June 30, 2016

Are risk weights of King John 0%, AAArisktocracy 20% and Englishmen 100% in the spirit of England’s Magna Carta?

Sir, with respect to Mark Carney having opined on the risks of Brexit you hold that “It is imperative to stop the attacks on the BOE because the central bank governor must command public confidence to do his job. “This is no time to attack the credibility of the BoE. The leaders of the Brexit campaign owe Mark Carney an apology” July 30.

I cared little about Carney giving opinions on climate change, and I care little about his opinions on Brexit but, Mark Carney is the chair of the Financial Stability Board, and so I do care about him regulating banks, when he does not understanding banking risks.

He does not understand the most basic truth, namely that those dangerously excessive bank exposures that could set of a major bank crisis, are never ever built with assets ex ante perceived as risky but always with assets ex ante perceived as safe. “May God defend me from my friends [what’s safe]: I can defend myself from my enemies [what’s risky]” Voltaire

And Carney has not understood either that allowing for different capital requirements, allows for different leverage of equity or societal support, which produces distorted risk adjusted returns on equity, and which distorts the allocation of bank credit to the real economy. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd

With the Basel Accord of 1988 bank regulators assigned a 0% risk weight for loans to the sovereign and 100% to the private sector. Some years later, 2004, with Basel II, they reduced the risk-weight for loans to those in the private sector rated AAA to AA to 20%, and left the unrated with their 100%.

Sir, do you think it is in the spirit of your Magna Carta to include risk-weights like King John 0%, AAArisktocracy 20% and Englishmen 100%? I do not. And so in essence, the bank regulators, your BoE and your Mark Carney, are messing with the foundations of your country, and you, FT, you keep mum on it.

But I won’t. I will protest those regulations, in all ways possible, not because of England, but because it is too important for the future of my children and grandchildren, my constituency.

@PerKurowski ©

June 29, 2016

The real UK economy, SMEs and entrepreneurs, need also to be invited to a “fireside chat” with Mark Carney and BoE

Sir, Martin Arnold and Caroline Binham report on the invitation of Bank of England extended to “The heads of the five big UK banks — HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered — along with a few others including Nationwide and TSB”, in order to have a “Fireside chat” May 29.

The real UK economy should also be invited, so that it is given a chance to ask: “Mark Carney, BoE, when compared to that of SMEs and entrepreneurs, when will bureaucrats stop having preferential access to bank credit?”

Let me explain: The current risk weight of the “safe” sovereign is zero percent, and that of “risky” not-rated citizens 100 percent.

That means banks need to hold much less or no capital at all, when lending to the sovereign, than when lending citizens; which means banks can leverage their equity and the support they receive from society (taxpayers) much more when lending to the sovereign than when lending to citizens; which means banks can earn higher risk adjusted returns on equity when lending to sovereigns than when lending to citizens; and which means banks favor more and more lending to the sovereign over lending to the citizen. And so the SMEs and the entrepreneurs who basically represent the “not-rated citizens” must face harsher relative conditions accessing bank credit, than those that would prevail in the case all bank assets faced the same capital requirements. 

There could be some discussion on whether lending to sovereigns represent less risk than lending to SMEs and entrepreneurs. I do not believe so. Banks do not create dangerous not diversified excessive exposures to SMEs and entrepreneurs; and, at the end of the day, the sovereign derives all its strength from its citizens.

But I doubt the real economy will be invited to the fireside chat… the regulators do not want to hear: “Sir, especially after Basel II introduced risk-weights that also favor the safer of the private sector, the AAArisktocracy; do you know how many million of loans to SMEs and entrepreneurs around the world have not been awarded, only because of your risk weighted capital requirements for banks? Have you any idea of how many jobs for our young ones have not been created as a direct consequence of this?

@PerKurowski ©

June 27, 2016

To put “broken Europe back together” it needs to be freed from dumb risk adverse bank regulators

Norbert Röttgen, the chairman of the committee on foreign affairs of the German Bundestag writes: “Given the range of challenges the EU faces with Libya, Syria, Russia, the euro, youth unemployment and the refugee crisis, the most urgent and profound danger for the EU is not economic or geopolitical: it is psychological” “Let Germany put broken Europe back together” June 28.

But in his prescribed ways forward he, as basically all experts have been doing, ignores how Basel Committee’s risk-weighted capital requirements have blocked banks from financing the riskier future and kept them busy just refinancing a safer past. Banks not daring to explore risky bays, is no way for Europe to solve anything. That just guarantees Europe will finish suffocating, gasping for oxygen, in some dangerously overpopulated safe havens. 

Nothing has done so much damage to the Eurozone as these regulations. For instance, without the ridicule low capital requirements applied when lending to sovereigns, Greece would never ever have been able to accumulate so much debt.

PS. And when Röttgen writes “Europe is a different place now the British have voted to leave. It is up to the rest of us to determine what type of Europe it will be.” I do find it somewhat hard to agree. First Britain is leaving the European Union not Europe. And then why should EU want to be a different Europa, just based on if Britain is in or out?

@PerKurowski ©

June 26, 2016

The Federal Reserve’s stress tests of banks are dangerously incomplete.

Sir, Ben McLannahan and Gillian Tett write that the US Federal Reserve reported that “Every one of the 33 US banks that took the first part of the annual “stress test” passed it” “US lenders face higher stress test hurdle”, June 25.

That is good news. But the bad news though is that, as I have said time after time, those stress tests are incomplete. They only include what is on the balance sheets of banks, and not what these should include but perhaps do not include. And that means that the all-important social role of banks of allocating credit efficiently to the real economy is completely ignored.

If banks run into problems because of allocating credit in accordance to the needs of the real economy, that is a much lesser problem than if the real economy does not have adequate access to bank credit.

What do I suggest? Analyze for example the evolution of how many credits, not guaranteed with house mortgages, have been given over the years to “risky” SMEs and entrepreneurs, and I am sure you will be shocked with how the credit risk weighted capital requirements for banks have distorted.

@PerKurowski ©

Embracing some inefficiency and duplication will improve resilience and recovery; and will reduce system fragility.

Sir, Gillian Tett writes “one of the problems of the modern world is that we live in such a tightly interconnected global system that it is a fantasy to think we can ever abolish all [terrorist] threats” and argues “the sooner our leaders can start talking bout resilience and recovery – and embracing some inefficiency and duplication– the better”, “Resilience in a time of crises”, June 25.

In March 2003, as an Executive Director at the World Bank, in a formal written statement I stated:

"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.

Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.

The Basel Committee dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth."

But my warnings were ignored. With Basel II in June 2004, not only were credit rating agencies fully empowered to determine what was risky and what safe, but also the whole issue of the need for bank credit to be allocated efficiently to the real economy, was totally ignored.

Just like my over thousand letters on subprime banking regulations have been ignored by all in FT, probably because you cannot fathom the idea that regulators, experts, could be as dumb as I hold them to be.

Ms. Tett, first I dare you to answer this question: What assets are more likely to generate that kind of excessive exposures that could endanger the banking system, prime AAA rated assets or speculative and worse too below BB- rated assets?

And then reflect on that the risk weights for AAA rated assets was set to 20% while that of the below BB- at 150%.

And also reflect on that allowing bank to leverage equity differently, based on perceived risk, guarantees that the allocation of bank credit to the real economy will be distorted.

So Ms. Tett, when you then conclude that Donald Trump and other western politicians should be educated on issues of resilience and recovery, perhaps you might not have earned the right to throw the first stone.

@PerKurowski ©

June 23, 2016

FT, you seem to exploit the needs and wants of the young only when it suits you, like today when fighting Brexit

Sir, you write: “The uplifting notes in this campaign should not be ignored. One of the brightest has come from the younger generation, a majority of whom favour staying in Europe. In a digital age, the young recognise that their future is one of connectedness and participation, not separation and isolation. While older Brexit voters seem to look backwards to an imperial past, the young look forward to a global future. It is their future that is ultimately at stake” “A moment of destiny for Britain and Europe”, June 23.

But you have insisted on keeping mum about the fact that current bank regulations, with its risk-weighted capital requirements, de facto favors the refinancing of your safer past, and impedes so much of those credits to the riskier that are required for the young to have a chance of a decent future.

Sir, to me it seems you bring in the young, only when it suits you, like now when fighting Brexit.

Yes, today’s election is important, and I would have voted to stay in EU, at least if I were sure Britain would raise some hell there. But, a much more important decision than that, is whether Britain wants to go back to being the daring go-get-it nation it once was, or remain the sheepish risk-adverse country that for instance the Basel Committee now wants it to be.

@PerKurowski ©

June 22, 2016

It behooves us to stress-test our main bank regulators; the Basel Committee and the Financial Stability Board

Sir, Caroline Binham, Stephen Foley and Madison Marriage report “Systemwide and individual stress-testing of asset managers, as well as examining whether greater disclosure should be made by mutual funds, were among 14 recommendations made by the Basel-based Financial Stability Board to authorities across the G20 nations yesterday” “Stress test asset managers, says FSB” June 23.

Much more important for us is to stress-test bank regulators, to be sure they really know what they’re doing.

Since about two decades I have been asking regulators many questions that have not been answered. And so for a start I would like to ask Mark Carney, the current chair of the FSB; Mario Draghi, the former chair of FSB and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision; and Stefan Ingves the current chair of the Basel Committee, the following:

For the purpose of setting the capital requirements for banks, in Basel II you assigned a risk weight of 150 percent to what is rated highly speculative and worse, below BB- but only 20 percent to what is rated AAA to AA.

Gentlemen why did you do that? Major bank crises have never ever resulted from excessive exposures to what is perceived as really risky, but always from what ex ante was perceived as safe but that ex post turned out not to be.

If these regulators are not capable of giving us a credible answer, then I submit they are not capable enough to stress test any bank, asset manager or mutual fund.

And, if they dare answer the first question, then make them explain all this!

@PerKurowski ©

Loony and statist bank regulators are destroying the opportunities of the real economy to sustain decent pensions.

Sir, Patrick Jenkins writes “The funding gap facing— anyone with the dream of a decent pension income — illustrates the broader truths about a slow burn financial crisis that threatens to engulf the globe over the next decade or two.” June 22.

But Jenkins argues all over the place without referring to the biggest threat, namely the state of the real economy, when all those pensions are to be paid out. Because it really doesn’t matter how much you save up, if the economy tanks precisely when you want to convert your savings into real purchase power of goods and services.

And the real crisis that will engulf our pension funds, is the direct result of all that essential risk-taking that has been denied the real economy, because of the credit risk based capital requirements for banks.

Had capital requirements not discriminated against what is ex ante perceived as risky, and in favor of what is perceived, decreed or concocted as safe, during more than a decade, then millions of small loans would have been given to SMEs and entrepreneurs, and the economy would have been much more dynamic and prepared to take care both of the jobs our young need, and the retirement needs of our older.

Truth is the world has been let down by bank regulators so loony so as to believe that what is below BB- rated pose greater dangers to the bank system that what is AAA rated.

Truth is the world has been let down by bank regulators so statist so as to believe that government bureaucrats can make better use of bank credit than the private sector.

@PerKurowski ©

Hardheaded bank regulators still believe they’re up against the expected while the real enemy is always the unexpected

Sir, Ben McLannahan discusses the consequences of changing “the current regime [in which] banks can hold off adding to reserves until the point at which losses on the loan become probable…[to one in which] banks will be made to log all expected losses over the life of the loan on day one, based on a combination of experience, their own forecasts and the state of the economy”, “Big lenders raise concerns over new loan loss rules” June 22.

One direct consequence of that is that those borrowers who are ex ante perceived as risky, will therefore force banks to recognize losses earlier than “when probable”. That might sound correct, but the real effect is that, when compared to those ex ante perceived as safe and which have lower probability of losses, it will discriminate against the risky.

And so when you layer this on top of the discriminations already produced by the risk weighted capital requirements for banks, the access to bank credit for those perceived as risky will only become more difficult. And all really without making banks much safer. The expected never causes major bank crises, it is always the unexpected losses for what had erroneously been perceived as safe that does.

McLannahan reports that Hal Schroeder, a board member at FASB, opines that the new rule — known as the Current Expected Credit Loss, or CECL — “aligns the accounting with the economics of underwriting, and the informational needs of investors”.

And to justify it Schroeder “noted that in the four years before the crisis, loans held by banks in the US rose 45 per cent, while reserves set aside for losses fell 10 per cent. That meant that loan-loss reserves as a percentage of gross loans were near a multi-decade low on the eve of the Lehman collapse.”

But why was that? That was the result of banks increasing their exposures to what was perceived as safe, because of lower capital requirements, and lowering their exposures to what was perceived as risky, because of lower capital requirements… and then being surprised when “super-safe” AAA-rated securities, backed with “super-safe” residential housing mortgages, and loans to sovereigns decreed as “super-safe”, like Greece, turn out, ex post, un-expectedly, against probabilities, to be very risky.

Sir, what’s being done here, especially without eliminating the risk-weighted capital requirements, evidences that the regulators still don’t understand that they are not up against the expected, their real challenge is the unexpected. Since what is perceived as safe has much more potential of providing unpleasant surprises than what is perceived as risky, their regulations just makes the bank system more brittle and fragile.

And to top it up by discriminating against the risky they hinder the banking system from taking the risks the real economy needs to move forward.

We need our banks to work for all, not just for the banks, and for those perceived as safe.

We need our banks to finance the riskier future of our young, not just refinancing the safer past of their parents.

@PerKurowski ©

June 20, 2016

And now, decades too late, FT publishes an article by LBS’s David Pitt-Watson mentioning that finance needs a purpose

Sir, David Pitt-Watson, an executive fellow of finance at London Business School writes: “Few had spotted… chronic failures in the system; for example, that on the best evidence available, for more than a century, the financial system has created no productivity increase in its task of taking our savings and investing them in productive projects”. And “that’s why LBS has introduced a new required course for its masters in finance, [which he teaches] called the Purpose of Finance.” “Students must learn the purpose of finance” June 20.

I am a London Business School, Corporate Finance graduate, 1980. Since my first Op-Ed in 1997, and then as an Executive Director of the World Bank 2002-04, and afterwards, I have held, among other in around 50 not published letters to FT, that bank regulators, so irresponsibly, never ever defined the purpose of banks before regulating these, and so completely ignored that the main purpose of banks was to allocate efficiently credit to the real economy.

In 2007 I even sent a letter to FT commenting on an article by David Pitt-Watson, in the sense that he had not understood the role of regulators in creating the distortions in the allocation of bank credit.

My problem was, and is, that I did, and do not, belong or behave, in accordance to the mandates of any inner circle, whether of LBS or FT.

Therefore when Pitt-Watson writes: “Before we launched the course, I researched what other masters in finance degrees taught. I could not find a single one that is explicit in teaching about purpose,” he is confessing to the worst of problems… the groupthink of regulators, of finance professors and of financial journalists.

I am pinning my hopes on artificial intelligence. That has at least no ego that refuses to admit to its mistakes.

And artificial intelligence would never ever have risk-weighted BB- rated assets at 150% and AAA rated at 20%. It would have known that banks would never ever create excessive financial exposures to what is perceived as risky, that only happens with assets ex ante perceived as safe.

@PerKurowski ©

Venezuela’s debts to China should first be investigated, not first negotiated.

Sir, Lucy Hornby and Andres Schipani report that Chinese "Envoys seek assurances from opposition on debt in case president [Maduro] falls” June 20.

I don’t know about the opposition, but I sure believe that if any developed countries had been given those loans in such non-transparent terms, as Venezuela got those of China, its citizen would have, at least initially, given the Chinese the finger.

And so this is not for the opposition to negotiate, it is for the opposition to openly and transparently investigate.

Only after complete investigations have concluded, and the debt has been declared bona fide, and not derived from odious credits or odious borrowings, could then open and transparent negotiations begin. 

@PerKurowski ©

June 19, 2016

In sovereign debt should not moral and ethical issues be more important than collective and pari passu clauses?

Sir, Robin Wigglesworth discusses bond legalese, like collective and pari passu clauses, and rightly concludes “paying attention to the legal differences is [especially] important when a borrower runs into a brick wall.” “Venezuelan bond small print piques investors’ interest” June 18.

But we citizens would also appreciate that lenders gave some minimum minimorum considerations to what the funds they loaned out were going to be used for, whether the loans were being correctly and transparently contracted, and of the quality of the managers of the proceeds, the governments.

In many cases, like that of Venezuela, if creditors had done so they could easily have concluded they were giving odious credits, and that the government was contracting odious borrowings; and that they better refrain from giving the loans, no matter how juicy the risk premiums.

In a world were legislation against acts of corruption exists it is surprising how little consideration “connoisseurs” give to the moral and ethical aspects of sovereign debt. Very high interest rate risk premiums, is the currency in which the corrupter and the corrupted too often conclude their dirty dealings.

For instance, in Venezuela, though there are serious scarcities of food and medicines, the government sells petrol domestically for basically nothing; and blocks humanitarian international arguing that to allow it would infringe their sovereign right to have exclusive responsibility for the welfare of citizens. And besides the market is well aware of that there are Venezuelans imprisoned for political reasons.

In such circumstances should not lending to Venezuela qualify as odious credit? Should that not also be qualified as part of odious government borrowings?

Should not citizens have a collective clause rights with which they can authorize or not the payment of odious credits and borrowings?

What should a due diligence process for bond issues which proceeds might help finance human rights violations include?

If a corporation suspect of drug trafficking made a bond issue, who would begin by revising the clauses of its legal documentation?

@PerKurowski ©

June 18, 2016

Bank regulators minimizing the social impact of banks more than neutralize the social impact maximizing investors.

Sir, Stephen Foley and Adam Samson quote write about the efforts of Pope Francis to champion ‘impact’ investments, “FT Big Read. Investment: Blessed returns” June 17.

And Pope Francis is quoted with: “It is increasingly intolerable that financial markets are shaping the destiny of peoples rather than serving their needs”. I believe that having a tête-à-tête with the Basel Committee for Banking Supervision, could serve the Pope better than speaking with social impact investors.

The pillar of current regulations, the risk weighted capital requirements for banks, allow banks to earn higher risk adjusted returns on equity, for no other purpose than that to avoid ex ante perceived credit risks. That’s a very a poor objective for those who have a prime responsibility of allocating bank credit efficiently to the economy.

As a result those perceived safe, those who because of that already have plenty and cheaper access to bank credit, now find even more generous terms, while those perceived as risky, like SMEs and entrepreneurs, those who already had less and more expensive access to bank credit, have to fight much harsher conditions.

Clearly that regulation only guarantees to diminish the social impact of bank lending. It is the direct consequence of regulators regulating banks, without defining the purpose of these. That is an unpardonable irresponsibility of them!

Social impact based capital requirements for banks, which would allow banks to earn higher risk adjusted returns on equity when producing a high social impact, could sound as an attractive possibility, but is not free from dangers. To base capital requirements for banks on for instance the GIIN list of 559 metrics, those ranging from ‘greenhouse gas emissions avoided due to products sold’ to the number of suppliers who were minority/female/low income” could be gamed and also distort credit allocation in many other ways.

But, just to require the Basel Committee to answer a question of whether bank credit should not have a social impact, could open up a much-needed discussion on the need of eliminating the current regulatory discrimination based on perceived credit risk.

@PerKurowski ©

June 16, 2016

Since you cannot put up a Leave Britain to referendum, you must force your Parliament to act more forcefully in EU

Sir, Chris Giles, fighting Brexit argues: “some [EU] economic officials have been granted constrained powers to take decisions for the public good… Competition authorities help arrange the playing field on which companies compete. Parliament’s ultimate sovereignty comes in the ability to remove these powers”, “Economists’ rare unity highlights the perils of Brexit” June 16.

But the problem is that many EU issues are considered so remotely, and in such convoluted ways, that parliaments are often not even aware of what is happening.

As an example, and though it is not directly a EU authority, let me refer to the Basel Committee for Banking Supervision.

The BCBS imposed de facto credit risk weighted capital requirements for banks which meant banks could hold assets perceived or deemed as safe against less capital that assets perceived as risky. And introduced a distortion of the playing field where borrowers compete for bank credit. 

What would the chances of the following proposal having been approved by any European parliament?

“By means of regulations, and in order to make our bank system safer, we propose to help banks earn much higher risk adjusted returns on equity when lending to what is safe, like to sovereigns, the AAArisktocracy and the financing of houses; and so that they are given good incentives to stay away from lending to what is risky, like to SMEs, entrepreneurs and citizens in general”

I bet no MP would have even dared to present such proposal for consideration.

And just think of proposing what the Basel Accord of 1988 decided: “The risk weight of the sovereign (the government) is zero percent and that of citizens 100 percent”

But since BoE, where Mark Carney is the current Chair of the Financial Stability Committee, and all other locals involved seem to agree with the above mentioned distortions, you are facing much more than a stay or leave EU issue.

Since you cannot solve it by putting a Leave Britain up to a referendum, you better get your Parliament to work on issues like this, hurriedly, come what may.

I would suggest you start by asking Mark Carney why he feels it is adequate that those assets rated below BB-, speculative or worse, and to which banks would never ever voluntarily create excessive exposures to, should have a risk weight of 150%, while the AAA to AA rated assets, those to which excessive exposures is precisely the stuff that mayor bank crises are made of, these have only a risk weight of 20%.

PS. “Rare unity” between economists does not have to mean they are right. EU is full of problems and I have not seen economists considering much the possible unexpected consequences of a strong rejection of Brexit.

PS. For full disclosure I also belong to those who have had enough with at least quite many of the experts.

@PerKurowski ©

June 14, 2016

Please help save us from regulators applying their standardized risk models to all banks… that would be the end

Sir, Martin Sandbu, in “Free Lunch: The bank, the fox and the henhouse”, June 13, discusses the issue that “Rules for banks’ capital cannot rely on their own models of risk

Sandbu writes: “non-initiated may be surprised to know that [some] banks were [and are] permitted to decide how risky their assets were — which determines their capital requirements under rules that set safe capital thresholds as ratios of “risk-weighted assets”. To the extent banks perceive capital requirements as a burden, that creates an incentive for them to engineer risk assessments that minimize that burden.”

And so clearly when “The Basel Committee on Banking Supervision, which recommends global standards for national banking authorities, proposes to replace banks’ internal models of riskiness with external standardized models” this sounds very logic to many.

But the non initiated are not aware either of that, with Basel II, the regulators already gave a set of standardized risk weights to be used by all banks deemed not sophisticated (or big enough) to run their own risk models.

And Sir, it behooves us to fully understand what regulators did, before we dare to hand over to them one iota of more power.

Unbelievable, Basel II derived the risk weights, those that determine the capital requirements, from the ex ante perceived risk of the assets per se, and not from the risk these assets can pose to the banks or the bank system.

And therefore we have that assets rated below BB-, speculative and worse, those assets to which banks would never ever create excessive exposures to, got a risk weight of 150%, while assets rated AAA to AA, those to which banks could easily get to be dangerously exposed, these got a risk weight of only 20%.

So Sir, is there any good reason for us to welcome the same regulators to start working on a Basel IV?

As a minimum minimorum, before Basel IV work begins, we must require regulators to clearly specify what is the purpose of the banks, something they never did before they regulated. I say this because with the distortions produced with Basel I, Basel II and Basel III, they clearly evidenced, they do not give a damn about whether banks allocate credit efficiently to the real economy.

The only useful risk model is that which understands that bank capital is to be there against unexpected events, not against expected credit risks. For example, capital could be 8 percent against all assets.

But perhaps banks do need more capital, like 10 percent, because now we also have to guard them against the “unexpected” reality of regulators being capable of such an immense hubris, they can just push on without a clue about what they’re doing.

PS. To top it up... their risk-weights were portfolio invariant

@PerKurowski ©

June 13, 2016

FT, when will you stop lying about “a light-touch oversight of financial markets before the 2008 crash”?

Sir, you write Brussels played no part…in the light-touch oversight of financial markets before the 2008 crash” “Pooled sovereignty has advanced national goals” June 13.

When are you going to stop advancing that notion of a light-touch oversight of financial markets?

In 1988, with the Basel Accord, Basel I, the regulators decided that for the purpose of calculating the risk weighted capital requirements for banks, the risk weight of some friendly sovereigns was zero percent, while the risk weight for supposedly equally friendly citizens, was 100 percent.

With that they started the most heavy-handed statist interventions of financial markets ever.

Banks needed no capital when lending to the infallible sovereign, but 8 percent when lending to citizens.

Banks could leverage equity infinitely when lending to the infallible sovereign, but only 12.5 to 1 when lending to the citizens, those from which the sovereign derives all its strength.

And then, with Basel II, in 2004, the regulators topped up their heavy-handedness by declaring that the risk weights for a private rated AAA to AA was 20 percent while the risk weight of a speculative and worse below BB- rated, one of those banks would never ever dream of building up excessive exposures to, was 150 percent.

And things have not changed significantly. In fact, on the margin, the intervention has become worse.

Was it a light-touch intervention that caused the 2008 crisis to result from excessive exposures to assets allowed being held, against specially little capital? Like with AAA rated securities, or with loans to sovereigns as Greece! No way José!

So FT, when are you to stop lying? It is sure way over time for it. 

@PerKurowski ©

Basel Accord’s risk weights subsidized sovereign bonds, so since then these were no longer proxies for risk free rates

Sir, Michala Marcusssen argues that because of quantitative easing and negative interests “the proxies of sovereign bond yields for the “risk-free” rate of return is becoming an increasingly imperfect substitute with potentially dangerous consequences” “The demise of the ‘risk-free’ rate in markets”, June 14.

Marcussen refers to “a new debate on how to treat sovereign debt on bank balance sheets. At present, sovereign debt enjoys favourable treatment not just in the euro area but across the globe. Basel III allows (but does not mandate) a capital requirement of 0 per cent for sovereign bonds”

Not exactly, as I have often written to FT, the problem of a not valid proxy for the risk-free rate originated much earlier, soon 30 years ago.

The Basel Accord of 1988, Basel I, set the risk weights for sovereigns at zero percent and that of citizens at 100 percent. Since that signified a regulatory subsidy of sovereign debt, ever since we have not have had a reasonable proxy for a risk free rate.

The problem with banks holding too much sovereign debt is that no one dares tackle the regulatory favoritism of it.

Sir, I refer to Reza Moghadam’s “A modest proposal on QE”, June 12

The problem: “With banks… is that their balance sheets are stuffed with government paper… banks’ sovereign holdings remain sharply skewed to their own sovereign.”

Moghadam’s proposal: “the ECB could buy the excess bonds as part of a new QE programme. It would do so not based on a country’s capital share at the ECB, as is now the practice, but according to the excess exposure in each country’s bonds”

His expected result: “By delinking national banking systems from their own sovereigns, banks would end up holding a more diversified portfolio of sovereign debt.”

Sir, bank balances are stuffed with government paper not because of QEs, but mostly because ever since Basel I in 1988, that is what requires the least capital from banks scarce of regulatory-capital. And what use is it really for the real economies of Europe that their banks end up holding a more diversified portfolio of sovereign debt? Absolutely none!

In November 2004 in a letter published by FT I wrote: How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

It is a problem that regulators do not dare tackle, mostly because its recognition points to the fact that the bank regulators were never really qualified to regulate.

@PerKurowski ©

A “Bye-bye-Basel” that frees Britain from dangerous credit risk aversion, would more than compensate Brexit costs.

Sir, Wolfgang Münchau describes a much constructive position with respect to the possibility of a Brexit. "In the event of Brexit, let Britain go in peace", June 13.

With respect to the long-term consequences of a Brexit, Münchau writes: “There are, of course, a number of specific negative economic effects, but also offsetting ones… Economic theory tells us that the wealth of a country ultimately depends on its skills, resources, and the quality of its policies. It is hard to see how Brexit would change that”

If Brexit would allow Britain to also wave goodbye to those stupidly dangerous credit risk adverse capital requirements for banks imposed by the Basel Committee… then Britain could also recover much of that go get it spirit that once made it an Empire.

“Stupidly dangerous”? Yes! First it pushes banks to create excessive exposures to what is ex ante perceived as safe, precisely the stuff major bank crisis are made of; and second it hinder banks from lending sufficiently to “risky” SMEs and entrepreneurs, precisely what makes an economy stall and fall.

@PerKurowski ©

To survive we need to be smarter than smart products; like “Walking the Fitbits”

Sir, Lucy Kellaway writes about the ever increasing number of products supposed to help us manage intelligently many daily chores “We need more smart products because we are stupid” June 13. I think she has missed a very interesting point, namely our efforts to beat these products because we’re smarter.

For instance children who are concerned with their parents not walking enough have furnished many of us a Fitbit... for many of us a torture instrument. That represents a great market opportunity for hackers or app developers who find a way to surreptitiously multiply the number of daily steps taken. I am currently working on a more basic method I call “Walking the Fitbit”. It very simply consists in a group of neighbors organizing themselves to take turns walking each other’s Fitbits. I can already see before me seven Fitbits gladly sharing the same arm… while six happy walkers take a day off. 

We will survive!​

@PerKurowski ©

June 12, 2016

Of the demand for sovereign debt, how much comes from the free market, and how much from regulatory distortions?

Sir, Dave Shellock writes that among other, because of the possibilities of Brexit, and because of Fed’s Janet Yellen’s dovish speech, “Sovereign debt demand drives benchmark yields to record lows” June 11.

When will someone try to figure out how much of that demand for sovereign debt has been artificially inflated by regulations? For instance banks are allowed to hold the least capital against sovereign debt, and knowing about the general scarcity of bank capital that must influence its demand very much. And similarly others, like the insurance sector, have been nudged in many ways to hold sovereign debt.

The day banks and insurance company are allowed to hold private sector assets under the same conditions they can hold sovereign debt, then we would be able to know what the free market really indicates.

Sovereign debt, like US Treasury and bonds, are most often used as proxies for the all-important “risk-free rate”. Sir, it is therefore really hard for me to understand why the possibility we might not have a true risk-free rate proxy, because the rate of US Treasuries and bonds are subsidized by regulations, is not of any interest to the Financial Times. It is like a National Geographic not being interested in the earth's rotation being shifted.

@PerKurowski ©

Europe - Eurozone stands no chance against the regulatory manipulation of how bank credit is allocated to its real economy.

Sir, Timothy Garton Ash opines “that rushing into a deeply flawed monetary union — bad design, too large and diverse a membership — was the biggest single mistake in the history of European integration”, “The fading of Europe is a result of both its failures and successes” June 11.

Few weeks before the launch of the euro I wrote an Op-Ed in Caracas titled “Burning the bridges in Europe”. I believe its content should have earned me a right to opine on what then has happened.

But what I had no idea about, since I then had nothing to do with it, was of the route bank regulators had initiated with their Basel Accord of 1988 (Basel I). In it the concept of risk-weighted capital requirements was introduced, and the risk weight for the sovereign (the government) was set at zero percent while that of the citizen was fixed at 100 percent.

Risk weighted capital requirements for banks might sound reasonable as making banks safer… though they really don’t! But, since they allow bank equity to be leveraged differently with different assets, these absolutely distort the allocation of bank credit to the real economy… and that distortion was completely ignored… and still is.

In essence it meant that since banks could leverage equity more with loans to the governments than with loans to the citizens, they would therefore earn higher expected risk adjusted returns on equity on loans to the government than on loans to the citizens. And that meant that the government bureaucrats were de-facto deemed to use bank credit more efficiently than the private sector.

And of course, such statism, introduced by the bathroom window, had to condemn Europe (and the rest), with or without the euro.

In a letter published by FT in November 2004 I asked: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?

And in June 2004, with Basel II, and though in that case I had been able to protest strongly but uselessly against it, the regulators also introduced risk weighting for the private sector. The risk weights ranged from 20% to 150%, depending on credit ratings; which discriminated in favor of “the safe” privates against “the risky” privates.

And of course, such credit risk aversion, introduced by the bathroom window, had to condemn Europe (and the rest), with or without the euro.

In November 2011 I explained it all in much more detail in “Who did the Eurozone in?”

But, for instance the absolute silence of FT about my many warnings about the regulatory distortion of the allocation of bank credit to the real economy, seems to indicate this issue is of little interest… I wonder why?

For me the risk aversion of Basel regulations, which implies not daring to climb higher because of being afraid of losing what its got, means that Europe (and the rest) have capitulated… and that is a mistake that at least is going to cost all our young ones much more than the possible euro mistake.

@PerKurowski ©

June 10, 2016

As a Venezuelan, I would sure like to know who those financing those who are destroying my country are

Sir, Elaine Moore and Andres Schipani report “Venezuela keeps paying foreign lenders despite blackouts and food queue riots” May 10.

But, when considering all that is going on in Venezuela, why should its creditors be treated with such neutral anonymity? Who are they? Is it okay for them whatever the nation does, as long as they get their high interest rates?

I am not implying there is something similar horrible going on in Venezuela, but are these investors who could for instance finance cremation ovens in Auschwitz, without blinking their eyes, as long as the price was right?

If you finance someone who is committing human rights violations, does that not make you an accomplice? And don’t tell me these lenders, in today’s globalized world, are innocently unaware of what is happening in Venezuela,

As a Venezuelan I would sure like to know who those financing those who are destroying my land are. I am by no means saying they are all the same. Many of them might have lent money to the revolution when things though bad seemed more normal. But most of all I would like to know if among them are some of the vultures that already had by other means been eating of what soon seems to become a carcass of a nation… and now want to have another last bite.

The world’s governments might urgently need a Sovereign Debt Restructuring Mechanism… but we citizens, we only really need it, if it comes together with a clear definition of what are odious public credits and what are odious public borrowings.

@PerKurowski ©

ECB’s Mario Draghi, regulating in favor of the old and against the young, should be ashamed of mentioning demographics.

Sir, Claire Jones reports “Mario Draghi, European Central Bank president, has stepped up calls for the region’s leaders to press on with reforms to create more jobs and help save a crisis of ageing in the Eurozone. Among what to do he recommends “a financial system that channels capital to dynamic firms” “Draghi urges action to offset ageing threat to eurozone”, June 10.

He should be ashamed. As the former chair of the Financial Stability Board and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision, he is as responsible as anyone for current bank regulations. And these regulations, with their risk credit weighted capital requirements, are designed as if to meet the investment criteria of the very old, and to guard against the “dangerous” risk-taking needed to build a future.

An AAA to AA rated corporation has been assigned a risk weight of 20%, the A+ to A- rated carry a risk weight of 50%, while the unrated citizens and the BBB+ to BB- rated are assigned a risks weight of 100%. How on earth can such distortions of the allocation of bank credit based on credit risk help to make an economy to be dynamic? On the contrary, it makes sure the safer past is more refinanced while the financing needs of the riskier future are not served.

That current regulators, like Draghi, have no idea of what they are doing is further evidenced by the fact that those rated below BB-, the group least likely to which banks could ex ante create excessive exposures that could put in danger the bank system, they have a risk weight of 150%.

Sir, if Mario Draghi wants to offset the ageing threat to the eurozone then he should push for the elimination of these regulations.

@PerKurowski ©

June 09, 2016

Where are the citizens, the taxpayers, in all the discussions about sovereign debt restructuring?

Sir, I refer to Robin Wigglesworth’s and Elaine Moore’s interesting discussion about sovereign debt restructuring. "FT Big Read. Sovereign Debt." May 9.

In it they state: “The International Monetary Fund and finance industry bodies have spent the past few years overhauling aspects of the sovereign bankruptcy architecture….

In April 2013, the US Treasury orchestrated an informal group of creditors, bankers, lawyers and governments to find a solution to the problem. Over the course of a year the ‘Sovereign Debt Roundtable’ meetings were attended by representatives from multilateral institutions, major governments and the London-based International Capital Markets Association.”

And I have to ask: Should not citizens be present there in order to make sure they are not forced to pay what could be considered odious borrowings by the governments or odious credits given by the lenders.

I know that all the costs or additional risks for creditors that could result from any Sovereign Debt Restructuring Mechanism will be reflected, one way or another, sooner or later, in the interest rates of the loans. Even so I am all for a SDRM as it represents a golden opportunity to reduce the risks that we citizens, we taxpayers, are taken to the cleaners, by any arrangements between governments and their bankers.

For instance, it would be great if governments, who cannot earn the right to be trusted by the markets sufficiently, and therefore had to accept risk premiums over x%, had no access to markets, otherwise being willing to accept, on us citizens’ behalf, interest rates in line with payday loans.

And what if the feeling you have is that those collecting payday high interests are some creditors who are "very" close to the government?

Equally a creditor that knowingly lends to a government that is not functioning, as it should, that is for instance violating human rights, should not see his debt classified for repayment in the same conditions than more bona fide lender.

Sir, let me give an example from Venezuela. Would you like your children have to repay a foreign debt contracted, at high interest rates, only because a government, even though there is lack of food and medicines, sells petrol at less than 2 US$ cents per liter?

Whenever we sit down to work out unsustainable debt… I would like that debt qualified.

PS. And there’s more and more and more on this issue.

@PerKurowski ©

June 08, 2016

Bank regulators, with their discrimination against “the risky”, decreed lower social mobility.

Sir, Sarah O’Connor writes about “Relative mobility…whether you end up on a different rung of the income or social ladder from your parents” “If we want poor kids to succeed, then more rich kids must fail” May 8.

My impression is that the findings she refers to, that so many on the top of the ladder keep on being on the top of the ladder, might be affected somewhat by survivorship bias. I am sure that an immense number of the descendants of those who centuries ago were up on the top have now descended that ladder.

That said, when O’Connor writes “To boost relative mobility, you would need to unpick… privileges” I could not agree more, especially with respect to entirely artificial privileges. 

The credit risk weighted capital requirements for banks, those that allow banks to hold less capital when lending to the safe “the rich” than when lending to “the risky”, is precisely that kind of hidden privileges that need to go.

For Sarah O’Connor’s benefit let me quote from John Kenneth Galbraith’s “Money: Whence it came where it went” It states: “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” 

And so, with their discrimination against “The Risky”, you could easily argue the regulators decreed lower social relative mobility.

@PerKurowski ©

Make sure Greek banks can lend to the risky private sector, in reasonable amounts, against low capital requirements

Sir, Martin Wolf, from his perspective, “the latest debt sustainability analysis from the International Monetary Fund [that shows] the programme agreed in 2010 was wildly unrealistic”, correctly discusses Greece’s future in “Painful choices still hang over Greece” June 8.

Big public debt haircuts, whether transparent or disguised, are needed in Greece. But that won’t suffice. I look at Greece from a complete different angle.

First I am convinced that what did Greece in, was the absurdity of allowing banks to lend to it against very little, even zero, capital. That produced expected risk adjusted returns on equity that were just impossible for banks to resist; that produced offers of credit that were just impossible for Greek governments to resist, and the crisis ensued. And this mistake needs to be admitted by the IMF and by the Eurozone governments.

And second, the risk-weighted capital requirements for banks discriminate against the access to bank credit of those perceived as risky, like SMEs and entrepreneurs; and that makes it impossible for the real economy in Greece to reach the dynamism needed to pull it out of its misery.

Anyone thinking that a recovery commandeered by the Greek government or just those who are perceived as safe from a credit point of view is possible, is simply cuckoo.

And so first things first, what is required is to make sure capital scarce Greek banks can lend to the “risky” private sector, in reasonable amounts of course, but against quite low capital requirements.

@PerKurowski ©

June 07, 2016

IIF confesses the distortions in the allocation of bank credit caused by Basel’s risk weighted capital requirements

Sir, Laura Noonan writes “The Institute of International Finance has denounced regulators’ proposals to give banks less freedom to use their own models to decide how much capital they need to support their loan books.”, “Risk warning over change to lenders’ safety measures”, June 7. It contains the following fascinating information.

“A low quality borrower with a risky BB- credit rating. Right now…generates a return on capital of just 7.7 per cent today. At the other end of the credit spectrum, a bank’s return on equity for an A+ rated borrower could fall from 13.9 percent today”.

So here IIF confesses that because of the risk weighted capital requirements, an A+ rated borrower (50% risk weight) currently generates about twice the return on equity for the bank than a BB- rated one (100% risk weight). Sir, do you think banks in such a case would lend to those BB- rated? Of course not! But are there not many BB- rated who should have access to bank credit, even if in small amounts? Of course there are. Can’t they get credit? Of course they can, but only if they pay much higher interest rates, so as to overcome the regulatory discrimination against them. 

Sir, that bankers, those who are supposed to be able to evaluate credit risks, should now earn a higher risk-adjusted return on equity on what is perceived as safe than on what is perceived as risky, sounds to me like the regulators have made bankers’ wet dreams come true.

And IFF then states that “a bank using the new rules could earn a return on capital of 11.4 percent on a low quality borrower with a risky BB- credit rating [but], a bank’s return on equity for an A+ rated borrower could fall to 4.6 percent under the new regime.”

Does that mean the A+ rated borrowers would not have access to bank credit any more? Of course not! It is only that they would have to pay slightly higher interest rates since they would not count with as much regulatory subsidies.

Sir, I have soon written a thousand of letters to you all in FT on how the risk weighted capital requirements dangerously distort the allocation of bank credit to the real economy. You have ignored all of these. Now here you are getting a clear and loud confirmation of that distortion from the horse’s mouth, will you still ignore it?

How should it be? Those rated A+ and those rated BB-, and all other, should compete on equal footing for bank credit, by means of offering different risk premiums, and the bank should assign the credit in an appropriate amount to whom has offered to provide it with the highest risk adjusted return on equity. And that can only happen if the capital required for lending to an A+ or to a BB- is exactly the same.

PS. An “appropriate amount” is that which guarantees a good diversification of the banks’ portfolios. The current risk weighted capital requirements are, to top it up, portfolio invariant.

@PerKurowski ©

June 06, 2016

A Universal Basic Income, a Societal Dividend, needs always to be slightly small, so as never risk being too large.

Sir Ralph Atkins and Gemma Tetlow report that “Swiss vote against basic income provision” “Welfare systems” June 6.

I support Universal Basic Income, for me it is a Societal Dividend, but I would have voted NO in the referendum. 2.500 Swiss Francs, about US$3.500 monthly, about 50 percent of the Swiss GDP per capita is way too large for a “Basic”. In Switzerland, something like $1.000, perhaps expressed as a percentage of GDP or of average or median salaries, would be a much more reasonable level at which to start this social experiment.

And of course the idea of those working not getting the UBI plays directly into the hands of those arguing that UBI could cause people to work less.

So what is a Societal Dividend or a Citizen's Dividend of that kind proposed by Thomas Paine? Here is my personal take on it.

It is a basic amount transferred to anyone independent of having been able to capitalize on society’s strengths and accumulated assets, like having been able to get a good job.

It could be seen as an effort to grease the real economy by combating the natural concentrations of wealth.

It could be seen as a substitute for many those redistribution efforts that because of their complexity, is bound to attract the profiteers.

It is a well-funded transfer, no funny money, from citizens to citizens, or from natural resources inherited by an Act of God, but not depending on government favors. It could therefore be seen as an effort by citizens to become more independent of that populism and demagoguery that often lies behind all societal redistribution.

Also the way it is funded, can help to align the incentives for other societal causes, for instance if with carbon taxes, with the efforts for a better environment.

But a Societal Dividend should never ever be so large so as to risk de-capitalizing the Society or induce generalized lazyness.

@PerKurowski ©

PS. In other words the Swiss UBI referendum was set up to fail... probably by some anxious redistribution profiteers L