Bank regulators never considered the unexpected, like a pandemic

Sir, Angela Merkel, Justin Trudeau and Erna Solberg opine: “The Covid-19 pandemic has taught us that the costs of prevention and early response are small compared with the consequences of under-investment.” “G7 should pay lion’s share of costs to help end the pandemic” FT June 10.

That’s correct but it should not have taken a pandemic to understand that banks need also to have sufficient capital so as to be able to respond to unexpected events. Unfortunately, instead of basing their bank capital requirements on such possibilities, or on that of misperceived credit risks e.g., 2008’s AAA rated mortgage-backed securities, bank regulators, the Basel Committee, doubled down on perceived credit risks, those which were already being cleared for by banks. 

The result? Though so many don’t want the innocent child to be heard, the banks now stand there naked.

Sir, again, if what’s perceived as safe is safe, and what’s perceived as risky is risky, would banks need capital. Not much. 

Bank regulations need a complete overhaul, meaning going back to the humbling reality of risks being hard to measure; instead of digging us down even deeper in the hole with Basel IV, Basel V and so on.

PS. July 12, 2012 Martin Wolf wrote: “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.” Martin Wolf clearly heard me, but he did not listen.

@PerKurowski

A major difficulty for EU is that what caused the last crisis, and attempts against its economic dynamism, shall not be named

Sir, Judy Dempsey writes that Merkel’s “conservative bloc would not buy into an agreement that would require Germany to spend more to bail out badly run economies” “Macron and Merkel will struggle to present a united front” June 19.

Have Merkel’s “conservative bloc” been told that their bank regulators assigned a risk weight of 0% to Greece and so that therefore Greece got way too much money?

Have Merkel’s “conservative bloc” been told that their regulators require banks to hold more capital against loans to German unrated entrepreneurs, than against loans to any EU sovereign?

Sir, I am sure that if central bankers and regulators were hauled in front of some really independent authority, and asked to comprehensibly explain so much of the crazy things their risk weighted capital requirements for banks entail, that would help clear the air and lead to much more constructive discussions in the EU about its future.

Who knows, perhaps such real discussions that would at long last hold some EU technocrats accountable, could even tempt a reversal of Brexit.

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

@PerKurowski

Martin Wolf, the western alliance is facing much more serious threats than Trump.

Sir, if an American citizen would I have voted for Donald Trump? NO! though not for Hillary Clinton either. That said each day I now wake up to see, which are the impeachable offenses or similar disasters Trump is being accused of during last 24 hours, or 24 minutes. Today it is Martin Wolf arguing he might be “disintegrating…The western alliance…the world’s biggest economic bloc and largest repository of scientific and business knowledge.”, “The rise and fall of American leadership”, May 31. Boy, as far as Trump misbehaving goes, that clearly beats any firing of the F.B.I. Director!

But NO! I can think of much larger threats.

Like having bank regulators willing to pay the price of distorting the allocation of bank credit, only to aspire having the banks standing there safe in shiny armors, at the burial of the real economy.

Like our societies not preparing in the least for how to manage all growing structural unemployment so that it does not detonate in social mayhem.

Like our societies allowing the profiteering that increases the costs of what needs to be done in order to contain the damages done to our pied-a-terre. If as Wolf opines “The Paris climate change agreement of December 2015 was not an answer to the challenge”, then perhaps good riddance.

Wolf holds Trump does not “seem committed to the mutual defence principles of Nato” which if true, I agree is very bad… though some thoughts on what “mutual” should mean in this context, would not be out of line.

Finally if Merkel because of Trump finds reason to state that the European Union would have to “take our destiny into our own hands”, then clearly he has done Europeans a great favor, reminding them that that is how it always should be.

Sir, this sure reads like that Wolf, as so many, is suffering from a severe bout of trumpitis. I sure hope he gets better because, if Trump really turns into a clear an immediate danger to our western world, then we all need to be much more clearheaded.

@PerKurowski

Trump might have done Europeans a huge favor by reminding them they have to fight for their own future themselves

Sir, today, May 29, is Memorial Day in the US. That is the day I walk down to the World War II Memorial in Washington, to try to thank those Americans who rescued my polish father from the concentration camp of Buchenwald more than 70 years ago. Had they not done that, I would not be, it is as simple as that.

But today I read Patrick McGee’s and George Parker’s “Europe can no longer rely on US partnership, warns Merkel” all the result of “a new transatlantic rift that has emerged after two days of international summits with President Donald Trump last week.” 

Is that true? No! Even when the partnership in World War II depended on very few, in my mind on Roosevelt and Churchill, any long-term partnership of this nature cannot really depend on what temporary leaders opine. If it did, it never existed.

There are of course general concerns. Like should I ask the Americans in the Mall to forgive Europeans for not showing the same interest in carrying their fair share of the defense load? Like, in these times of outsourcing, are the European and American manufacturing sectors able to respond somewhat similar than America did when it built up what Roosevelt called the Arsenal of Democracy, and that without it would have given the war a totally different outcome? Like, in these times of drones doing more and more of the fighting, are our soldiers capable to keep sufficiently of that fighting spirit that at the end of the day will be needed? And there is more… like the huge public debt loads and other minutia.

Sir, and if Chancellor Angela Merkel is sort of indirectly excluding the UK from the European defense, does that mean perhaps Britain should begin thinking about the need of promoting some English Language Empire as a substitute?

I do agree though 100% with Ms Merkel when she says: “We have to fight for our own future ourselves.” That is always the case, no matter what partnership or alliance you find yourself in. Merkel should reflect on the irony that Trump might have done her and all Europeans a great favor of reminding them of that simple fact of life.

@PerKurowski

Ms Merkel, Mr Renzi and Mr Hollande. Do you want to tackle growth and youth issues? Read the memo or give me a call.

Sir, Arthur Beesley, Anne-Sylvaine Chassany in Paris and Stefan Wagstyl report on that the leaders of Germany, France and Italy will attempt to forge a common plan to bolster Europe’s economy; and that Sandro Gozi, Italian secretary of state for European affairs said: “Europe needs an immediate answer on growth, youth and security issues”, “European leaders seek to bolster economy” August 22.

Part of that is because the result of that a the €315bn investment plan introduced last year by Jean-Claude Juncker, European Commission designed to tackle youth unemployment, during its first year, fell well short of expectations.

Here is what I would suggest they should do. They should ask their bank regulators whether when they regulated they gave any attention to the need that banks cooperate promoting sustainable growth and employment for the youth?

The answer they should receive, if the regulators were honest, would be: “Not one iota… all we cared about was for banks to avoid the risks we all perceive ex ante!”.

At that moment Ms Merkel Mr Renzi and Mr Hollande should begin to get an intuition that something is not smelling right.

In short, the current risk weighted capital requirements have banks avoiding the financing of the riskier future, and just keeping to the financing of the safer past, and that’s not the way for our economy to move forward, in order to not stall and fall.

Of course, if they want further explanation on how inept the current bank regulators are, they could read the following aide memoire, or they could give me a call.

@PerKurowski ©

Holier than thou extreme political correctness causes incorrectness, and that is only human

Sir Gideon Rachman quotes Der Spiegel with “Germany these days is a place where people feel entirely uninhibited about expressing their hatred and xenophobia.” “The end of the Merkel era is within sight” October 27.

I do no know about Germany but, when I visited Sweden earlier this year, what I felt was a lot of inhibitions to express even the slightest indication of not being fully comfortable with many foreigners in their small cities, many of them in public places begging.

Clearly not being allowed to vent normal human reactions builds up pressures that, sooner or later, will make humans explode.

@PerKurowski ©

Financial Times - FT: Sir, on the causes of the crisis of Greece, how about some journalistic honesty from yourself?

Sir, you write that “Ms Merkel has allowed the entire euro crisis to be portrayed within Germany as a fiscal mess caused by profligate peripheral countries. This analysis ignores the role of the financial bubble fuelled by banks — including Germany’s”. And then you title it as “The need for honesty in the crisis over Greece”, August 22.

But this Merkel analysis, and your analysis, ignores what I have been writing to you about in over a hundred of letters over the last decade, namely that the financial bubble fuelled by banks, was a direct result of Basel’s credit-risk weighted capital requirements for banks.

You know, because I do not believe you dumb, that had banks needed to hold the same capital they are required to hold when lending to any European SME or entrepreneur, 8 percent, instead of the 1.6 percent or less allowed by regulators when they lent to the Greek government, this Greek tragedy would not have resulted, no matter how much Greece might have manipulated its financial data.

You even published a letter of mine I wrote in November 2004 in which I asked: “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.”

So may I suggest it is high time for the Financial Times to also display some honesty over the causes of the crisis in Greece. Who are you covering up for? Is it perhaps for some too delicate big egos? Is yours really ethical journalism? Dare to live up to your motto!

http://teawithft.blogspot.com/search/label/Greece

@PerKurowski

This is the icebreaker Alexis Tsipras should use with Angela Merkel

Sir, Wolfgang Münchau refers to the new discussions between Greece in Germany and that are to be held in a climate that could not be characterized as friendlier. “A stealthy route to Grexit”, July 7.

As I have argued many times, if I was Alexis Tsipras, as a potent icebreaker, I would tell Angela Merkel: 

“Please don’t just blame Greece. The Basel Committee, between June 2004 and November 2009, allowed banks to leverage their equity and the explicit and implicit support they received from taxpayers 62.5 times when lending to Greece.

That gave European banks irresistible incentives to give Greece loans that by nature are irresistible to most politicians and government bureaucrats.

Had it not been for that dear Angela… we would be sitting here discussing much more pleasant affairs.” 

@PerKurowski

Martin Wolf, a neighbor, Russia, can become dangerous by Europe’s and US’ own weakening.

Sir, Martin Wolf is absolutely right when he writes “For Europe and, I believe, the US, there is no greater foreign policy question than how to deal with today’s Russia”, “Russia is our most dangerous neighbor” September 17.

But that said let us not never ignore the dangers with a neighbor becoming more dangerous, only because ones’ own country is becoming weaker. And in this respect something is happening both in Europe and in the US. 

Only as an example I cannot shake off the impression it made on me seeing the image of Britain’s David Cameron, Germany’s Angela Merkel, Holland’s Mark Rutte and Sweden’s Fredrik Reinfeldt, in a row boat, in a little lake, probably surrounded by thousands of life guards… wearing life vests… exactly where, perhaps in the same boat, 50 years earlier, we had seen Tage Erlander of Sweden and Nikita Khrushchev, rowing… without life vests.

What I said to those around me was “Never ever would Winston Churchill (or Putin) have allowed to be photographed in a little row boat, on a small lake, close to the shore, wearing a life vest!”

And with respect to the US, I just heard on the radio of a soccer team being sued because one of the players hurt his head while playing… come on... in the "home of the brave"?

And of course I do not refer here to any silly bare-chested testosterone showing-off, like Putin often does… but, of course, I do refer here to that de-testosteroning of our banks, which risk adverse regulators are causing with their credit-risk-weighted capital requirements.

PS. By the way, in order not to become dangerously cocky, we should never forget that one of the reasons for the fall of Russia was the low oil price at that time.

No matter what Schäuble-Merkel or Wolf think, Europe will not survive if it does not rid itself of Basel II and III

Sir I refer to Martin Wolf’s “Germany’s strange parallel universe”, September 25.

Bank regulators have based and still base their capital requirements for banks on how borrowers could fail and not, as they should, on how banks could fail, as entities and in allocating credit to the real economy. For instance, instead of observing themselves the credit ratings of any bank borrowers, they should be observing what bankers do when they see those credit ratings.

And so when the Basel Committee regulators introduced risk-weighting into the capital requirements for banks they created huge distortions, which have proven to be not only very dangerous for the safety of the European banks, but which also impedes bank credit to be efficiently allocated in Europe.

And that unpardonable mistake caused the crisis in Europe, and blocks any real European economic recovery, and this no matter what other route Europe takes, be it Schäuble’s and Merkel’s, or one that Martin Wolf could agree with.

Europe go directly to Basel IV!

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

We need solutions not solely based on finance ministers and central-bankers

Sir, Michael Steen reports “All eyes and ears on Draghi over bond proposal” September 5.

Sincerely why should the solution to the current crisis come down exclusively from ministers of finance and central bankers? Especially when it was the bank regulators they appointed who messed it all up? 

Sincerely any solution, without major economic structural changes occurring, among other in bank regulations, will only be kicking the can further up the slippery slope.

We need to think urgently about how for instance manage to channel the private Greek savings, which luckily have not also been lost, into solutions more helpful than the buying of location-location-locations in London. 

On a recent Labor-With-No-Jobs-Day, I speculated about an idea that could be good for Europe, and for America to explore and here below is the link:

http://teawithft.blogspot.com/2012/09/theres-economic-war-raging-out-there.html

There’s an economic war raging out there, so we need ministers and bank regulators with vision, not janitors and nannies!

Sir, Josef Joffe’s “Merkel’s case of good politics and bad economics” September 5, makes a solid case for buying gold and go to church and pray (and perhaps buy a gun) 

What can I say? There’s an economic war raging out there and we need our finance ministers and bank regulators to be men of vision, not janitors or nannies! Has anyone seen a Lord Keynes lately? 

Personally, and not as a Lord Keynes by any means, but as a simple consultant with quite a lot of workout experience, on a recent Labor-With-No-Jobs-Day, I thought that the following could be a good idea for Europe and America to explore: 

There is currently a tremendous scarcity of bank capital, and all fresh capital raised is going to plug holes instead of generating the new business needed… and so we are in dire need of traditional bank capital, not that silly modern stuff. 

In this respect I would gladly contemplate granting a 15 years full exoneration from corporate and dividend taxes, to whatever bank capital is raised by a banks that agrees to hold 15 percent in capital against any asset, no matter how safe or risky it might seem. 

There is a world of productive risk-taking waiting out there to get our youngster their generation of good jobs… let’s give them a chance. 

I would love to see 500 billion Euros (dollars) in this type of fresh bank capital...which could be leveraged into over 3 trillion Euros (dollars) in loans which do not discriminate based on perceived risks more than what they should ordinary do in a free market. 

That could mean a fresh start for our economies and a full-stop to that other war our current bank-nannies are waging against the "risky".

Angela Merkel, helps us understand, thanks! And now credit rating agency Del Sur!

Sir the world at large needs to show Angela Merkel much gratitude for when she says “I think that in the medium term Europe will need a working ratings agency because the robust currency system of the euro has not yet secured sufficient influence over the rules governing the financial markets” June 11, she is in fact daring to lay bare the fault in the whole fundamentals for the use of the credit rating agencies, namely that these agencies could, objectively, without bias, and presumably without mistakes, measure risk.

Not so, whether through bias or through mistakes they are as humans to err and with their signalling lead us in the wrong directions or even over precipices.

I can already hear a hugo chávez call for a credit rating agency Del Sur!