Andy Haldane, I am an economist too, but I can still not make head or tails out of your bank regulations. Please enlighten me with BoE’s “EconoMe”!

Sir, Chris Giles writes that Bank of England’s chief economist Andy Haldane argues that economists must work harder to help the public understand and accept their message. “If economics or economic policy is elitist and inaccessible to most people, it is not doing its job,” he said. “Economics should be more accessible” November 28.

Absolutely! So please could Haldane explain to me why regulators want banks to hold the most capital for when something perceived risky turns out risky, when it is when something ex ante perceived as very safe ex post turns out to be very risky, that one really would like banks to have the most of it?

The risk weighted capital requirements allow banks to leverage differently different assets, and thereby allow banks to earn different risk adjusted returns on equity on different assets, must distort the allocation of bank credit to the real economy. Some, like for instance “risky” entrepreneurs are paying with less access to credit for the regulators favoring “safe sovereign, AAArisktocracy and house financing. That must not be helpful for creating new jobs. Am I wrong? If am not, why does this seem to be of no concern to regulators?

And talking about favoring, who authorized the economists to suddenly take upon themselves to decide that the risk weight of the sovereign was 0% and that of citizens 100%? Is that not just outrageous statism? Has that not caused governments getting credit at much lower rates that they would otherwise have gotten? Has that not caused governments to take on much more debt than they would otherwise have been able to do?

If Haldane does not know the answers to these questions perhaps he can ask Mark Carney, Mario Draghi, Jaime Caruana or Stefan Ingves.

And if those elite experts can’t provide him with a satisfactory answer, perhaps he should sit down and listen to me. I as one economist to another would willingly explain to him the regulatory lunacy he is involved with. For a first session of that, Haldane could prepare reading THIS:

PS. And at FT you are all also cordially invited. Since you have mostly ignored, and even hushed up my arguments, I know that if Haldane proves me wrong, you will all feel tremendously alleviated.

@PerKurowski

Low interest rates stimulate laziness in project execution and in revision of investment decisions

Sir, Izabella Kaminska is not going to be much loved today as she bravely points out to many the very uncomfortable possibility that they might have fallen head over heels “for fanciful narratives or investor cults”. Well done! That is going to generate a lot of soul-searching. “Cultish long-termism can hobble investors” September 13.

I would though like to remind Kaminska that much of “investors’ forgiving attitudes” could be explained by current extraordinary low interest rates. Just like these introduce much laziness in the execution of projects these can also provoke fewer revisions of investment strategies. Also, do not the sheer existence of negative interest rates help fuel the “grandeur of the futuristic visions being touted”?

PS. I would not refer to Andrew Haldane as a great champion for long-termism. As a regulator he has supported the extraordinary short-termism imbedded in the risk weighted capital requirements for banks. These keep banks from financing the “riskier” future our grandchildren need to be financed, having them basically just refinancing the “safer” present.

@PerKurowski

Post-Crash Economics Society: Risk models & credit ratings are not wrong, the credence bank regulators give these is

Sir, since I was travelling I missed David Pilling’s “Crash and learn: should we change the way we teach economics?” October 1.

It discusses the Post-Crash Economics Society that was created by students at Manchester university, mostly in response to “glaring failure of mainstream economics [that failed] to explain, much less foresee, the financial crash of 2008.”

In it Pilling quotes Andrew Haldane, chief economist at the Bank of England: “We all became overly enamoured of a particular framework for thinking, or a modelling approach… It became something of a methodological monoculture [that] was not well equipped for dealing with economies or financial systems close to, or at, breaking point.”

That sounds about right. It was not the models’ faults, but the fault of those using the models.

For instance bank regulators, with mindboggling hubris, and blind faith in the models, using only knowledge, decided that the capital requirements for banks should be based on risk models using ex ante perceived risks. That was dumb. Clearly any regulatory wisdom would have indicated that those capital requirements, should be based on the so much more dangerous consequences to the bank system that could be caused if those risk models or risk perceptions, like credit ratings, turned out to be wrong.

The faster that is understood, the faster we can bridge the differences between those who, like Angus Deaton, though accepting that “economics is a broad church” yet argue that it “needs to be kept rigorous”, and those who, like Joe Earl, want it to be “more an exploration of ideas, and less a training in the economic priesthood.”

Of course, that will require bank regulators to declare much mea-culpa, or in other ways upsetting a lot the cozy relations in their mutual admiration club.

Here a more extensive aide memoire on some of the monstrosities of such regulations.

@PerKurowski ©

Bank regulators suffer “pre-dread-risk”, an exaggerated sense of fear and insecurity anticipating catastrophic events.

Sir, you know, and John Plender knows that over the years, with more than a thousand letters, I have warned that current capital requirements doom banks to dangerously overpopulate “safe havens” and equally dangerously under-explore the “riskier” but surely more productive bays where SMEs and entrepreneurs reside. And the regulators, as the safest of all safe havens, designated the infallible sovereigns… their paymasters.

In November 2004 FT published a letter where I said: “We wonder 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.”

And now John Plender writes about “a shortage of so-called safe assets… a stampede into sovereign bonds with negligible or negative yields — Even a modest move in the direction of historic interest rate norms could pose a threat to solvency [of] banks whose balance sheets are stuffed with sovereign debt” “Why bullish markets did nothing for bearish boards”, August 6.

An in the discussion Plender mentions that “OECD economists [have] identified flawed incentive structures as part of the reason for divergent perceptions of risk… equity-related incentives and performance-related pay…earnings per share and total shareholder return, [which] are manipulable by management.”

And Plender also brings forward “economists at the Basel-based Bank for International Settlements believe that low interest rates beget yet lower rates because they cause bubbles, followed by central bank bailouts. Their worry is that we risk trapping ourselves in a cycle of financial imbalances and busts.”

But Plender, in true FT tradition, does not say one single word about the perverse manipulation of credit markets carried out by bank regulators.

Plender mentions Andrew Haldane putting “particular emphasis on the phenomenon of “dread risk”, a term used by psychologists to describe an exaggerated sense of fear and insecurity in the wake of catastrophic events.

But, does not requiring banks to have 500% more capital when they lend to “the risky” than when they lend to “the safe”, evidence the mother of all exaggerated sense of fear and insecurity… in this case anticipating catastrophic events… a sort of pre-dread risk?

Because, that is exactly what regulators showed when, with Basel II, they required bank to hold 8 percent in capital when lending to a “risky” SME or entrepreneur, but only 1.6 against AAA rated assets… and allowed zero capital when lending to infallible sovereigns.

PS. The OECD’s Business and Finance Outlook 2015 also similarly ignores the effects of the risk-averse bank capital requirements. When referring to the “reduced bank lending [which have] affected SMEs in particular” it shamelessly limits itself to stating “credit sources tend to dry up more rapidly for small companies than for large companies during economic downturns”. 

@PerKurowski

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

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

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

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

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

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

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

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

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

@PerKurowski

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

Few things hamper growth as much as sissy bank regulations.

Sir, Gillian Tett writes that according to BoE’s Andy Haldane, there has been “a shift in cultural attitudes towards the future” with “our hyper-connected technology [perhaps] inadvertently shortening our time horizons [making us] less ‘patient’ less able to plan and invest long term” “How impatience hampers long-tem growth”, February 20.

And Ms. Tett, as an anthropologist who knows “cultural attitudes toward time vary”, finds this interesting. And indeed it is!

But, why on earth is Ms. Tett, the anthropologist, not interested in the willingness of societies to take the risks, that which gives future a chance?

At this moment, the most significant danger to growth is the risk-aversion imposed on banks, by means of equity requirements based on perceived credit risks; those that allow banks to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky. That goes back a very short time, to the early 90’s Basel I, and then much increased in 2004, with Basel II.

Ms. Tett also refers to Daniel Kahneman’s fast and slow modes of thought. And so let me explain in those terms:

The at-first-sight “System 1: Fast, automatic, frequent, emotional, stereotypic, subconscious” standard basic intuition of risky-is-risky and safe-is-safe, has proved too strong so as to permit opening a more reflective “System 2: Slow, effortful, infrequent, logical, calculating, conscious” analysis… which would lead to risky-is-safe and safe-is risky and most specially if that means questioning some of the other members of a mutual admiration mutual important network club.

Look for instance at Martin Wolf. In July 2012 he wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." And yet Wolf is incapable to take it from there, so as to accept that perhaps current bank regulations, with respect to perceived credit risk, are 180 degrees off target.

FT, John Plender, it was FIVE years ago that I told you “Simplicity in banking should always take precedence”

Sir, John Plender writes that Deutsche Bank’s net equity in 2007 amounted to just under 2 percent of total asset, meaning an over 50 to 1 leverage, while “its tier one core capital under the Basel weighted capital was 8.6 percent” which implies a lower than 12 to 1 leverage, “Simplicity in banking should always take precedence” December 7. 

As a consequence of not reading up sufficiently on what Basel II really was about you were duped. On my TeawithFT blog you can find hundreds of letters that tried to explain the Basel distorted bank leverages to you. You ignored these and even kept on again and again comparing the Basel risk-weighted bank leverages with the historic un-weighted bank leverages. 

And this amounts to a quite sloppy journalistic job and a general lack of questioning capacity in FT. 

And now on “simplicity” 

On December 19, 2007, John Plender, in “Investors pray for acts of God but even they come at a cost”, asked, what is the right level of capital for today´s financial world? 

And here is the answer to that that I wrote to FT, and to John Plender, five years ago: 

“Since it is in fact impossible to calculate the right capital then the best thing would be to be humble about it and require one single capital requirement on assets, instead of arrogantly trying to outwit the market as the regulators did when they created their current minimum capital requirements that differentiates based on how risks are perceived, primarily by the credit rating agencies. 

It is when the regulators themselves start acting like God that they really set us up for the big systemic disasters.” 

Does FT really have the "without fear and without favour" in it itself to recognize those who have been right all the time, even though these do not belong to FT’s own crony intimate circle?

Regulators bully banks, banks bully “The Risky”, and “The Infallible”, they just have a blast.

Sir, Brooke Masters, Claire Jones and Patrick Jenkins report “Big banks’ capital needs under microscope” November 30. 

"Regulators suspect banks have understated possible losses and need a 'material' amount of extra capital"

Of course I favor more capital in the banks, at least for their exposures to ‘The Infallible”, which are seriously under-capitalized as a result of overly generous capital requirements. 

But what regulators must remember is that while different capital requirements for different assets exists, their pressures on banks to increase their capital, will be mostly felt by those who generate the largest capital requirements, namely “The Risky”, like small business and entrepreneurs. 

Regulators bully banks, banks bully “The Risky”, the small businesses and entrepreneurs, and “The Infallible”, sovereigns and triple-A ,they just have a blast getting even more bank funds at even lower interest rates.

PS. Could these type of capital adjustments not trigger the conversion into zero clause of Barclays' recent $3bn contingent capital notes deal?   

Ultra-loose monetary policy distorts but, in that category, the title goes to capital requirements based on perceived risks

Sir, John Plender is indeed bringing up an interesting point in that ultra-loose monetary policy carries with it the possibility of maintaining, alive and sort of kicking, zombie companies that should otherwise and best disappear; and this prevents an effective resource allocation “UK economic growth hobbled by overambitious banks” November 21, and “Japan counts ‘zombie’ cost of easy money” November 6.

That said, and in the category of financial distortions, the title clearly must go to the capital requirements for banks based on perceived risk.

Just as an appetizer consider that the better information banks have, such as those Plender mentions Andy Haldane points to, “a shared utility, storing client accounts details”, the more this information will be adequately cleared for by the banks, and so the lesser the need to have that risk information also reflected in the capital requirements.

By the way it was interesting reading about the way by which Handelsbanken was entering Britain, since a couple of months ago I described a bank that I would be interested investing in, in the following way:

“As an investor in a bank, the first thing I want from it is to dedicate itself exclusively to lending to what is officially considered as “risky”, like small business and entrepreneurs, and for which the bank is required to have capital... meaning that I, as a shareholder, count. 

And I abhor my bank to lend to anything that is officially considered as “absolutely safe” for the following reasons:

a.- It probably means the bank will be less careful.

b.-They can do so with much less bank capital and so therefore I, as a shareholder, become less important.

c.- It is only in what is considered as absolutely not-risky that the banks can build up exposures that can lead me to lose all my investment.

d.-If I want to invest in something perceived as “absolutely not risky”, I do not need a bank for that... anyone can read a credit rating (and save himself some banker’s bonuses)

I do not know if Paul Tucker is or not the right man for the Old Lady, but he sure does not seem the right man for Britain.

Sir, you hold that Paul Tucker is “The right man for the Old Lady”, November 16. And though I do not know much about the Old Lady I must disagree, because the last thing I feel that Britain needs at this moment, is someone who quite recently opined that “Stability comes before the good things in life”. 

It was stability searching nannies, with their silly and uncontrolled risk adverseness that made the banks to excessively increase their exposures to what was considered absolutely not risky, “The Infallible” and to doing so, not only causing many safe havens to become dangerously overpopulated but also stopping “The Risky”, like small businesses and entrepreneurs, from having access to bank credit on equal terms. 

You suggest that “the new governor should make room for intellectual free spirits, such as Andrew Haldane”. Though in some ways I have not felt Mr. Haldane yet to be free enough, I wonder why someone like him could not directly replace Sir Mervyn King.

More than simple rules we need rules that do not distort.

Sir, in your weekly review of the fund management industry, FTfm, Jonathan Davis writes that “There is an inevitable irony in the fact that the two main epicenters of the debt crisis, subprime mortgage lending and more recently sovereign debt, were both assigned minimal capital at risk ratings under the Basel II regime”, “Simple rules should trump regulatory overkill” November 5. 

“Irony”? No way José! The Basel II capital requirements for securities rated AAA, like those backed with mortgages to the subprime sector, and to sovereigns rated like Greece was for some years, were only a meager 1.6 percent of some very generously defined capital. If you allow banks to leverage the risk-adjusted return when lending to “The Infallibles” 62.5 times to 1, but only 12.5 times to 1 when lending to “The Risky”, that is simply dooming the banking system to a disaster. 

Of course, for all those reasons recently exposed by Andrew Haldane, we need simpler rules, but, what we most need is for the bank regulators to stop acting as if they were the master risk-managers of the world, and distorting the financial markets and impeding the banks from performing efficiently their vital function of allocating economic resources.

What does the Financial Times’ motto “Without fear and without favour” really signify?

Over many years I have written letters to FT mentioning for instance that the Occupy Wall Street movement, though correct in many ways, was completely wrong about the location. What they should have occupied is Basel with its Basel Committee for Banking Supervision. 

It was the Basel Committee which, with its capital requirements for banks based on ex ante perceived risk, as perceived by credit rating agencies, favored those already favored, “The Infallible”, like the AAA rated and sovereigns, and discriminated against those already being discriminated against, “The Risky”, which members include small businesses and entrepreneurs. 

I also explained to FT, in so many ways that those capital requirements, besides representing an important driver of inequality, were one of the most economic distortive factors ever, and completely impeded the banks to perform efficiently their role of allocating economic resources.

If for instance a German bank, lent to Greece, rated as one of “The semi-Infallible” Greece was just a couple of years ago then, according to Basel II, if it could make a 1 percent net after perceived risk and cost margin, then it could aspire to earn 62.5 percent on its equity. But, if instead it lent to a small German or Greek unrated business and earn the same net margin, then it was only allowed to achieve 12.5 percent return on equity. Does this nonsense makes sense to FT? I cannot believe so. Yet, what am I to think?

You can find my soon 900 letters to The Financial Times on this issue, for over soon a decade now, here:

And though I have received many letters from some of FT’s journalists and experts agreeing on my points, though I admit a couple of them have been conspicuously silent and never responded to one of my comments on their pieces, my arguments have not been allowed to fully surface. 

Now, little by little my arguments are gaining traction, although yet in an incomplete way, among others by the recent comments made by Andrew Haldane, and to which FT’s Editor refers in “Haldane occupies a strange platform”, October 31. 

I argue that if the Financial Times had given support to my arguments earlier, a lot of sufferings, and a lot of travelling on the mistaken road of Basel III, could have been avoided. 

And so I must wonder if not the Financial Times’ motto “Without fear and without favour” for more transparency should add: “Applicable to those who do suck up to us and do not hurt our egos”. 

Am I a bit upset? Yes, why not? You would be too! It is hard enough to fight the Regulatory Establishment on your own for you to also be encumbered by the uncooperativeness of a powerful media which wants to favour other arguments and other arguers. 

But, I was given a voice in the Financial Times? Yes! 15 letters published from 2003 until 2006 and only one thereafter. Whose ego did I trample on?

Then of course Martin Wolf generously permitted me in his Economist’s Forum in October 2009 to publish my “Free us from imprudent risk-aversion”. 

Do I have sufficient credentials to aspire having more voice? I truly believe so but you can judge yourself. 

That said, now and again I have found voice in other media… like for instance this letter in the Washington Post. 

But, since I am sure that I am correct in my arguments, and these will win the day, sooner or later, the Financial Times will have to acknowledge their mistake. I do not believe they will even try to hide the fact that these were my arguments… or them being capable of such un-ethical behavior as endorsing these to someone else they want to favour.

Regulators, thou shall not lead bankers into temptations, nor distort

Sir, Robert May writes “In finance too, complex ecosystems can be vulnerable”, October 20. The opinions of a zoology professor should be much welcomed since only a diversity of views could help us to avoid regulatory faux pas of such magnitude as the current. That said there are things I do not agree with him and would love to discuss. 

For instance when he writes that” it is hard to believe anyone could have been so beguiled by mathematical elaboration of silly assumptions as to rate grouped triple B mortgages as triple A”, he ignores first that well awarded triple B mortgages can indeed be grouped in such a way that most of those could be rated triple A, and secondly, completely, the power of incentives. 

When regulators offered the banks needing only to hold a meager 1.6 percent of capital against securities rated triple A, we are talking about Churchill´s initial "Madam, would you sleep with me for five million pounds?”, and not his "Would you sleep with me for five pounds?". The Lord´s Prayer prays for “lead us not into temptation”, but irresistible temptation was precisely what the regulators created. 

Then of course Professor May correctly supports the recent calls made by Andy Haldane in favor of simple leverage ratios for banks instead complex Basel styled risk-weighted ratios. 

But, unfortunately, and as Mr. Haldane, he has yet to understand that the most important argument for simple leverage ratios is that the risks that regulators have been and are weighing for, are already weighted for by the banks in terms of interest rates and amounts of exposure, and a weight on a weight, can only end up being too much weight. 

And that over-weighting ,in favor of “The Infallible” and against “The Risky”, is precisely the reason why our banks have become dangerous obese ingesting supposedly absolutely safe assets and anorexic on the for us so nourishing risky assets, like loans to small businesses and entrepreneurs. 

I am sure Professor May would never have done a dumb thing like that, to one of his complex and beloved ecosystems.

Some are waking up to the colossal failings of Basel bank regulations... when will FT?

Sir, Shahien Nasiripour and Tom Braithwaite report “US regulators urged to outdo Basel III rules” October 5. In it they mention that “some like Jeremiah Norton, a director on the FDIC´s five man board, have voiced doubts about the proposed risk-weighting scheme, which links capital levels to assets risk”. Might he have tried to answer some of my wicked questions on bank regulations? Like: 

1st: When do banks most need capital, when the risky turn out risky, or when the “not-risky” turn out risky? 

2nd: If bankers do as Mark Twain says, namely “lend you the umbrella when the sun shines and wanting it back when it rains”; and all bank crisis ever have result from excessive lending to what was perceived as “not risky”; and the perceptions of risk have already been cleared for in the interest rates and the amounts of the loans, then what is the logic behind allowing banks to hold less capital requirements when they engage in what is perceived as “not risky”, as current bank regulations do? 

3rd: What economists can be so dumb not understanding that if you allow banks to leverage 60 times or more their bank equity for some assets and only 12 times for other, producing thereby vastly different returns on equity, you will drastically distort the economic efficient resource allocation that banks are supposed to perform? 

More sooner than later, everyone is going to wake up to the fact that our current bank regulations are built upon absolutely insane foundations. And then of course, the silence of the Financial Times on this issue is going to be a source of immense embarrassment for the paper and especially for those responsible of, notwithstanding its motto, ordering its silence on it, during so many years.

There´s a hole in the bucket dear Andy dear Andy

Sir, when we can read about 500 billion Euros in bank capital shortfall in Europe alone, and no one swears that would suffice, it should be clear that no one wants to be the first drop in the bucket… and I am reminded of Harry Belafonte singing “There´s a hole in the bucket dear Liza dear Liza”. 

And yes, I agree completely with Andrew Haldane in that “We should go further still in unbundling banks” October 3, especially since we really have not even started doing that. But, how can you unbundle without solving the lack of bank equity issue? Are you intent on leaving all those nude and famished bundles lying there on the beach for everyone to see? 

No, any unbundling has to come hand in hand with monstrously large equity injections into the banks. And these could in my mind only occur in two ways. By government injections, and for which I would much recommend you look into how Chile intelligently handled that during its 1981-83 crisis, or, by giving private capital massive incentives to invest, for instance by assuring it significant long term tax benefits. 

And of course, you need to convince the market that you have a different banking sector, a safer one, so that investors could be satisfied with lower returns. And for that, throw out the concept of risk-weights which determine the effective capital requirements for any particular bank asset, and that so much confuses, distorts and makes it so complex to stop regulators from understanding what they are regulating and for what purpose.

Basel III is dead because it is just as wrong as Basel II or even worse.

Sir, Brooke Masters writes that “Time is running out for the opponents of Basel III" as “it has been nearly two years since regulators from 27 countries struck a landmark banking reform deal aimed at preventing future financial crisis.”, “Basel naysayers delve into detail in battle to dilute reforms", September 29. That is sheer nonsense. 

If the "deal struck" had any chance to prevent better a future financial crisis then that could be correct, but, as it stands, it can only result in causing the repeat of another financial crisis, precisely because of the same reasons as the current. In Basel III, not only do capital requirements for the banks remain as in Basel II determined by the ex-ante perceived risks, favoring any assets officially perceived as “not risky”, and discriminating against assets deemed “risky”, but now, to top it up, the liquidity requirements will also do so.

I agree completely with those who want simplified rules and banks to rely exclusively on a “leverage ratio” and to that effect I have written some couple of hundred letters to FT over several years, which were all simply ignored in the name of I do not know what. 

But the real reasons for the need of change have not surfaced yet, basically because they are too embarrassing for those responsible, but they will, sooner or later, and you can bet on that. 

What happened? Bank regulators, scared witless by the possibility that bankers would expose themselves too much to assets deemed as “risky”, something that bankers never or very rarely do, created huge incentives for banks to concentrate on assets that were, ex ante, perceived as “not risky” and, in doing so, they fomented an incredible dangerous highly leveraged bank exposure to the “not risky”, something which has us already placed over the brink of disaster. 

You do not create jobs, or a sturdy economy, based on favoring the access to bank credit of the “not-risky” more than it is already favored, and thereby making it harder and more expensive for the "risky", like small businesses and entrepreneurs to access the bank credit they need. If you do so, your economy will become flabbier and flabbier, day by day, until it completely breaks down. Capice?

Bank regulators should keep it simple, and not allow complexity to distract them from their real business.

Sir, as you know by now, I agree completely with the need for simplifying bank regulations, like recently suggested by Andrew Haldane, and now also strongly supported by Sebastian Mallaby, “Regulators should keep it simple”, September 5. 

But, my reasons for doing so, are not really because the issues are too complex, and the data is too hard to gather, but because the regulators have no role playing risk-managers to the world, and thereby risk adding distortions to the markets; their role is to prepare for when complex risk-management fails. 

Look at what happened! Bankers react of course to the perceived risks, by means of interest rates, amounts of exposure and terms of loans, and so, when too creative busybody regulators came along and used the same perceived risks to set their capital requirements; the whole banking sector overdosed on perceived risks… and so now we have a crisis because of obese dangerous bank exposures to what was perceived as absolutely safe, and anorexic bank exposures to what was officially perceived as “risky”, like small businesses and entrepreneurs. 

There is an economic war raging, so we need ministers and bank regulators with vision, not janitors and nannies!

Yes, Basel III has to be thrown out the window, in its entirety, current bank regulators too

Sir, Brooke Masters, September 1, reports that Andrew Haldane, at Jackson Hole, made a “Call for simpler bank oversight” which “would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years”. 

As you must know by now, even though you quite diligently have set your mind on ignoring it, I have for almost a decade held that bank regulators are not just some few degrees wrong, but 180 degrees wrong, and so I cannot but agree with Haldane. 

His argument is in line with that of mine that holds that, by accepting to engage banks through complex regulations, the regulators have acted less as regulators and more as risk-managers… which does not make any sense, since a regulator’s prime responsibility is to prepare itself for when risk-management fails. 

But there are of course many more reasons to throw Basel III, and the current Basel Committee regulators too, out of the window. Unfortunately, no matter how wrong one can prove them to be, getting rid of it and them is no easy task, especially when even a Financial Times want to treat them with kid gloves.

Yes, ease the rules on small business loans, by eliminating the regulatory discrimination against these.

Sir, Patrick Jenkins and Brooke Masters on November 12report that Andrew Haldane, the Bank of England’s executive director of financial stability opines that “regulations that potentially constrain lending to small businesses should be eased [made less capital intensive] when the economy is suffering”. That is a marvelous opening for someone like me who has been for more than a decade clamoring to eliminate the regulatory discrimination against small businesses, though I would of course want that to happen at all times and not only when the economy is suffering. 

Andrew Haldane, with much honesty also says “At present [the risk-weights] are calibrated to the risk of a bank. In future they need to reflect returns to society”. Yes Mr. Haldane that is what they should have done all the time. 

What is really sad though is to read a senior regulatory specialist at a global bank saying “You can’t just change risk weightings at whim because what really matters is that risk is priced correctly”… this specialist, as most other specialists, has still not been able to figure out that you cannot price risk correctly when different risk-weights are imposed on different assets… and that is what have us all now drowning in the ocean of the ex-ante perceived as not at all risky assets.

Regulators should take the beam out of their own eyes

Sir, Richard Lambert makes a reference to a research paper by Andrew Haldane, the Executive Director for Financial Stability, and Richard Davies of the Bank of England where they evidence an increasing short-termism in the pricing of company shares and conclude by blaming it all on a market failure, “Sir Ralph´s lessons on how to end short-term capitalism” May 23.

Short-termism is indeed a serious problem that derives from human weaknesses, but Messrs Haldane and Davies should start by taking the beam out of their own eyes. The mother of all short-termism is how the bank regulators, on top of how the market favors those perceived as less risky, also, by means of their risk-weights which determine the effective capital requirements for banks, shamelessly layer on their own favoritism of the same.

For a starter that regulatory short-termism created our current crisis by pushing our banks excessively into sovereigns and triple-A rated business. Also those regulations make it much more difficult harder and much more expensive for our small businesses and entrepreneurs to access bank credit… and if that is no short-termism what is?

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html