The central banks monetary policies are hampered more by distorting bank regulations than by bad communications.

Sir, I refer to your “Central banks struggle to make things clear”, January 30. In it you hold that the monetary policy is hampered by bad communications. No Sir, their monetary is hampered much more by bad bank regulations.

Central bankers are also commercial bank regulators. Just look at this list:

Mario Draghi of ECB and Mark Carney of BoE are the former and current chairs of the Financial Stability Board.

Jaime Caruana of BIS and Stefan Ingves of Sveriges Riksbank are the former and current chairs of the Basel Committee for Banking Supervision.

In such a role they have all for years supported credit risk weighted capital requirements for banks which indicate that ‘highly speculative’ below BB- rated assets are far more dangerous to the bank system than ‘prime’ AAA rated assets.

In Basel II the risk weight for ‘highly speculative’ below BB- rated assets is 150 percent while the risk weights for ‘prime’ AAA rated assets is a meager 20 percent.

And therefore according to Basel II banks need to hold 12 percent in capital (basically equity) against ‘highly speculative’ below BB- rated assets, while only 1.6 percent against ‘prime’ AAA rated assets. 7.5 times less!

Honestly, when have banks created excessive dangerous financial exposures to what ex ante is perceived as ‘highly speculative’? Have these all not been created around assets ex ante perceived as ‘prime’ but that ex post turned out risky?

But the stability of the banks is not the most important problem with those capital requirements. The real problem in that they completely distort the allocation of bank credit to the real economy and thereby nullify all central banker’s monetary policies.

Nothing but central bankers' self-inflicted damage!... for which we all suffer.

@PerKurowski ©

Martin Wolf, as elite, why have you not spoken out against lousy bank regulators and redistribution profiteers?

Sir, Martin Wolf cries out: “Elites have become detached from domestic loyalties and concerns, forming instead a global super-elite. It is not hard to see why ordinary people… are alienated. They are losers, at least relatively; they do not share equally in the gains… After the financial crisis and slow recovery in standards of living, they see elites as incompetent and predatory. The surprise is not that many are angry but that so many are not… Elites need to work out intelligent responses. It might already be too late to do so” “The losers are in revolt against the elites” January 27.

Of course Wolf is absolutely right… but that requires the elite to be willing to call out the truth, even when that truth hurt other in their mutual admiration club of elites.

For instance, how can the elite gather in a Davos WEF event, year after year, and not tell central bankers and banks regulators in their face, that it is outright stupid to distort the allocation of bank credit to the real economy, especially based on credit risks already cleared for by banks.

For instance, has Martin Wolf himself dared to ask Mark Carney, Mario Draghi, Jaime Caruana, Stefan Ingves about why they believe ‘highly speculative’ below BB- rated assets pose more dangers to the banking system than those ex ante perceived as ‘prime’ AAA rated?

And what about “The wealth of 62 richest equals that of 3.6 billion poorest” message sent out this year by some “NGOs” to all those in Davos. Who said anything there about that being a deviously false and odiously divisive statement?

I do not claim to belong to any elite, especially not the wealthy elite, but, as a father and a grandfather, I know we cannot sit still and not do anything about the growing inequalities, whether the local or the global.

But I also know that if we are going to do something effective about it, we cannot afford to keep failed bank regulators blocking opportunities, or fall into the traps of redistribution profiteers.

December 31, 2009, on the eve of the new decade, FT published a letter I sent titled “The monsters that thrive on hardship haunt my dreams” In it I basically shared and expressed the same concerns Martin Wolf is expressing now. What happened?

@PerKurowski ©

But why does FT’s John Kay not find it wrong when regulators restrict the competition for access to bank credit?

Sir, John Kay writes: “to restrict competition is to damage both the process of innovation and the public interest” “What the other John Kay taught Uber about innovation”, January 27.

Indeed but why does FT’s John Kay steadfastly refuse to apply the same criteria when regulators restrict the competition for access to bank credit?

Regulators tell banks: “You can leverage your equity, and the support we give you by for instance deposit insurance schemes, much more with the net risk adjusted margins paid by “The Safe”, than with the same margins paid by “The Risky”

And by that, regulators are de facto restricting the competition for bank credit for all those who ex ante are perceived as risky, like the SMEs and entrepreneurs.

And that also damages the process of innovation and the public interest.

@PerKurowski ©

The huge bonuses paid to bankers were enabled by lousy regulators, and were not the result of free market capitalism

Sir, John Plender writes: “Like the robber barons, today’s bonus-hungry bankers have shown once again how capitalists excel at giving capitalism a bad name”, “Capitalists excel at giving themselves a bad name” January 25.

No! Free market capitalism would never ever have enabled the payment of extraordinary high bonuses to bankers… because in free market capitalism banks would have had to hold much more equity than what banks currently hold, and so therefore not only would the risk adjusted returns on equity be lower than what has been seen, but there would also have been less left over for bankers’ bonuses.

With Basel II regulators allowed banks to hold extremely little capital (equity) against assets perceived as safe… for instance only 1.6 percent when lending to the AAArisktocracy. That allowed banks to leverage extraordinarily the explicit and implicit support given by society, for instance by deposit insurance schemes… while having to provide a decent return on very little equity… which left of course a lot of margin to pay the huge bonuses.

The real question is how come these extremely lousy regulators are getting away with what they did and are doing… having even been promoted for it.

@PerKurowski ©

Can journalists wash their hands about the (dis)empowering of citizens and of keeping failed elite in power?

Sir, Gillian Tett referring to “how the global elite converged on Davos this week” writes: “The most interesting issue revolves around something the WEF calls the “(dis)empowered citizen”. This arises because the internet makes voters feel more powerful than ever… The bitter irony is that although the internet gives people the impression they have a voice, in most countries power remains firmly with the elite.”, “The big illusion of empowerment for the masses”, January 22.

Tett holds “This creates disappointment and frustration: ordinary people have the illusion they are vocal. But although they use their mobile phones to exercise power over some issues, they cannot easily use them to change important issues such as politics.”

But, do journalists have no role to play in that? Are they not suppose to in many ways represent ordinary people in front of the elites?

For instance I do not call the Financial Times on the mobile phone (except perhaps when I will travel and suspend my subscription for a week or so) but I have sent thousand of letters to FT, including to Ms. Tett on issues like the following:

Four very important central bankers in Europe; ECB’s Mario Draghi and BoE’s Mark Carney, former and current chairs of the Financial Stability Board; BIS’ Jaime Caruana and Sveriges Riksbank Stefan Ingves, former and current chair of the Basel Committee for Banking Supervision, with their approval of risk-weighted capital requirements for banks, believe that ‘highly speculative’ below BB- rated assets are far more dangerous to the bank system than ‘prime’ AAA rated assets.

Since ex ante perceived ‘highly speculative’ below BB- rated assets have never ever set of a major bank crisis, as these have always resulted from excessive exposure to something ex ante deemed as safe but that ex post turned out very risky; that should raise some very serious questions about the risk management capabilities of those four highly empowered technocrats.

But, would Ms. Gillian Tett raise such question when meeting them? I don’t think so but, if she has, and has not reported back on the answers, to me or to you Sir, then she is just much more complicit in the cover up of the elite’s blunders than I thought possible.

@PerKurowski ©

Europe’ banks are in hand of regulators and central bankers who prefer dreaming about the safer past than a riskier future.

Sir Mark Mazower writes: “I was going to write — “critics and supporters of the European dream”. But there is no dream any longer and that is in some ways the biggest problem of all.” “Fresh ideas and lessons from the past are key to Europe’s survival” January 22.

A dream could be about a better future or about conserving a better past. Europe’s bank regulators, with their credit risk weighted capital requirements, which allow banks to earn much higher risk adjusted returns on equity when refinancing the safer past, than when financing the riskier future, clearly evidence what they dream about… poor Europe’s youth.

Let me refer to four extremely important European central bankers: ECB’s Mario Draghi and BoE’s Mark Carney, former and current chairs of the Financial Stability Board; BIS’ Jaime Caruana and Sveriges Riksbank Stefan Ingves, former and current chairs of the Basel Committee for Banking Supervision

All these gentlemen fully support credit risk weighted capital requirements for banks, which de facto means they believe that ex ante perceived ‘highly speculative’ below BB- rated assets, are far more dangerous to the bank system than ‘prime’ AAA rated assets. Europe, if that’s not scary, what is?

@PerKurowski ©

Too much fighting for a safe haven dissipates its safety and turns in into a dangerously overpopulated haven.

Sir, Tim Harford writing on the “dissipation of economic rents” holds that “They’re frustrating, because value is being frittered away in the competition to secure them… the entire value on offer will be consumed by the race to grab it.” “How fighting for aprize knocks down its value”

How come it is seemingly so hard for Harford and other economists to apply the same concept to the “dissipation of credit safety”?

If regulators allow banks to hold less capital against what is perceived as safe, which means they can leverage more with these assets, and which means they will earn higher expected risk adjusted returns on assets perceived as safe than on assets perceived as risky … then they will hold more and more of safe assets perceived as safe… until the safety of these assets dissipates.

Harford asks: “Can anything be done about … rent-dissipating behaviour?” and answers “One approach is to tax it.” 

Since dissipating credit security is the result of a regulatory subsidy in favor of safety, in that case an easier and more sustainable solution would be just to get rid of dumb regulators, those who think that what is ex ante perceived as safe is more dangerous to the banking system than what is perceived as risky. 

@PerKurowski ©

Mark Carney's worries over financial risks, are influencing the results of BoE’s monetary policy.

Sir, Martin Wolf writes: “Worries over financial risks are legitimate. But they must not determine monetary policy” “Carney is right not to follow in the Fed’s footsteps” January 21.

But worries over financial risks have influenced the results of monetary policy for quite some time now, but few seem to care.

The credit risk weighted capital requirements that allow banks to earn higher risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky, act like hidden capital controls, and clearly distorts the allocation of bank credit to the real economy, favoring The Safe and discriminating against The Risky. And, as a result, the benefits of the low interest rates that are here discussed flow much more to “The Safe” than to “The Risky”.

Current bank regulations reflect the belief that for instance ‘highly speculative’ below BB- rated assets, is far more dangerous to the bank system than the ‘prime’ AAA rated. I find that to be a crazy notion. But, since Mark Carney, chair of the Financial Stability Board and Martin Wolf seems to agree that it is so, I must confess being a bit at loss when it comes to value their recommendations.

@PerKurowski ©

Could bank regulators, like Mark Carney, have accepted responsibilities for something they are not really qualified for?

Sir, you write: “Mr Carney acknowledges the concern that keeping interest rates very low for a long time may fuel a sharp rise in risky lending. It does not take a genius to see this, he adds, showing some frustration at the chorus of commentators warning of a credit bubble.” “Carney is right to keep UK interest rates on hold” January 20.

But, forget the interest rate for a second. Carney also wears the hat of the Chair of the Financial Stability Board. And, does it take a genius to understand that allowing banks to earn the highest risk adjusted returns where they most want to earn it, where it is perceived as very safe, will create, sooner or later, a bank credit bubble?

Here below is a question that we do not know how Mark Carney would answer it, because seemingly it looks that no one dares to make it… at least not FT.

Introduction:

The Basel Committee decided that in order to make banks safe, these need to hold more capital (equity) against assets perceived as safe from a credit risk point of view than against assets perceived as risky. 

For instance in Basel II a private sector asset rated ‘prime’ AAA carried a 20 percent risk weight while an asset rated ‘highly speculative’ below BB- had a 150 percent risk weight. That meant banks needed to hold 7.5 times more capital against a below BB- rated asset than against an AAA rated asset.

Allowing banks to leverage their equity differently based on credit risks obviously distorts the allocation of bank credit to the real economy, something that by itself could also be very dangerous for the safety of banks.

And the only way those risk weighted capital requirements for banks could be justified, would be if they really made banks safer.

And so the question:

Mark Carney, Sir, would you be so kind so as to provide us with one example of a major bank crisis that has resulted from excessive bank exposures to assets that were perceived as risky when placed on the balance sheet of banks.

I mean we can think of many instances were bankers were lulled into a false sense of security by good credit ratings, but I cannot for my life imagine bankers building up excessive exposures to something rated below BB-. Can you?

Sir, if Carney is not able to answer that very straightforward question adequately, it might indicate he has accepted a responsibility he is not fully up to and that should be worrisome… wouldn’t it?

Could it not be this bank regulatory distortion that impedes low interest rates and other stimulus to reach where it is most needed, like to SMEs and entrepreneurs?

@PerKurowski ©

How can we wean the world off horrendously mistaken bank regulations?

Sir, Robert Zoellick writes: “After seven years of extraordinary governmental stimulus, the world needs a shift from exceptional monetary policies to private sector-led growth… Three possible ways to generate growth stand out for 2016.” “How to wean the world off monetary stimulus” January 19.

Then Mr Zoellick lists: Lawrence Summers’ “big government spending, especially on infrastructure, financed by borrowing at extremely low interest rates”;

Kenneth Rogoff’s “ease debtors’ plights by keeping rates low or even negative, and by restructuring debt, while setting the stage for productive investment”;

Michael Spence’s, and Kevin Warsh’s “emphasise that the demand that will drive private capital investment, which should support higher wages and profits, is expected future demand [so] policies intended to boost demand in the near term can actually discourage business confidence in the future”

And finally “others call for tax and regulatory policies to encourage private sector investment and employment”

I find myself squarely among the latter. Getting rid of that nonsense of credit risk weighted capital requirements for banks would eliminate that distortion that impedes bank credit reaching where it could do the most good, namely to those SMEs and entrepreneurs who most depend on bank credit to lend them the opportunities for helping to move theirs and ours economies forward.

As a member of Civil Society, whatever that now means, at a Civil Society Town-hall Meeting during the 2010 Annual Meetings, I had the opportunity to pose the following question to Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, and to Robert B. Zoellick, the President of the World Bank:

“Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

I got, not splendid but reasonably good answers from both. Unfortunately, 5 years later very little has been done about how to wean the world off some lousy bank regulations, probably because regulators are more concerned with covering up their mistakes.

PS. In 2011, in the same venue, I repeated a similar question, all to no avail.

@PerKurowski ©

#WEF, the world needs some ordinary people (like me) to ask the salon experts in #Davos2016 some awkward questions.

Sir, John Thornhill titles his review of World Economic Forum’s Klaus Schwab’s recent book, “The world’s problems solved the Davos way”, January 18. 

And he begins it with: “The World Economic Forum does a remarkable job of forging the conventional wisdom among the global elite. The trouble is that conventional wisdom is invariably wrong.”

Indeed, and that is especially true considering that among the experts there gathered, there will always be too many who, in John Kenneth Galbraith’s words, qualify as those who by pretending to knowledge they do not posses, cannot ask for explanations to support possible objections.

And there are many urgent questions waiting to be made about the nakedness of experts. Among these the following:

Regulators currently allow banks to leverage their equity, and the support the society gives them with deposit insurance schemes and implicit bailout promises, much more when lending to what is deemed or perceived as safe, like infallible sovereigns and the AAArisktocracy, than when lending to the risky, like SMEs and entrepreneurs.

For instance with Basel II, banks could leverage as much as they wanted with OECD sovereigns, over 60 times with what’s rated AAA, 12 times with what is not rated, and 8 times with what’s rated below BB-.

And that of course allows banks to earn much higher risk adjusted returns on equity when lending to “the safe” than when lending to “the risky”.

Why do regulators allow that?

Does that not, by distorting the allocation of bank credit to the real economy, impede banks to perform well what is perhaps their most important social function?

How on earth can something rated ‘highly speculative’ below BB-, be considered more dangerous to the banking system than something rated ‘prime’ AAA?

Do not regulators know that banks already took into consideration credit risk when setting interest rates and size of exposures, before requiring these to double down on ex ante perceived credit risk in their capital?

Do not regulators understand that all risks, even if perfectly perceived, cause the wrong actions if excessively considered?

Regulators know that bank equity is to cover for unexpected losses. Do they not understand that the safer something is perceived the larger its potential to deliver unexpected losses?

Do not regulators and central bankers understand that, while this distortion is in place, whatever fiscal or monetary stimulus they provide will be wasted and not reach where it is most needed?

Do not regulators understand that by favoring “the safe” over “the risky” they will increase inequality?

Do not regulators understand that by doing this, banks will no longer sufficiently finance the riskier future, which is what our young need, but will mostly keep to refinancing the safer past?

World Economic Forum, during #Davos2016, for the good of the world, especially for our young, have someone ask these questions to Stefan Ingves, Mark Carney, Mario Draghi, Jaime Caruana, Janet Yellen, Martin Gruenberg, Christine Lagarde or any similar experts present… and press them for full answers.

WEF/Davos. Clarify the mystery of how global regulatory lunacy invaded the Basel Committee for Banking Supervision.

Sir, Gillian Tett referring to the turmoil in China, low oil prices and the dramatic drop in the Baltic Dry Index writes: “the elites breezing into Davos for the World Economic Forum next week should take note… that globalisation does not always proceed in a straight line” “Globalisation moves in mysterious ways” January 15.

“Mysterious ways” indeed. The elites in Davos would do well asking themselves how on earth the development of bank regulations to be applied globally, the Basel Committee, landed in hands of “experts” who think that what is rated ‘highly speculative’ below BB-, is much more dangerous to the banks and to the banking system than what is rated ‘prime’ AAA?

In Basel II the capital requirement for what was rated AAA to AA was 1.6 percent while for below BB- it was 12 percent.

In Basel II, banks could therefore leverage over 60 times their equity with what was rated AAA to AA and 8 times with what was rated below BB-.

So with Basel II banks could obtain much much higher risk adjusted returns for what is rated AAA to AA than for what is rated below BB-.

And neither has the Financial Stability Board found something curious with that regulatory concept that so distorts the allocation of bank credit to the real economy.

And here we are with a financial crisis that originated in AAA land, and a real economy that is weakening because of lack of access to bank credit for “risky” SMEs and entrepreneurs. How many #Davos201x will it take to ask the right questions?

@PerKurowski ©

Bank regulators distorted and unleveled the access to bank credit playing field

Sir, Shamit Saggar, a former Non-Executive Director of the Financial Service Authority (1998-2004) writes: “Regulators cannot avoid getting involved: their role is to level the playing field” “Regulators must keep banking culture in check” January 14.

Exactly! But then he should explain to us why he kept mum when regulators, by means of credit risk weighted capital requirements for banks, unleveled the whole playing field.

They allowed banks to leverage much more with loans to those perceived or deemed as safe, than with loans to those perceived as risky; which meant banks would earn higher risk adjusted returns on exposures to those perceived or deemed as safe, than to those perceived as risky.

And so “The Safe”, like the sovereigns and the AAArisktocracy, got much easier and cheaper access to bank credit than usual; while the Risky, SMEs and entrepreneurs, had to face much lesser and more expensive bank credit than usual.

Mr. Saggar, like so many others of his regulatory colleagues, should be ashamed of what he allowed to happen on his watch.

@PerKurowski ©

Ordinary holders of bank shares had little idea that their investment was leveraged a speculative 50 to 1.

Sir, Daniel Davies, with respect to the lower returns on equity that result from higher capital requirements, holds that bank executives should tell investors: “You loved this business when it had equity-to-asset ratios of 2 per cent and a 16 per cent RoE. Why do you hate it now that it has 5 per cent equity to assets and a 9 per cent RoE?”, “Banks should not fixate on double-digit returns” January 13.

Let us be clear of that 2 percent equity to asset ratio signifies 50 to 1 equity leverage, and one of 5 percent, 20 to 1.

Does he really think shareholders loved the 16 percent RoE had they been truly aware that the bank management was leveraging his investment a mindboggling speculative 50 to 1… and taking home great bonuses because of that?

Does he really think shareholders would be satisfied with a 9 percent RoE if they really internalize the significance of banks now leveraging their investments 20 to 1, in times when any official assistance operations requires shareholders and creditors to first sustain important losses… in order for the management to keep taking home great bonuses?

Shareholders, like many other, were and are still misled by all those low leverages reported as a result of not using gross assets but using risk weighted assets instead.

Go back some years and you will, even in FT, find that the great majority of articles mention 10 to 1, or even lower leverages, quite often even ignoring to mention the risk weighing of assets, that which so much diminished the asset on which the leverages were calculated.

Would I be satisfied with a 9 percent RoE? Yes, perhaps for a bank leveraged 10 to 1… and with the bonuses to be paid to the managers decided by us, the shareholders. 

@PerKurowski ©

Martin Wolf, where do bad credit bubbles grow, in ‘prime’ AAA land, or in ‘highly speculative’ below BB- terrain?

Sir, Martin Wolf writes “The adjustment ahead for a world economy so addicted to credit bubbles is going to be difficult” “This turmoil is the result of the Fed’s blunder” January 13.

Basel II regulations to which most developed emerging and developing markets adhered, set capital requirements for banks of 1.6 percent for what is AAA rated and 12 percent for what is rated below BB-. That means that banks could leverage their equity 62 times when dwelling in AAA land but only about 8 times when daring into below BB- terrain. That means banks would obtain much larger risk adjusted returns on equity when lending to what is AAA rated (or sovereigns) than when lending to what is rated below BB-.

And Martin Wolf has never understood the credit risk aversion that introduced in the regulation of banks, nor does he understand the fact that risk-taking is the oxygen of all development. Currently, because the regulatory distortions credit risk weighted capital requirements produce in the allocation of bank credit, the whole world is submerging.

And that distortion does not provide the banking system with one iota more of stability. It is just the opposite.

Sir, do yourself a favor, give Martin Wolf a call right now and ask him: “Martin what do you think poses more danger for the stability of the banking system, or creates more dangerous credit bubbles, that which is rated ‘prime’, AAA, or that which is rated ‘highly speculative – near default below BB-’?” 

Sir, when compared with the dangers to the world economy of current bank regulations, the .25 percent rate increase by the Fed, is pure chicken shit.

Are there many problems in the emerging markets? Of course there are! It suffices to go back a couple of years and read the many opinions about the ‘marvels’ of emerging markets… especially in light of the almost inexistent interest rates for what was perceived or deemed safe in the developed world.

@PerKurowski ©

Culture might not be a matter for bank regulators, but common sense should be.

Sir, you write “Banks are ultimately private institutions and not adjuncts of the state. It is the job of the FCA both to ensure that they treat their customers fairly and also to preserve the integrity of the UK’s financial markets. It is not the regulator’s function to determine how they go about the day-to-day management of their businesses. The soundness of the country’s financial system ultimately depends on having a sensible framework of well enforced rules as well as institutions that are capitalised sufficiently to withstand inevitable periodic shocks.” “Culture is a matter for banks not regulators” January 13.

Indeed but what have the regulators done? Nothing less than giving the banks the incentives that allow these to earn much higher risk adjusted returns on equity when lending to those ex ante perceived or deemed as safe, like the AAArisktocracy or Infallible Sovereigns, than when lending to those ex ante perceived as risky, like SMEs and entrepreneurs.

And that they did by means of credit risk weighted capital (equity) requirements, more risk more capital – less risk less capital; which means banks can leverage more with assets perceived as “safe” than with assets perceived as “risky”. 

Basel II prescribed 1.6 percent in capital for what was AAA rated, and 12 percent for what was rated below BB-. The meaning of that is “be very scared of the risks you see, what’s below BB-, and very daring with those you don’t see, the AAAs”

And with that regulators guaranteed that when really bad things happen, like when an AAA rated assets turned out ex post to be very risky, banks would stand there with especially little capital to cover themselves up with.

And with that they regulators also guaranteed the weakening of the real economy, that economy for which risk taking is the oxygen that helps it to move forward so as not to stall and fall.

Frankly, in their current incarnations, we would all be better off if the Basel Committee, the Financial Stability Board, the FCA, and other similar meddling schemers simply did not exist.

Sir, and you should be ashamed of helping to cover up those bad regulations that are taking our economies down.

Current bank regulators do not hope for the best nor do they plan for the worst.

Sir, Lawrence Summers concludes: “Policymakers should hope for the best and plan for the worst” “Heed the fears of the financial markets” January 11

But let me note that current credit risk-weighted capital requirements for banks are based on the opposite principle.

What would be the best? That the risky turn out to be safe. Do they hope for that? Absolutely not, they even prohibit that hope. They require the banks to hold more capital against what is perceived risky than what is perceived safe.

What would be the worst? That the safe turn out to be risky. Do they plan for that? Absolutely not! They allow banks to hold especially little capital when lending to The Safe.

@PerKurowski ©

By giving weight to credit rating forecast that already had weight, bank regulators poisoned these Pringles.

Sir, I refer to Tim Harford’s “Why predictions are a lot like Pringles” January 9.

He argues than when we hear a forecast because “we imagine it happening… other scenarios, equally plausible, fade into the background” and also that “forecasts offer us a lazy way to understand a complex world… it will probably be wrong. But at the instant it is consumed, it gratifies… a lot like Pringles

And Pringles, although they can seriously dent your losing weight plans, basically just gives you “the fleeting pleasure of consuming them”, and that’s it.

But what if you bet on the predictions, like on credit ratings, if you then see an AAA and the rest of possibilities “fade into the background” and you use them as a “lazy way to understand a complex world” then those Pringles carry poison.

For instance bank regulators, with Basel II, set the risk weight of an AAA rated asset at 20 percent while the risk-weight of a below BB- rated asset was 150 percent… which (with a basic capital requirement of 8 percent) meant banks were allowed to leverage their equity over 60 times with AAA rated asset but only around 8 times with assets rated below BB-.

First there is no way below BB- rated risks are riskier to the stability of banks than what is AAA rated. But also since banks already considered the ratings when setting interest rates and size of exposures, the regulators de facto poisoned the AAA Pringles the ratings agencies offered, and the whole world suffered as a consequence.

PS. I now need to reference often Emma Jacobs’ “Teachers who make risk child’s play” January 8. In it Jacob’s describes how Daniel Kish, he himself blind, teaches blind children how to manage risks they cannot see. And I beg you to compare that, to bank regulators who, with credit risk weighted capital requirement for banks, try to help bankers to manage the risks they already see. What a crazy world!

PS. January 2003, in a letter published in FT I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough.” Unfortunately the world wanted Pringles.

@PerKurowski ©

Out with Stefan Ingves, Mario Draghi, Mark Carney and other, and in with Daniel Kish, Conrad Allen and Lenore Skenazy

Sir, Emma Jacobs has penned one of the most important articles I have read over the last decades. I refer to “Teachers who make risk child’s play: Three people who coach children in how they can anticipate and manage hazards offer their insights on how to be bold” January 8.

In it she describes how Daniel Kish, president and founder of World Access for the Blind and chief perceptual-navigation instructor, he himself blind, teaches blind children how to manage risks they cannot see.

Compare that to silly bank regulators who, by means of their credit risk weighted capital requirement for banks, want to help bankers to manage the risks they already see.

And she refers to Conrad Allen, chief instructor of True-ways Survival, who objects to that kids “don’t go into the woods to play any more… largely because their parents are risk avoiders rather than risk mitigators”

And compare that to silly bank regulators who, by means of their credit risk weighted capital requirement for banks, give banks ice cream and chocolate cake, larger risk adjusted returns on equity, as long as they stay away from those dangerous forests where spinach an broccoli, SMEs and entrepreneurs, grow.

And she refers to Lenore Skenazy, a free-range parenting advocate who “has spoken at schools to encourage children to push back against their parents’ well-meaning coddling and take risks”

And compare that to the silly bank regulators who, by means of their credit risk weighted capital requirement for banks, insist with Basel III in that bankers should stick to refinancing the safer past and stay away from financing the riskier future.

As for me, I would, without a doubt, immediately throw out the current regulators in the Basel Committee for Banking Supervision, and gladly hand it over to Daniel Kish, Conrad Allen and Lenore Skenazy, so as to save the Western Civilization, that which became what it is thanks to risk-taking and not to risk aversion.

God make us daring!

@PerKurowski ©

It was the regulatory culture and not the banking culture that went wrong. The regulators need a real bashing.

Michael Skapinker writes about “the recent decision by the UK Financial Conduct Authority to drop its probe into the culture of banking is wrong, and why members of the Treasury parliamentary committee are right to call for hearings into why it did so.” “Bankers need a (metaphorical) bashing — as do the rest of us” January 7. He also opines that: “Lax regulation led to the 2008 banking crisis.”

Sir, what if FCA’s probe into the culture of banking would have come up with the following:

“The culture of bankers has not changed; as usual they do their best to provide their shareholders with the highest risk adjusted returns on equity possible.

This time though, the regulators, the Basel Committee, allowed banks to leverage their equity differently with assets, depending on the ex ante perceived risk of these. For instance with Basel II, they authorized a leverage of over 60 to 1 for any AAA to AA private asset but only 12 to 1 in the case of a loan to an unrated corporation.

That meant of course that the risk adjusted returns on equity for safe assets shot up in the sky. An expected 0.5 percent risk adjusted margin to something safe could produce a 30 percent on equity, while a loan to a risky SME or entrepreneur, with the same expected risk adjusted margin, would only yield about a 7 percent ROE.

And so banks, naturally, as should have been expected, went overboard in exposures to for instance AAA rated securities and loans to Greece. And assets perceived ex ante as safe but that ex post turn out to be risky, is precisely the stuff bank crisis are made off. In this particular case the crisis ended up so much worse by the fact that banks were holding very little capital when the ex post realities set in.

Another unfortunate consequence has of course been that banks have either completely abandoned the lending to the risky, or are charging them extra premiums in order to compensate for the regulatory distortions.

We have to make a note that the distortion that caused the crisis remains in effect with Basel III.

In order for regulators to introduce the necessary correction, we want to remind them of the following:

Bank capital is to cover for unexpected losses and so, to have these based on expected credit risk, a risk already cleared for by banks by means of interest rates and size of exposure makes absolutely no sense.

The safer and asset is perceived the greater its potential to deliver unexpected losses.

The regulators should not worry about the credit risk of bank assets but about how banks manage those risks, and a good place to start is by not introducing distortions that makes it more difficult for them.

In conclusion “lax regulations” had nothing to do with causing this crisis. It was all about seriously bad regulations. Of course we feel sad about it, but our bank regulation colleagues must be held accountable for what they did, otherwise the moral hazard becomes just too big to handle.

Yours truly”

Sir, could it not be that FCA has abandoned its probe into the culture of banks because its conclusions would reflect very badly on the culture of regulators?

Skapinker with respect to the malpractice that is allowed to go undetected, like because of the silence of the media before the 2008 crisis writes: “One part of society needs to step in when another does not. It is through their actions that the system is kept honest, more or less, or at least honest enough for it to keep functioning”

Absolutely, but why has FT not helped me to do so? How can you be so sure I am wrong… or is it something else?

@PerKurowski ©

IBM, Watson could have a role in regulations that accept the need of the real economy for banks to take credit risks

Sir, I refer to Richard Waters report on the difficulties IBM faces in expanding the application of its Jeopardy champion Watson, “FT Big Read: Artificial Intelligence: Can Watson save IBM” January 6.

In it quotes Lynda Chin mentioning the challenge that “On Jeopardy! there’s a right answer to the question, but, in the medical world, [in the real world] there are often just well-informed opinions… [So how to know] how much trust to put in the answers the system produces. Its probabilistic approach makes it very human-like… [Watson] Having been trained by experts, it tends to make the kind of judgments that a human would, with the biases that implies.”

Indeed how much trust is just another way of stating how much risk is one willing to take.

For instance if one wants driverless cars to provide absolutely security, then traffic will probably become very slow, or even come to a standstill. And one of the difficulties these cars will encounter will be based on defining the acceptable amount of risk taking.

Likewise, if one wants our banks to be absolutely secure, then one would be better off with hiding money under mattresses in bank vaults… but the real economy would be languishing because of the lack of credit.

So there might be a big role for Watson in bank regulations. First of all it could help me convince the Basel Committee of that their credit risk weighted capital requirements are based on a very faulty human bias against risk; something which at the end of the day only endangers banks, since it causes excessive exposures to what is perceived as safe, precisely that which has caused all major bank crisis.

And, if fed with continuous information on bank credit and the state of the real economy, Watson could also be used to automatically send out countercyclical adjustments. Too much growth in credit… increase capital requirements somewhat… too little growth in credit reduce capital requirements somewhat. The most important thing needed for that would be to make Watson immune to lobbying pressures of all sorts.

What I would not allow Watson to do though is to display that kind of human arrogance of thinking itself capable of setting different capital requirements for different assets, so as to distort the allocation of bank credit as it thinks fit to distort.

To do that, I would still want a human to be behind that kind of risk taking… of course a human who understand what he is doing and is willing to be held very much accountable, if taking the next generations down the wrong path.

@PerKurowski ©

Martin Wolf there is a slow moving but sure regulatory destruction of our economies, and that is a guaranteed disaster

Sir, Martin Wolf writes: “If one wants to worry, there is plenty to worry about. Yet, from the economic viewpoint, what matters is not so much whether the world will be well managed: it will not be. What matters more is whether a disaster will be avoided… The cumulative chance that at least one of all such disasters will occur is greater than the chance that any one of them will do so. Nevertheless, the likelihood that none of them will occur is surely bigger”, “Why economic disaster is an unlikely event” January 6.

Wolf ignores the ongoing slow moving but sure destruction of the economy that results from the distortion in the allocation of bank credit introduced by regulators by means of the credit risk weighted capital requirements for banks. In terms of what our banks can do for our real economies, these have been castrated.

If the stress testing of banks had, besides looking at what is on their balance sheets, looked for what should be on and is not, the technocrats would have discovered the growing absence of credit to the risky SMEs and entrepreneurs, those that on the margin are responsible for moving the economy forward in order not to stall and fall.

How do I know that? Well, if banks are allowed to leverage more on assets perceived as safe than on assets perceived as risky; and thereby earn higher risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky, that is doomed to happen.

How does Martin Wolf not know that? I haven’t the faintest. From what he answered me on one occasion, it would seem he thinks bankers should resist the temptation to maximize their returns on equity. That is a strange thesis, especially when that maximization results from holding assets perceived as safe. Make the most on the safest sounds like a banker’s dream come true.

@PerKurowski ©

What if a holder of a bank bond who loses his investment in a bank tries to sue the regulators?

Sir, I refer to Jim Brunsden’s, Patrick Jenkins’ and Rachel Sanderson’s FT’s Big Read “Bondholders on the hook” January 5.

Suppose a bank that has too much exposure against too little capital to something that is ex ante perceived as safe but that ex post turns out to be very risky collapses.

And suppose reports on the bank indicated that all was fine and dandy because the bank had more than enough capital against risk-weighted assets to meet the Basel Committee's criteria.

So what if a holder of a bank bond that loses his investment goes in front of a judge and argues the failure happened because regulators created set wrong incentives and that they authorized the issuance of confusing information that understated the bank’s real leverage?

I am no lawyer so I have no idea about the final consequences, but I sure would like to see that trial and hear the judge’s opinion when he gets to understand the full extent of what has been going on.

@PerKurowski ©

Corporations and their tax payments distract the full attention the citizens deserve from their governments

Sir, I refer to John Plender’s “A strange aversion to corporate tax” January 4. I have an aversion to corporate taxes that is not duly reflected there.

In my homeland Venezuela the government gets directly 97 percent of all exports and, when oil prices are high, we citizens become almost a nuisance to those in charge of administrating such revenues… only when oil prices are low do they begin to remember us.

As a result I have held that the ideal tax system is that in which the government gets all of its income directly from identified citizens… not anonymous sales taxes, and that makes me to have an aversion to corporate taxes too. The corporations, with their often very high profits equally, quite often, constitute a distraction that hinders the governments to give full attention to us citizens.

100 percent citizens based tax system, true tax heavens, would also be the best way to diminish the needs for tax havens.

http://perkurowski.blogspot.com/2012/03/my-tax-paradise.html

@PerKurowski ©

Sweden, ask Stefan Ingves a simple question before granting him more powers.

Sir, I refer to Richard Milne’s “Sweden central bank chief [Stefan Ingves] gains forex intervention powers” December 5.

And “Andreas Wallstrom, an economist at lender Nordea, called Mr Ingves’s new powers “truly sad” because currency interventions often failed to bring about the intended result.”

Mr. Ingves, as the current Chair of the Basel Committee, is one of the experts on interventions that fail to bring about the intended results.

Take just the case of regulations that force banks to hold more equity against what is perceived as risky than against what is perceived as safe, and which dangerously distorts the allocation of bank credit.

The result, dangerous bank exposures to AAA rated securities and Greece and equally dangerous lack of exposures to “risky” SMEs and entrepreneurs.

So just ask Mr Ingves the following:

Sir, would you be so kind so as to provide us with one example of a major bank crisis that resulted from excessive bank exposures to assets that were perceived as risky when placed on the balance sheet of banks.

If he cannot answer, should that not be a sufficient indication he might have no idea about what he is doing?

Regulators assigned a 20 percent risk weight to AAA rated private sector bank assets and a 150 pecent risk weight for similar assets rated below BB-. I can think of many instances were bankers were lulled into a false sense of security by good credit ratings, but I cannot for my life imagine bankers building up excessive exposures to something rated below BB-. Sir, can you?

Bank regulators have set their highest bank capital requirements for what poses the least dangerous tail risks

Sir, I refer to your “World economy of so-so growth and fat tailed risk” January 4, and your reporters “Unlikely suspects are in the wings for 2016” of January 2.

The latter states: “Some risks are quotidian. Will a company struggle to generate cash flow, or will a particular asset fall out of vogue. Then there are outcomes that exist in the narrow, far reaches of statistical probability distributions, known as “tail-risks”. A hefty blow to investments is usually the result when such shocks occur.”

And with respect to current bank capital requirements, those that are supposed help cover for unexpected losses I have two questions for your reporters.

First, what can cause more unexpected losses, quotidian risks like credit risks, or the kind of events that they exemplify as some possible dangerous tail risks?

Second, in the case of credit risks, what has the capacity to produce the most sizable unexpected losses, what is perceived as safe or what is perceived as risky?

The correct answer to those questions should indicate the absurdity of setting the highest capital requirements for that that in terms of a quotidian credit risk is perceived as risky.

Think of it. The risk weight for a private sector asset rated below BB- was set at 150 percent, while that of an AAA to AA rated was only 20 percent. Is below BB- rated, something which scares away any risk adverse banker, really more dangerous to the banks than what is AAA rated? 

Sir, how long will your reporters ignore this sad truth? Is there a tail risk they personally have to be afraid of?

Laura Noonan in “EU board budgets for 10 bank failures” December 4, writes that the Single Resolution Board is seeking €40m in accounting advice, economic and financial valuation services and legal advice, to be used in the resolution of struggling Eurozone banks from 2016 to 2020.

Sir, have any of the possible big shot candidates for that consultancy ever informed bank regulators that their capital requirements make no sense? Sorry, just asking.

@PerKurowski ©

The sky might not fall on America, yet, but credit-risk phobia sucks the Home of the Brave’s vitality

Sir, you write “Cheer up, the sky is not falling on America’s head” January 2.

Sir, if bank regulators suddenly gave banks great incentives to avoid lending to those perceived as risky, like the SMEs and entrepreneurs, and to concentrate on lending to the sovereign and the AAA rated, would you still hold that all was fine and dandy in the Home of the Brave?

I ask because that is precisely what has been going on since1988 when regulators came down with a serious and dysfunctional credit risk-phobia that made them impose risk weighted capital requirements on banks.

In Basel I the risk weight of the sovereign (government) was set at zero percent, while America’s private sector was risk weighted at 100 percent. And then in 2004, with Basel II they split up the private sector in a range that went from a 20 percent risk weight for the AAAristocracy, and up to 150 percent for any borrower rated below BB-.

And that meant that banks now earn higher risk adjusted returns on what is perceived as safe than on what is perceived as risky. With such regulations that hinder the opportunities of the risky to have fair access to bank credit, it is clear that America would never have become the economic powerhouse it got to be. 

And similar things could be said about the entire Western world. Sir, it never stops to amaze me how determined you have been not to reference the distortions in the allocation of bank credit to the real economy that the Basel Committee has produced.

@PerKurowski ©