Without fear”, seem to at long last have to come to grips with the fact that risk-taking is much needed in order to avoid even worse risks. Sadly, you should at the latest, have written that in June 2004 when Basel II was announced.

Then silly risk adverse regulators, who clearly had never read The Parable of the Talents, imposed a culture of fear of “The Risky” by excessively embracing “The Safe”. Its risk-weighted capital requirements, clearly instructed banks to avoid taking risk on The Risky, by giving them permission to leverage incredibly, much riskier, with what is perceived ex antes as safe.

And you write: “Sergio Ermotti, the chief executive of UBS, has been so bold as to urge his staff to embrace risk-taking again”. Great, and of course I agree full heartedly with him. That is our responsibility towards those coming after us. God make us daring!

Unfortunately, Ermotti can urge his staff to embrace-risk taking as much as he wants, that will still not happen, not as long as the credit-risk weighted capital requirements remain in place. That is of course unless Ermotti is now suggesting that UBS tinkers with risk measuring, along the way Volkswagen tinkered with emissions measuring.

PS. On a personal note I wish of course you would have had the decency to at least acknowledged that this, Basel’s dangerous regulatory risk aversion, has been the leitmotiv in the over thousand of letters I sent you, which you preferred to ignore. The letters though are still all out there on my http://teawithft.blogspot.com, for the world to see.

PS. When bankers grow old and begin to fade away... what would they regret the most, the risk they took or the ones they did not dare to take?

PS. Here I have a brief YouTube explanation, in red and blue, of our crazy bank regulations.

@PerKurowski

Perhaps Paris should have a little tête-à-tête with Volkswagen about what to do about embarrassing pollution ratings.

Sir, Adam Thomson discusses the embarrassment to Paris its lousy environmental readings could cause when, for a UN conference in November, “some 40,000 politicians, delegates, scientists and environment experts will descend on Paris to discuss what is billed by many as humanity’s last hope of saving the planet from irreversible climate change”. “Dark and dirty days in the city of light” September 23.

Perhaps Paris should have a little tête-à-tête with Volkswagen to see if it has any ideas about what could be done.

Or, in these days when Volkswagen has so utterly destroyed the credibility of emission controllers, Paris could perhaps just discreetly let out something like: “Our emission readings are sincere”

Oops… should those who have responsibility for supporting tourism in big cities also need to have tête-à-têtes with App developers like Plume?

http://ourpiedaterre.blogspot.com/2015/09/the-vw-volkswagen-emission-control.html

@PerKurowski

Both leftwingers and free-marketeers got lost in the world of finance, banks and regulations

Sir, Paul Marshall identifies himself as one of “those of us who want free markets to retain their legitimacy” and reacts against that “monetary policy has already extended well beyond its technocratic bounds into the realms of wealth distribution” … because of course that is what Mario Draghi, president of the European Central Bank… is doing [with quantitative easing when] “artificially distorting the bond markets so that the debt-ridden governments of peripheral Europe can continue to enjoy a low cost of capital (the eurozone’s very own Ponzi scheme)”, “Central banks have made the rich richer” September 23.

I agree, but central bankers are assisted in this scheming, by regulators who have allowed banks to hold loans to The Safe, like governments and the AAArisktocracy, against much less capital that what they need to hold when lending to The Risky, for instance SMEs and entrepreneurs.

Paul Marshall also writes: “Quantitative easing, as this policy is known, has bailed out bonus-happy banks and made the rich richer. It is a surprise that the UK opposition party and other leftwingers have not made more of this.” That is correct but in response I would also ask, where were those free-market believers like Paul Marshall when in 1988 the Basel Accord assigned risk weights of zero to sovereigns and 100 percent to the private sector… and completely distorted the free market allocation of bank credit?

As food for thought let me quote from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.” 

With current regulations banks become "bad banks" from lending excessively to the good risks... and that does not sound too egalitarian to me.

PS. Bank regulators need an App to do their job for them. An App developer would at least have asked what is the purpose of a bank and so not have ignored their function of allocating bank credit efficiently to the real economy. An App developer would also know that what is dangerous for the banking system is what is perceived safe... never what is ex ante perceived as risky

@PerKurowski

Fed, before lowering interests, tear down the Basel wall that keeps “risky” from having fair access to bank credit

Sir, George Magnus discussing the increase of interest rates writes: “If the Fed continued with financial market stability as the leitmotif of policymaking, a later more disruptive policy adjustment and greater instability are the all too likely outcomes” “Fed should start making clear it faces difficult trade-offs” September 22.

I agree but before thinking of increasing rates, the Fed must make certain it tears down the regulatory Basel Committee wall that is keeping SMEs and entrepreneurs from gaining fair access to bank credit. The zero rates the Fed and other have been experimenting with the last seven years have not been able to reach the risky because of credit-risk weighted capital requirements. To increase interest rates, before eliminating this Maginot line built by the Basel Committee so stupidly where the passing was already difficult, would really be to leverage the difficulties of the real economy even more.

And it is all really about picking some low hanging fruit because, though some individual banks might have suffered, never ever has a major bank crisis been caused by excessive exposures to what is perceived as risky.

Few can inject so much vitality into a sagging economy as the tough we need to get going when the going gets tough, like the SMEs and entrepreneurs. And so therefore, if I was the Fed, I would immediately make sure that banks were not obliged to hold one cent more of capital than what they already hold against all assets, if they lend to risky SMEs and entrepreneurs.

The zero rates the Fed and other have been experimenting with the last seven years have not been able to reach those perceived as risky. To increase interest rates before eliminating any silly regulatory barrier, amounts to an assassination.

@PerKurowski

FT, can you help me understand the practical significance of different internal carbon prices?

Sir, Pilita Clark reports that Spain’s Inditex fashion group, owner of the Zara brand, says it has a US$30 a ton internal carbon price even though EU benchmark carbon process are around $US9. “Companies accelerate carbon pricing” September 21.

I have no idea whether those prices are high or low so it would be interesting reading what Zara will not be doing with a price of US$30 compared to what it would be doing if the price was $US9.

I ask, because when I announced to my family we will from now on be using an internal carbon price of $US60, twice that of Zara’s, my kids were properly impressed, “Way to go dad!" But then they came back and asked me what that meant for them… and I don’t have a clue… and I hope I don’t have to scrap my outdoor grill now either. 

@PerKurowski

Without the endorsement by regulators, banks would never have leveraged their equity 60 times to 1 with any asset.

Sir, Gary Silverman writes: “exempting the derivatives known as credit default swaps from more rigorous federal regulation…[was] one of the biggest mistake leading to the financial crisis”, “Why it is wrong to forget Lehman’s fall” September 20.

That is not so. Again, for the umpteenth time, I will explain prime cause of the financial crisis, namely the capital requirements for banks, and this by using the examples of Lehman Brothers, AIG and Greece.

The regulators in June 2004, with Basel II, decided that against AAA rated private sector assets, and against any sovereign rated as Greece was until November 2009, banks needed to hold only 1.6 percent in capital, meaning banks could leverage their equity with those assets over 60 times to 1. In comparison, when holding “risky” assets like loans to entrepreneurs and SMEs, banks were only allowed to leverage 12 times to 1. 

On April 28, 2004 the SEC decided that what was good for the Basel Committee was good enough for them, and so allowed Lehman to leverage over 60 times to 1 with AAA rated securities guaranteed with mortgages to the subprime sector… Since Europe were allowing their banks to do the same… the demand for these AAA securities became so huge that it overpowered all the quality controls in their manufacturing and packaging process… and Bang!

If AAA rated AIG guaranteed an asset, banks could also dramatically reduce the capital they needed to hold against that assets, and this overwhelmed AIG’s capacity to resist selling “very profitable” loan default guarantees… and Bang!

And Greece was of coursed offered loans in such amounts, and in such generous terms, so that its governments could not resist the temptations… and Bang!

As can be seen the above has nothing to do with deregulation, or with exempting anything from rigorous federal regulation, and all to do with imposing extremely bad and distorting regulations. On their own, and without the direct endorsement of regulators, banks would never ever have dreamt of leveraging their equity 60 times or more, with any asset… no matter how safe it looked.

If we are not going to spell out the real reasons why Lehman Brothers fell, then we better all forget Lehman’s fall.

PS. Here are 7 questions US Congressmen and Governors should ask bank regulators.

@PerKurowski

We should be grateful for the chance of experience boredom. It is much more valuable than we think.

Sir, Robert Shrimsley tackling the issue of boredom writes: “denial of boredom is a serious societal issue. One day, many of these kids will have to sit through a strategy meeting, watch a 24-page PowerPoint presentation or feign interest in the deep thoughts of a senior colleague. How will they cope? As concerned parents, it falls to us to put some boredom back into our kids’ lives”, “Bring back boredom in family life”, September 19.

Though learning the social skill of feigning interest while bored is indeed important and useful, boredom is so much more important than that. In this respect let me translate here some few sentences from an extraordinary book in Swedish titled “In the Shadow of a crime” written in 2004 by Helena Henschen, who passed away in 2011. 

“Sometimes it feels necessary to expose oneself to lonely boredom… It is as if the psyche must have silence and time at being activated and trigger a creative process. I must get away from everyday life with the constant incoming data occupying the space, a stream of impressions that gushes from the outside and requires sorting, valuation and action. It is only when the clatter from the outer life stops as they arise a conversion. Current switches direction. From boredom grow a movement from the opposite direction, from the inside out. It seems that boredom and creation have to do with each, as well as the listening to nothing.”

In other words Henschen is saying that boredom represents that free space in our mind that allows us to digest and put some order to our impressions, as well as to hopefully add something of our own making to it. I agree, from this perspective boredom is indeed something of which our children and we should all be grateful to experience. Sir, think of that next time you get bored.

@PerKurowski

If after nine years of ultralow interest rates there’s little real response to it, should not the Fed look elsewhere?

Sir, John Authers argues “US rate rise harder to justify nine years on” September 17.

My automatic question would be: does not nine years of super low interests without any real economic activity picking up in a sustainable form not suffice to indicate the Fed it should search somewhere else?

May I suggest they have a look at the horrendous distortions in the allocation of bank credit risk weighted capital requirements cause… or is that just a too delicate issue for them to handle over there at the Fed.

@PerKurowski

Sir FT, who is more likely to engage in predatory bank regulations, men or women?

Sir, I have some questions to you in reference to Brooke Masters’ “Women regulate banks run by men” in Your FT Special Report on Women in Business of September 15.

An audit report from the office of inspector general of the FDIC broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers”. Since current risk-weighted capital requirements for banks cause additional discrimination against borrowers deemed as risky, this could also be deemed as predatory regulations.

So Sir, who do you believe is more likely to engage in such regulatory deviances, men or women?

Who is more likely to understand that those financial excesses that can endanger banks is not built with what is perceived as risky but what is erroneously perceived as safe, men or women?

Who is more likely to understand that the cost of introducing such risk-adverse regulations that cuts off bank credit to SMEs and entrepreneurs will be paid by future generations, men or women?

Who is more likely to understand that this sort of discrimination can only increase whatever inequalities exist, men or women?

And when finally understanding how stupid these current Basel Committee regulations are, who is most likely to say “sorry”, and then rectify, men or women?

Sir, just to make it clear, I do not hold any clear opinions in this matter… I am just asking about yours... do you dare giving it? 

@PerKurowski

It seems experts guilty of totally absurd bank regulations, have managed to enact a powerful Maxwellisation process

Sir, in reference to what could be "The policy choices of high-income countries” taken in order to weather a slowdown, Martin Wolf writes: “politics has almost universally ruled out fiscal expansion; the intervention rates of central banks are near zero; and, in many high-income economies, private leverage is still quite high. If the slowdown were modest, nothing much might be done. The best response to a big slowdown might be “helicopter money”, created by the central bank to stimulate spending”, “A new Chinese export — recession risk” September 15.

Wolf shies away from commenting on how banks are doing and if they are prepared to help out… or even allowed doing so. Many are screaming for higher capital requirements, which, if imposed, would constrain overall lending, especially the kind of risky lending that is most needed when the going gets tough.

Just look at what happens if a company looses a good credit rating. Then immediately banks are required to hold more capital against loans to that company, which reduces their capacity to lend to others, or even forces them to offload other assets.

Today, next to Wolf’s article, John Kay refers to “Maxwellisation… a process by which the … powerful obstruct criticism of their actions” “The tale of the crook and his obstructive legal legacy”.

Clearly current bank regulations issued by the Basel Committee, not only distort the allocation of bank credit in good times but being extremely pro-cyclical are also unhelpful in slowdowns. The lack of possibilities to question these regulations, which includes FT’s silence… makes us therefore wonder whether we are facing a Maxwellisation process enacted for their benefit by bank and ex bank regulators, and other supposed experts on the subject.

PS. Or is it more like what John Kenneth Galbraith wrote: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”?

@PerKurowski

The Basel Committee has never cared one iota about the purpose of banks, like that of industrial revivals.

Sir, Patrick Jenkins writes: “A structurally low-profit banking system was the price Germany decided to pay for its industrial revival”, “European banks set their sights on German expansion”, September 15.

Compare that to the current banks, living in an environment of credit risk weighted capital requirements for banks. Banks are now allowed to make massive profits, derived from massive leverages of their equity and the support received from society, as long as they stay to something that is perceived or can be construed as being absolutely safe.

No! Not a single second did the overanxious and overprotective bank nannies in the Basel Committee for Banking Supervision waste thinking about the purpose of banks, like that of industrial revival.

Sir, I ask you again: Whose dreams should regulators most try to help come true, the bankers’ or those of entrepreneurs or unemployed?

@PerKurowski

Psychological barriers to entrepreneurship, like an overanxious nannie mentality, thrive in developed nations too.

Sir, Sarah Murray writes: “the biggest barriers to entrepreneurship are psychological.”, “A variety of barriers thwart entrepreneurs in poor nations” September 15.

Indeed, so it is, and not only in poor nations.

Entrepreneurs, because they are most often ex ante perceived as poor credit risks, need to pay higher risk premiums, and have access to smaller loans; and therefore represent, ex post, quite little danger for banks.

Those ex ante perceived as very good credit risks, are required to pay much smaller risk premiums, and have access to much larger loans; and therefore, if ex post they turn out to be risky, represent much bigger dangers to banks.

Unfortunately, because of some psychological weakness, a sort of overanxious and overprotective nannie mentality, the current batch of bank regulators confuse the ex ante expected losses with the ex post unexpected losses, and so require banks to hold more capital when lending to “risky” entrepreneurs, than when lending to “safe” sovereigns and highly rated private sector borrowers.

And that allows banks to earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky… and we know what that means to the access to bank credit of the entrepreneurs.

@PerKurowski

Analyzing infrastructure procurement difficulties is more important than opening another public vs. private debate

Sir, it is hard to follow Keith Burnett’s, the vice-chancellor of the University of Sheffield’s logic, as expressed in his “Free markets are a flawed way to plan and fund infrastructure” September 15.

On one hand he mentions free markets cannot deliver essential infrastructure, but on the other he explains this with “lobby groups have the power to halt essential schemes. The result is a tendency to delay procurement of desperately needed infrastructure projects.” If lobby groups have such powers, are we really talking about free markets? “No!” must be the answer. And by the way, who allow themselves most to be influenced by lobbying groups?

And Burnett adds to the confusion by stating “Long-range planning has been replaced by the short-termism that typifies the markets”. I have no idea were he gets to state as a fact that short-termism typifies markets but, if its only to argue that governments are better at taking the long view, he needs to be reminded of the fact that very short term political interests unfortunately drives too much of most governments actions.

There might indeed be many needs for governments having to intervene in infrastructure projects… but if these projects are urgent and not getting due attention or being extremely inefficiently developed, the causes might very well reside in other factors that affect governments and private sector alike.

For instance when I see the slow pace of so many infrastructure projects in the US I always scratch my head and ask myself… is this the same country that in 1940-45 was able to create almost from scratch an incredible war machinery?

Arthur Herman, the author of “Freedom's forge” of 2012, a book that describes how that war machine was built, was asked by Mark Thompson during a discussion of the book: “What’s the most important lesson from World War II for today’s military-industrial complex?”

Herman’s answer: “More military and industry, and less complexity!

Today we have a military-acquisition system that’s way too expensive, way too slow, too bureaucratic, and highly unproductive. There’s a lot today’s Pentagon could learn from their 1940-1945 predecessors.”

In the same way I believe Professor Burnett, though he began doing so, should delve much deeper into the whole problematic of infrastructure procurement. That should prove more useful for all of us, than just opening another private vs. public debate.

@PerKurowski

#1 Macro-prudential rule is never take for granted those in charge, like bank regulators, know what they are doing

Sir, Richard Milne quotes Stefan Ingves with “sailing a small boat on the ocean: it’s good if you know how to sail.”, “Riksbank head warns on tools to tackle crises”, September 14.

But let us not forget that Stefan Ingves is the current chairman of the Basel Committee, and as such, we could presume he agrees entirely with the current risk-weighted capital requirements for banks. In essence that regulation implies the following:

The better things are going for some assets, and so the safer these look (like house mortgages), the less capital are banks required to hold against these, and so the more incentives do banks have to lend, and thereby make these assets look even better yet… that is until the overcrowding of those safe havens become so dangerous that the whole banking system fails.

The worse things are going for some assets, and so the riskier they look (like loans to SMEs), the more capital must banks hold against these, and so the more incentives will banks have to reduce lending, and thereby make these assets look even worse yet… that is until riskier but perhaps more productive bays are left so unexplored that the whole economy fails.

Sir, the first and most important macro-prudential rule is that of never taking for granted that those in charge of sailing the boats know how to sail. And as I have argued for years, current bank regulators, which include Mr. Ingves, have no idea about what happens out there on the real oceans… their experience might be restricted to having played with toy boats in bathtubs.

The second most important macro-prudential rule with respect to banks, and boats, is that instead of by all means trying to stop these from going under, assist these to fail expeditiously, whenever they seems to be insufficiently seaworthy.

If it were up to me, and knowing these are to cover against unexpected losses I would set the capital requirements for banks based of cyber attack or being struck by asteroids, so as not have to spell out these as based on risks of bankers not knowing how to manage perceived risks, and worse, on risks of regulators trying to manage risks.

PS. “Gud gör oss djärva” “God make us daring” is a Swedish psalm. It would do us much good if bank regulators tried to understand its message....perhaps Riskbank would be a more appropriate name than Riksbank for a nation that has prospered thanks to risk-taking and much reasoned audacity.

PS. Axel Oxenstierna, 1648: “An nescis, mi fili, quantilla prudentia mundus regatur?”, “Do you not know, my son, with how little wisdom the world is governed?”, “¿No sabes, hijo mio, con que poca sabiduría el mundo esta gobernado?”, “Vet du inte, min son, med hur litet förstånd världen styrs?” 

@PerKurowski

Basel Committee’s desktop Don Quixotes with Basel III, keep fighting banking windmills, with ever-greater complexity

Sir, John Authers quotes Robert Shiller “You would think that when interest rates are higher people would just sell stocks, but the financial world just isn’t that simple”, “Fears mount over US stocks bubble” September 14.

Had bank regulators understood that “The financial world just isn’t that simple” it would have saved us many tears. As is, with much hubris they proceeded to design their risk weighted capital requirements, and for which they congratulated each other effusively and then went to bed, thinking they got it solved. Most of them even thought that “risk” included more than credit risks; very few if any knew the risk weights were portfolio invariant, the higher up in the regulatory echelons you were the less you apparently needed to concern yourself with such nitty-gritty; and nobody cared one iota about what that regulatory risk aversion could do to the allocation of credit to the real economy.

It should seem logical that the more complex something is, the simpler are the relations you should maintain with it. But no, the desktop Don Quixotes of the Basel Committee, with Basel III, keep on fighting banking windmills, with ever-greater complexity.

@PerKurowski

Judge Jed Rakoff. Do you not know the Home of the Brave prohibits discrimination against those perceived as risky?

Sir, in Lunch with the FT of September 13, Kara Scanell describes Jed Rakoff as: “A leading authority on white-collar crime, he has made headlines for demanding greater accountability in cases of alleged Wall Street fraud and for launching a one-man mission to prevent banks from dodging responsibilities for the financial crisis…. Rolling Stone magazine calls him a ‘legal hero of our time”.

Had Judge Rakoff known about the false signals, the incentives, and the distortions built into the portfolio invariant credit-risk-weighted capital requirements for banks, he would be ashamed of going after bankers, as he would instead, I he really is a hero, have gone after the bank regulators.

Imagine allowing banks to hold only 1.6 percent in capital, which means over 60 to 1 leverage of equity when lending to sovereigns and the AAArisktocracy, while only a 12 to 1 leverage when lending to the “risky” entrepreneurs and SMEs. As if there was no “Equal Credit Opportunity Act (Regulation B)? But, then again, there might not be any interested in enforcing such Act.

PS. Of course I am not referring to the natural discrimination of the risky that calls for banks to prudently charge higher risk premiums. I am referring to the artificial regulatory discriminations that has no prudence basis whatsoever... since what is really dangerous for banks is what is perceived as safe but that can turn out to be very risky. 

@PerKurowski

The more qualified experts become, like the Fed’s, the more in awe will too many be of their inscrutable mumbo jumbo.

Sir, Sebastian Mallaby writes: “By toggling short-term rates, the Fed hopes to guide the more important long-term ones that matters to homebuyers and businesses, but the transmission mechanism is unstable” “Whether they raise or hold, central bankers are due a fall” September 12.

But the transmission mechanism has been also made more unstable than usual by means of very faulty bank regulations that have been imposed on banks.

Mallaby writes: “Gone are the days when the Fed was a holding pen for cronies and chancers… modern bankers have become more scientific and sophisticated [but] there is a danger in pushing this reverence too far”

Indeed, Edward Dolnick in his “The forger’s spell” wrote about Daniel Moynihan opining “There are some mistakes it takes a Ph.D. to make” and also quoted George Orwell, from “Notes on Nationalism”, with: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.”

And the pillar of current bank regulations, the portfolio invariant credit-risk weighted capital requirements for banks, is a truly great example of the kind of mumbo-jumbo that can be produced by experts.

John Kenneth Galbraith wrote in his “Money: Whence it came, where it went” 1975: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.” And one of the great dangers of these times of ample access to information is that the number of those pretending knowledge is increasing exponentially.

@PerKurowski

Tim Harford, FT, yes, let us be real blunt: criticism works, but only when it is acknowledged.

Sir, I refer to Tim Harford’s “Let’s be blunt: criticism works” September 13.

Let me cite from John Kenneth Galbraith’s “Money: Whence it came, where it went” 1975: “What people do not understand, they generally think important…[but] If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

That describes the case where the walls have become too high for constructive criticism to even be acknowledged by the participants.

Take for instance the Financial Times. For a decade, in thousands of letters, I have informed its editor, its reporters and its columnists, of some serious weaknesses in the portfolio-invariant credit-risk weighted capital requirements for banks. Yet I have not been able to get any assistance in transmitting to the regulators some simple questions asking for explanations.

For instance this very straightforward question: Dear regulator. Since dangerous financial excesses do always result from building up too large exposures to assets that are ex ante perceived as safe but that ex post turn out to be risky, why must banks hold more capital against what is ex ante perceived as risky?

The regulators do not want to answer little insignificant me… but, if it was FT who formally asked for explanations that would of course carry much more weight.

And frankly is not asking for explanations “Without fear and without favour” that what journalism is all about? Why then do you not then stop pretending you know so much and dare ask for some explanations? Or is this just too much criticism for you to swallow?

I am not only asking FT for help. I just send out a message to all US congressmen and governors with a list of questions it behooves them to make to the Fed, FDIC, and OCC.

@PerKurowski

Capital requirements for banks, instead of on credit risks, should be based on the risk of loony regulators regulating.

Sir, I refer to Patrick Jenkins’ “Make advisers pay when deals go wrong” September 11. 

In it Jenkins writes: “for at least eight years, free markets have been far from genuinely free… inflated in part by the policy response to the financial crisis… market distortions… created by the tougher rules imposed on the investment banks in the aftermath of the financial crisis”. 

Evidently Jenkins does not want to contemplate the possibility that the existence of no free markets, as a consequence of distorting rules arising from Basel I and II caused the financial crisis.

And he refers to “lightly regulated banks”… Come on! Is it not high time for some intellectual honesty?

What is so light about allowing banks to leverage 60 times or more lending to sovereigns and AAArisktocracy and only 12 times lending to SMEs and entrepreneurs? What is so light about capital requirements that completely distort the allocation of credit to the real economy?

Jenkins opines: “Make advisers pay when deals go wrong” Absolutely! But what about making regulators pay when regulations go wrong? And what about making influential financial journalists pay when they completely ignored what was happening?

No Sir. Clearly the capital requirements for banks, instead of being based on credit risks, should be based on the risk of regulators being totally wrong… and it is the journalist’s responsibility to diminish that risk… so that we do not have to require banks to hold 100 percent in capital.

@PerKurowski

Ad-blockers, do not allow any unsolicited ads on my mobile… unless of course I get paid good money for looking at it.

Sir, Richard Waters writes: “Slow loading times for mobile web pages — when users are paying for data… cost more than just time” and yet, while discussing the issue of ad blocking he refers to all major actors, except the users. “Who gets to block ads is flip side of who gets to decide which get through” September 10.

It is we the users who end up bearing the brunt of the costs, when having our limited and valuable attention span filled up with noises of all types. And so therefore let me repeat a request for ad-blocking services that would better serve my purpose.

I want an ad-blocking that charges anyone trying to send me an unrequested solicitation of any sort, or more than one per moth of the requested, to charge the advertiser an adjustable fee for me to look at it. Let us say initially US$1 per 30 second’s view. And on that income I would be willing to pay the ad-blocker for his services an adjustable commission, let us say initially 20%.

An alternative in which I could perhaps bypass the ad-blocker is signing up an agreement, for instance with Facebook, Twitter, Google and Apple by which they share their revenues obtained from targeting me and my preferences, for instance, initially 50 percent.

Users unite! Let us maximize the returns for us of our valuable and very limited attention span. 

http://teawithft.blogspot.com/2015/07/my-ideal-adblocker-besides-earning-on.html

http://teawithft.blogspot.com/2015/03/i-want-net-40-percent-of-revenues.html

http://perkurowski.blogspot.com/2015/06/for-1us-i-will-look-for-30-seconds-with.html

http://perkurowski.blogspot.com/2014/06/should-not-google-and-other-public-eyes.html
http://teawithft.blogspot.ca/2007/06/in-search-of-answers-on-search-engines.html

@PerKurowski