Citigroup’s Chuck Prince said: “As long as the music is playing, you’ve got to get up and dance”, but bank regulators insist on playing the same 30 years old song.

Sir, Andrew Hill worries about how many of today’s banker class remember it, let alone worry, about the complacency expressed in Chuck Prince’s “As long as the music is playing, you’ve got to get up and dance. “James Gorman, chief executive of Morgan Stanley “Amnesia dooms bankers to repeat their mistakes” June 24.

Hill hopes Gorman “is experienced enough to have detected the echoes of 2007 in the current soundtrack of rising share prices and lowering regulatory burdens… and that he teaches “more of his younger, fresher-faced staff to recognize the tune and know when to bow politely and leave the dance floor.

As for me I would much rather prefer the regulators stopped playing that very same old song of the “risk weighted capital requirements for banks”, composed in 1988 by the Basel Accord, and otherwise known as “You earn higher returns on the safe than on the risky”. That song drove bankers into an intense maniac polka, in pursuit of the very high expected risk adjusted returns offered on what was perceived (houses), decreed (Greece 0% risk), or concocted (AAA rated securities) as safe.

PS. Hill refers to John Kenneth Galbraith’s The Great Crash 1929 account of the willful errors and self-interested speculation of the great investment banks. But Galbraith also wrote “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.” Money: Whence it came, where it went” (1975)

@PerKurowski

What magical misleading thinking could explain the Basel Committee’s bank regulation idiocy?

I refer to Andrew Hill’s “The magical thinking that misleads managers” November 27.

Sir, what magical misleading thinking could lay behind regulators wanting banks to hold the most capital for when something perceived risky turns out risky, when it really is when something perceived very safe turns out to be very risky, that one would like banks to have the most of it?

“Numerology…mumbo-jumbo”? Well if you read through the Basel Committee’s 2005 “An Explanatory Note on the Basel II IRB (Internal Rating Based) Risk Weight Function”, that could be it.

“Leaps of faith”? Absolutely. Believing that by allowing some few human fallible credit rating agencies to decide instead of millions of eyes, and thereby intrducing the mother of all systemic risks (as I warned in 2003 in a letter published by FT) was effectively one of the greatest centralized leap of faiths ever.

“Throw a coin and make a wish”? Believing that the risk weighted capital requirements would not distorts the allocation of bank credit can only remind me of “Three coins in the fountain”, although in that movie the girls' dreams came true.

“Chants and mantras”? The whole minute by minute growing and expanding Basel Committee’s regulations cannot but be a prime example of that.

“Human sacrifice”? Though they never ever cause a major bank crisis how many millions of entrepreneurs have not been denied the often life changing opportunity of a credit in the name of this so badly understood stability.

“Hero worship”? Just look at all those members of that mutual admiration club of technocrats who are able to promote themselves even in the face of a financial crisis that resulted from allowing banks to leverage so excessively when lending to the 0% risk weighted “infallible” sovereigns, the 20% risk weighted AAArisktocracy and the 35% risk weighted financing of houses?

Hill ends arguing that “humble deference to unpredictable and poorly understood outside forces would be healthy”. Indeed, but how is that to happen if public opinion makers, like the Financial Times, refuse to hold the regulators accountable, perhaps because they all like to be seen as part of thei exclusive network... and be invited to Davos.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

When does groupthink really become more of a dangerous group-no-think?

Sir, Andrew Hill, discussing the works of Jennifer Chatman from UC Berkeley’s Haas School of Business writes: “Cohesion and co-operation may look like virtues, but they could be symptoms of groupthink. The greater the collective will of the team — and the higher the stakes — the less likely people are to dissent, because, in Prof Chatman’s words, ‘speaking up about risks is like saying you have no confidence in the group’.” “When the stakes are high, dissent is a sign of success”, September 12

So if “dissent and friction are unlikely signals of success” Prof Chatman says: “Maybe we need to live with a little more discomfort and difference to get these valuable outcomes.”

And again I must ask myself; might that be the reason for that no one in the bank regulation community spoke up against that strange theorem that held that what was perceived as risky was riskier to the banking system than what was ex ante perceived as safe? That theorem is in fact so loony that we perhaps should not even speak about groupthink, but more in terms of group-no-think.

And truly dangerous that was, since from that theorem they deducted their risk-weighted capital requirements; which then completely distorted the allocation of bank credit to the real economy.

So what “little more discomfort” should we apply for instance to the Basel Committee? Could a town-hall meeting where doubters could ask their questions suffice? I am not sure, I have spent more than a decade asking the regulators this, and they just don’t answer; worse nobody finds anything strange with their silence.

Or is it that what I confront is not a group but a massive gathering of confused minds; that among other includes you Sir and perhaps all FT journalists; I mean something like that which was the case when the earth was believed flat?

@PerKurowski ©

The Basel Committee for Banking Supervision’s engineers… where did they graduate? They sure can’t be any real engineers

Sir, Andrew Hill, when reviewing Greg Ip’s book “Foolproof” writes: “Ip is scrupulous about not favouring one side or the other in the tug-of-war between what he calls “engineers”, always tempted to step in, and “ecologists”, who prefer to stay flexible for fear of unintended consequences of man-made intervention.” “The foolishness of attempting to make everything foolproof” October 8.

In a formal statement I delivered as an Executive Director at the World Bank in 2003 I wrote: "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.” And so according to Ip’s definition I would definitely classify as an ecologist”

But that’s too simplistic, often the “unintended consequences of man-made intervention” do not really result from actions by engineers, but from actions of those who should never have been allowed to call themselves engineers.

Hill writes: “Ip’s timing with Foolproof could not be better, as memories of the 2008 crisis fade.” No! Forget it! The memories of the 2008 crisis will not fade away… they will grow with time… as history starts to understand and acknowledge the Greatest Regulatory Blunder of all times… that of the portfolio invariant credit risk weighted capital requirements for banks.

I have just started to fill up a post on a blog with all the type of stupidities one needed to believe in order to believe that piece of regulations made any sense. It will certainly disclose us as a dumb society, filled with arrogant besserwissers and persons impressed by arrogant besserwissers. (I am sorry Sir if that is going to include all your journalists who kept mum on it)

Hill mentions: “Forest managers now mostly choose to suppress fires rather than letting small areas burn, which could limit more devastating blazes.”

Yes! In May 2003 addressing regulators during a workshop on risk management at the World Bank, this is what I said on forest fires and risks:

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

@PerKurowski ©  J

Pär Boman, at the end of the day, your children and grandchildren, and your nation, are your most important customers

Sir, Andrew Hill refers to that the chief executive of Handelsbanken told the “FT in 2013 that he had studied 5,000 years of credit risk, while the bank draws on minutes of board meetings from the past 140 years to inform its attitude to customer loans and business cycle”, “Creative forces”, “Boldness in business” March 20.

What a splendid occasion that would have been to ask Pär Boman whether in all that information, he had found any sort of evidence supporting that bank regulators should require banks to hold more equity against what is from a credit point of view perceived as risky from, than against what is perceived as absolutely safe.

That as you know Sir, has in my opinion introduced the most serious disruptive distortion in the allocation of bank credit to the real economy.

Unfortunately, in “Customers first”, Richard Milne later reports that Boman opines: “I don’t think it’s our role to have an opinion on whether the democratic system has taken the right or wrong decision. We see regulation more as a signal system from parliament on how we want banks to behave”.

That’s a shame. My opinion is that it is precisely persons like Pär Boman who owe their customers’ society, the duty to speak out if they feel signals provided by regulations could be taking banks down the wrong route.

Richard Milne quotes Boman in that the “main lesson [from] the 140 years of board minutes that lie in the basement… is that about every 17 years there is a financial crisis.”

That could be… but another lesson that should be extracted from that data is when did banks do the most for their nation between crisis and crisis… and I doubt the answer to that would be… “When we took no risks.”

On the web I find that Pär Boman has three kids… and one of this days he might have grandchildren too. He should never forget that, at the end of the day, they and his nation are his most important customers. And I am absolutely sure they do not need regulators like the Basel Committee and the Financial Stability Board to infuse their banks with dumb credit-risk aversion. That is no way how to finance their future. 

And Andrew Hill and Richard Milne, your duty, that is to press Pär Boman and others to speak out.

God make us daring!

@PerKurowski

The Basel Committee and the Financial Stability Board have also some questions of ethics they should grapple with.

Sir, if a boy listens to the weatherman, and dresses up accordingly, but then comes his mommy and, having listened to the same weatherman, and ignoring what clothing the boy already has on, orders him to put on or take off additional layers of clothes, you can bet that boy will end up having too much or too little on, even if the weatherman turns out to be absolutely right about his forecast. And of course, and especially if the weatherman was wrong, as happens sometime, real tragedy could ensue with the boy dying from either excessive cold or heat.

That is precisely what happens when regulators, ignoring how banks have adjusted to the perceived risk of the asset through interest rates, size of exposure, duration and other terms, order banks to also adjust for the same perceived risk in the capital they are required to hold. 

Even if the risks have been perfectly perceived, the bank will as a consequence lend too much in too generous terms to those perceived as “absolutely safe” and too little in too harsh terms, to those perceived as “risky”. The introduction of this regulatory distortion puts both the banks and the real economy at serious risk.

And artificially favoring the borrowings of some bank clients over others, just to satisfy I do not what, is a highly unethical to do. And so Sir, in reference to Andrew Hill´s “Bankers grapple with question of ethics” December 9, I wonder if Dan Ostergaard, the managing partner of Integrity By Design and who is mentioned as advising on ethical training, might have a program for the Basel Committee for Banking Supervision and the Financial Stability Board. If not it seems urgently needed.

By the way it might also have to do with ethics when financial journalists refuse to make any reference to this regulatory distortion, for reasons of their own. Think of it, “Five years on, Lehman still haunts us” and the fact that it was the extremely low capital requirements allowed by the SEC to the investment banks under their supervision, when holding AAA rated securities, that most tempted Lehman into perdition, is not even discussed.