The case against insane globalism also remains strong.

The purpose of the Basel Committee for Banking Supervision BCBS, established in 1974 is to encourage convergence toward common approaches and standards. That sure reads as it could qualify as that global cooperation Martin Wolf asks for in his “The case for sane globalism remains strong” July 16.

But what if it is not sane?

BCBS has basically imposed on the world the use of credit risk weighted capital requirements for banks.

Since perceived credit risks are already considered by bankers when deciding on the interest rate and the size of exposures they are willing to hold, basing the capital requirements on the same perceived credit risks, means doubling up on perceived credit risks. 

And Sir, as I have argued for years, any risk, even if perfectly perceived, causes the wrong actions, if excessively considered. 

I dislike the concept of any kind of weighted different capital requirements, because that distorts the allocation of credit with many unexpected consequences. But if we wanted to have perceived credit risk to decide bank capital, it would of course have to be based on the conditional probability of what bankers are expected to do when they perceive credit risks, and these might be wrongly perceived.

Would we in such a case assign a 20% risk weight to what is rated AAA and a whopping 150% to what is rated below BB- as in Basel II’ standards? Of course not!

And if we did not think that government bureaucrats know better what to do with bank credit they are not personally liable for, than entrepreneurs, would we then assign the “safe” sovereign a 0% risk weight and the “risky” not rated entrepreneur a risk weight of 100%, which would clearly send way too much credit to sovereigns and way too little to entrepreneurs? Of course not!

And if we thought having a job as important or even more so than owning a house, would we then allow banks to leverage so much more with residential mortgages than with loans to small and medium enterprises, meaning banks can obtain easier and higher risk adjusted returns on their equity by financing “safe” houses than by financing “risky” job creation? Of course not!

Sir, in 2003, when as an Executive Director of the World Bank I commented on its Strategic Framework 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."

Does this mean that I do not agree with Martin Wolf when he argues in favor of multilateral co-operation? Of course not! But it sure argues for being much more careful when going global with plan and rules.

By the way in those same 2003 comments at the World Bank I also wrote: “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 it did not take the world long before drowning in 2007 and 2008 in the AAA rated securities backed with mortgages to the subprime sector in the U.S.

But have those who concocted those ill suited risk weighted bank capital requirements ever admitted a serious mea culpa? No, they have blamed banks and credit rating agencies.

And in EU the authorities assigned a 0% risk weight to all Eurozone sovereigns even though they all take up debt that is not denominated in their local printable currency. And no one said anything?

Sir, in the whole world, I see plenty of huge dangers and lost opportunities that can all be traced back directly to BCBS risk weighted bank capital requirements. 

So, besides having to be very careful when going global, we also have to be very vigilant on what the global rulers propose. Of course, for that our first line of defense are the journalists daringly questioning what they do not understand or like.

Has FT helped provide sufficient questioning about what the Basel Committee has and is up to? I let you Sir answer that question.

http://subprimeregulations.blogspot.com/2003/03/my-comments-on-world-banks-strategic.html

@PerKurowski

“Any populism yours can do, mine can do better; mine can do populism better than yours” “No he can’t!” “Yes he can, yes he can, yes he can!!!!”

Sir, Simon Kuper ends his “Secrets from the populist playbook” March 16, with “Some new politicians, notably the new Democrat congresswoman Alexandria Ocasio-Cortez, can rival Trump for engagement. To some degree, we are all populists now.” “Secrets from the populist playbook”, March 16.

Indeed but the populists must also be measured with respect to the success they have when selling their populism.

For instance, our current bank regulators must be some of the most successful populists ever. Just think how they have managed to convince the world (most or all in FT included) that by imposing risk weighted capital requirements for banks, they are reducing the risks for our bank system. With that they have distorted the allocation of bank credit all over the world, weakening the economies and increasing the dangers of a systemic meltdown of our banks. 

Sir, I am from Venezuela, and so unfortunately I know too much about populists, but, when compared to the Basel Committee on Banking Supervision’s and the Financial Stability Board’s populism, Hugo Chavez was just a quite gifted amateur.

@PerKurowski

PS. My 2019 letter to the Financial Stability Board (FSB)

Monsieur Macron, more than a finance minister/ministry, Europe needs bank regulators who know what they’re doing.

Sir, Reza Moghadam lays out a proposal for a European finance minister/ministry that, though it “stops short of Mr Macron’s vision of fiscal union, with Europe-wide taxes and spending… focuses on the essential: a collective action mechanism for managing and stabilising economies in crisis.” “Macron is right — the Eurozone needs a finance minister” September 29.

Moghadam suggests the job description for that post should answer some key questions, and among these: “How can the risk of crises, and so fiscal payouts, be minimised? What would be the role of the minister in a crisis?”

The prime answer to the first question should be:

Getting rid of current risk weighted capital requirements for banks. These only guarantee that banks will hold the least capital, when a crisis, as usual, arises because of something that was ex-ante perceived as very safe turns out ex-post to be very risky.

The prime answer to the second question should be:

Make sure any stimulus, like QEs or low interest rates, flows freely so that the market has a chance to use it as efficiently as possible. This also requires getting rid of current risk weighted capital requirements for banks. These, by allowing banks to earn higher risk adjusted returns on equity on what is perceived safe than on what is perceived risky, seriously distorts the allocation of bank credit to the real economy.

Sir, in other words, much of what Europe could need from a finance minister, could be achieved by just firing the current inept bunch of bank regulators.

Basel II’s standardized risk weights of 150% for the below BB- rated and of 20% for the AAA rated, should be more than enough evidence on how little current regulators understand of banks and of finance.

Monsieur Macron, do you know bank regulators have decreed inégalité?

PS. Perhaps Monsieur Macron could ask his wife what has a better chance of causing those big bank exposures that can result in a major bank crisis, the ultra-safe AAAs, or the ultra-risky below BB-? I am sure Mme Macron would give him a more correct answer than what Mario Draghi would do; and this even though Draghi was the previous chairman of the Financial Stability Board and is now the chairman of the Group of Governors and Heads of Supervision the oversight body of the Basel Committee of Banking Supervision.

Perhaps Monsieur Macron should also ask Mme Macron what she thinks of 0% risk weights of sovereigns. Does she really think government bureaucrats know better than the private sector how to use bank credit efficiently? Reza Moghadam, who was previously at the IMF, has not expressed any sort of concern with that… but then again he is now the vice-chairman for sovereigns and official institutions at Morgan Stanley.

@PerKurowski

Why should technocrats seemingly be exempt from U-turn requirements, even in the face of horrendous mistakes?

Sir, Tim Harford writes: “For many government policies, it’s important to have an emergency stop to prevent bad ideas getting worse”, “In praise of changing one’s mind” May 27.

The worst idea, of the last century at least, has been that of, in order to make the banks safe, one needs to distort the allocation of bank credit by favoring, as if that was needed, banks’ exposures to what is perceived safe over those to what is perceived risky.

That meant that when the ex ante perceptions of risk, of especially large exposures, ex post turned out to be very wrong, that banks would stand there with especially little capital.

That meant that those rightly perceived as risky, like SMEs and entrepreneurs, those so vital for conserving the dynamism of the economy, would find their access to bank credit much harder than usual.

The 2007/08 crisis caused by excessive exposures to what was perceived or decreed as safe, 2007/08, AAA-rated, Greece, and the economies lack of response to outrageous stimulus thereafter clearly evidences the above.

But nevertheless, the concept of risk weighted capital requirements for banks, although somewhat diluted, still survives distorting on the margin as much, and in some cases even more than before.

When one reads Basel II’s risk weight of 20% for what is AAA rated and 150% for what is below BB- rated, the only conclusion one who has walked on Main Street could come to, is that a 180 degree turn into the directions of the risk-weighting would seem to make more sense.

Sir, why is it so easy for journalists to mock changes of minds of public political figures like Trump and May, and not the lack of change of mind of for instance the technocrats of the Basel Committee, the Financial Stability Board, BoE, ECB, IMF, Fed and so on?

Could it be because the latter “experts” tend to find themselves more in the journalists’ networks? Or could it be because of NUIMBY, no U-turn, no changing my mind, never ever in my own back yard. 

Sovereigns were handed a 0% risk weight! Why do we have to keep on reading references to deregulation or light-touch regulations, in the face of one of the heaviest handed statist regulations ever? Could it be because most journalists are also runaway statists at heart?

Why do "daring" journalists not dare to even pose the questions that must be asked?

@PerKurowski

Current bank regulating technocrats posing as scientifically knowledgeable are just vulgar impostors.

Sir, Anjana Ahuja refers to how Galileo was imprisoned by the Roman Catholic Church for his conviction that the Earth went round the Sun, and warns scientists may well feel the heat from those in power once again, referring here clearly to Donald Trump. “Echoes of Galileo in the populist retreat from reason” December 7.

Sir, careful there, often those in power masquerade as scientists. For instance bank regulators of the Basel Committee and the Financial Stability Board, behave much more like theologians than the scientists they purport themselves to be. Their creed is: Assets perceived ex ante perceived as risky are ex post risky, and so banks should therefore hold more capital against these.

And if a third, or much lesser class Galileo like me, dares to argue that what is perceived as risky, becomes less dangerous precisely because of that ex ante perception; while what is perceived as safe becomes more dangerous precisely because of that ex ante perception, then he has to be ignored and his questions should not be answered. 

Sir, you want further proof about these fake scientists? Ahuja writes: “Why is science under siege? One possible explanation is that it favours objective evidence over subjective experience.” Well, the Basel Committee never even researched in order obtain objective evidence of what has caused all previous major bank crises, before adopting their own subjectivity as their guiding light.

Lately I have been wondering whether I need to go on a hunger strike or take similar extreme actions, in order to get some response to some very basic questions from the impostors. But perhaps I should refrain from doing so, since I could be burned at the stake… and without the science respectful FT, perhaps also feeling alleviated, not even reporting on the incident.

Like Martin Luther I might just nail my questions on some Church door in Basel, and take it from there.

PS. Let us not forget that Galileo's views were at one moment considered "alternative facts" or "fake news"

@PerKurowski

I would not shed tears for the Basel Committee for Banking Supervision’s demise. Neither would millions of SMEs.

Sir, Caroline Binham and Jim Brunsden, with help of Laura Noonan, report that the Basel Committee for Banking Supervision is introducing reforms that include a contentious “output floor” that would limit banks’ ability to use their own internal models to assess risk. “In many cases this will effectively raise the amount of capital that banks have to hold” “Basel group warns of call for lenders to ramp up capital” October 8.

What do they mean with “in many cases”? How can anyone believe all banks authorized to use internal models do not use these to minimize the capital they need to hold …so that they can maximize their returns on equity?

Sadly, what is really contentious with all this, is how on earth we ended up with such infantile regulators.

Anyhow the authors report these reforms are creating some discord between the US and Europe; to such an extent it “tests the viability and purpose of the Basel group, founded 41 years ago to harmonise banking rules around the world.”

Sir, if that would signify the end of the Basel Committee, you know I will not shed a tear. Neither would the millions of SMEs and entrepreneurs who over the years have been denied fair access to bank credit, if they finally came to realize that was a direct consequence of Basel’s regulatory discrimination. 

Knowledgeable bank regulators know below BB- rated assets are risky. Wise ones know what’s AAA rated is dangerous. The world is overdosing on information and knowledge and it sorely needs more wisdom.

PS: Here is an aide memoire on the regulatory monstrosity of the risk weighted capital requirements for banks.

@PerKurowski ©

When will the Basel Committee define the purpose of our banks, and regulate accordingly?

Sir, Jim Brunsden writes of a “letter from the banking associations [that] calls on the Basel Committee on Banking Supervision to scrap plans for a floor limiting how far a bank can decrease its capital requirements by using internal risk models. “Lenders step up their fight against global capital reform.” September 2.

My immediate reaction could be to ask the bankers: When will you return to earning your returns on equity by doing banking and not by minimizing equity?

The current confusions about bank regulations all begin with that mindboggling fact that the regulator has not defined the purpose of banks. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

When will the regulator understand that banks must finance the “riskier” future and not just refinance the “safer” past?

When will the regulator understand that what’s rated AAA is more dangerous to banks than what’s rated below BB-?

When will the regulator understand Voltaire’s “May God defend me from my friends. I can defend myself from my enemies”

When will the regulator understand that risk weighted capital requirements distorts the allocation of credit?

When will the regulator understand the full monstrosity of its risk weighted capital requirements for banks?

PS. Sir, from your steadfast silence on these issues I can only deduct your “Without fear and without favour” is pure BS. You are clearly beholden to banks and their regulators, caring very little for the real economy on Main Street.

@PerKurowski ©

Pity the Basel Committee’s small leverage ratio; it sure has to carry a lot of risks on its back.

Sir, with interest rates and size of exposure the expected credit risk is the risk most cleared for by banks. Yet bank regulators also wanted to clear for it, and imposed their expected credit-risk weighted capital requirements. That left out of consideration, at least until Basel III, all other risks, like for instance that of cyber attacks to which Gillian Tett refers to in “Hackers target the weakest links in the financial chain”. May 20.

I say “until Basel III”, because now banks are by force of a leverage ratio, to hold at least 3% of capital against all exposures to cover for any risk.

But the Financial Stability Board has also “Task Force on Climate-related Financial Disclosures” which reminds us of risks from climate change.

And then there are the risks of demographic changes; the risk that the economies do not react to stimulus; the risks that credit risks have not been correctly perceived; the risk of war; the risk of epidemics, negative interest rates, deflation… and a never-ending list of risks of expected or unexpected losses. 

And you know I have repeatedly called for banks to also hold some capital against the risk regulators have no idea about what they’re doing, a risk that has morphed into a frightening reality.

But what’s the enticement for banks to cover for these types of risks when they can leverage as much as they currently do? Very little… in the same vein that the bonuses you can pay out to bank managers, when little bank capital is required, can be very big.

What do I propose? The abandonment of all dumb credit risk weighted capital requirements, and move towards a leverage ratio of 8 to 12%. That should increase the importance of the shareholders vis-à-vis management. And that should help to generate more interest among shareholders into making sure better risk avoidance or risk preparedness takes place.

The process of implementing those changes must though be very carefully designed, so as not to worsen the current capital scarcity driven bank credit austerity.

PS. The fact Basel Committee argued that “a simple leverage ratio framework is critical and complementary to the risk-based capital framework” was already a confession of not knowing what they were doing, but that notitia criminis was foolishly ignored. 

@PerKurowski ©

Lucy Kellaway is sure lucky a Basel Committee for Transport Supervision does not regulate her cycling.

Note: I just added a PS that might explain the letter better.

Sir, I refer to Lucy Kellaway’s “I want to get back on my bike in spite of the dangers” April 25.

The Basel Committee for Banking Supervision decided banks need to hold more capital, which is like a sort of tax, whenever they lend money to something risky, like to SMEs and entrepreneurs; and this even though banks charge higher risk premiums and give smaller loans whenever engaging with the risky.

And so it does because even though “the risky” are clearly riskier individually to banks, the BCBS ignores that it is those perceived as safe but that could turn out risky, which represent much greater danger to the banking system. 

So lucky Lucy Kellaway, that a Basel Committee for Transport Supervision does not regulate her cycling. Because, if it did, she would be taxed by much more than the “to avoid car doors and lorries turning left [and] wear all the safety gear” she taxes herself with when riding a bike.

And that because, like the BCBS, a BCTS could similarly regard cycling as much more dangerous than any other means of transport, even though most other means of transport, for instance cars, certainly cause more deaths in London than those “more than a dozen cyclists die each year” Kellaway refers to.

So if Lucy Kellaway had to pay a BCTS cycling tax, she might not get back on her bike, and she would then feel “angry, depressed, cynical, possibly prone to heart attacks and musculoskeletal disorders”… a bit like the banks and our economies end up feeling after being submitted to BCBS’s dumb rules.

PS. An alternative explanation is that the Basel Committee for Transport Supervision would pay Lucy Kellaway and the rest of Brits a subsidy in order for them to safely travel immobile on their bottoms and avoid the risks of cycling. Would Britain be better for it?

@PerKurowski ©

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

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

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

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

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

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

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

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

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

@PerKurowski ©

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

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

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

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

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

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

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

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

@PerKurowski ©

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

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

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

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

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

@PerKurowski ©

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

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

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

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

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

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

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

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

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

For the good of the real economy, let’s pray the day of the so much needed bank regulatory enlightenment arrives soon.

Sir, Caroline Binham and Laura Noonan informs that “The Basel Committee on Banking Supervision said yesterday it had dropped a plan to ban banks from relying on rating agencies when they calculate risks in their portfolio” And with that “The banking lobby has beaten back a global reform plan that it claimed would result in a “substantial” increase in capital”, “Lenders win Basel U-turn on assessing risk” December 11.

I am not sure because the Basel Committee recently issued a Consultative Document on the issue and we should wait what could come out of it.

Anyhow, what is completely missed is that banks already look at credit ratings when setting their risk premiums and the amounts of exposure. And so when also having to use the same credit rating to set their capital requirements, means that the credit risk info contained in those ratings is excessively considered. And any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

The day the Basel Committee wakes up to the dangers of distorting the allocation of bank credit to the real economy based on credit risks, something that has not one iota to do with whether borrowers pursue objectives that deserves fair access to bank credit, that day everything will change.

For the good of the real economy and of the perspectives for our young to find good jobs in the future, let us pray that day of regulatory enlightenment arrives soon.

http://subprimeregulations.blogspot.com/2015/12/the-basel-committee-insists-in-not.html

@PerKurowski ©

William Coen. Do you really think that government bureaucrats use bank credit more productively that SMEs and entrepreneurs?

Sir, I refer to Laura Noonan, Caroline Binham and Barney Jopson reporting that “Basel group faces up to compliance challenge” May 26.

We read David Green stating that still to be answered “is whether the new regulations actually does what it was intended to do and whether the side effects are acceptable, whether they are intended or not”. And that is something that does not sound quite unimportant eh?

But then William Coen, head of the Basel Committee’s secretariat, tells us “We hear quite often about unintended consequences of our reform when, in fact, the effects of our reforms are actually fully intended; some just don’t like them”.

But here then is a question to Mr. Coen.

The Basel Committee uses credit-risk weighted capital requirements for banks were the weight of governments is 0% while the weight of SMEs and entrepreneurs is 100%... and that is something quite discussable, especially in these days when governments announce they need to use financial repression in order to impose informal haircuts on their obligations.

But worse, much worse, looked at from the opposite side, it tells us that the Basel Committee for Banking Supervision feels that the risk of bank credit not being used productively is 0% for government bureaucrats, and 100% for SMEs and entrepreneurs.

Is that really what you believe and have intended to say Mr Coen? Are you a communist?

@PerKurowski

Basel Committee, Financial Stability Board: Hear hear… Tim Harford’s "The Power of saying ‘NO’"

Sir, hear hear… Tim Harford’s, “The Power of saying ‘no’”, January 17.

“Please, please, dear bank regulator, allow us lower equity requirements on these ultra safe exposures and we promise that will stay away from what’s risky”

Absolutely NOT! The real bank crises have always occurred when something ex ante was considered as “absolutely safe” so I will not run the risk of next time that happens, you will, because of me, stand there with your pants down and no equity. Copy: finance.historians@gmail.com

Absolutely NOT! If I allow this, then I will not be able to look into the eyes of all those small businesses and entrepreneurs, who will be denied credit as a result of favoring the AAArisktocracy; or into the eyes of all those young unemployed, who could become a lost generation if I did so. Copy: risky.borrowers@gmail.com unemployed.youth@gmail.com

PS. But, unfortunately, bank regulators did not have it in them to say “NO!” to bankers.

For Basel IV should we not expect equity requirements for banks based on regulation and central banks risks?

Sir, I refer to John Authers’ “Lessons to be leant from Switzerland doffing its cap” January 17.

Whatever, this really places the fact that regulators and central banks impose credit-risk-weighted equity requirements for banks, when they themselves are the source of so much risks, in a totally new perspective.

Frankly, it must be much easier for banks to clear for credit risks by means of interest rates, size of exposure and other contractual terms than what it can be for them to clear for regulatory and central bank risks.

And so for Basel IV, we must now expect equity requirements for banks based on regulation and central banks risks… what a conflict of interest for regulators and central banks! That might indeed seriously affect the friendly collegiality that reins in their mutual admiration club.

Basel Committee, do we now need trustworthiness of central banks ratings?

Financial Stability Board, what trustworthiness ratings would you assign to Draghi-ECB or to Carney-BoE?

Basel Committee and Financial Stability Board… please… Let it go¡

Sir, January 2003 in a letter you published I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds”.

And so one could assume that when Sam Fleming now, December 23, reports that “Banks face sharp restriction on use of rating agencies in loan risk assessment” I should be satisfied.

I am not! Because now the regulators want to impose other criteria to be used by banks for calculating how much capital (equity) they need to hold against an asset.

For instance: “Corporate exposures would no longer be risk-weighted by reference to the external credit rating of the corporate, but they would instead be based on a look-up-table where risk weights range from 60% to 300% on the basis of two risk drivers: revenue and leverage.”

And so all regulators are doing here is introducing new sources of systemic risks; and defining new tools to be used in gaming a system the regulators set up to be gamed.

Why can’t regulators just let it go and let the banks use any method each one of them finds appropriate to measure credit risks; and why can’t they just fix one capital requirement for all assets… no gaming allowed?

Sir, let me explain it to you again, for the umpteenth time.

Do you agree Sir with that a bank will and should decide how much to lend, at what interest rates and on what other terms, based on the credit-risk he perceives the borrower represents?

I assume you answer "yes" Sir, but so then, why on earth should bank regulators also stipulate that the same perceived credit-risk is also to be cleared for in the capital (equity) account of the bank? Is not clearing for the same perceived risk twice overdoing it? 

Does that not mean for instance that, if we instead of allowing two nannies to use their average risk aversion when taking care of our kids, we allow them to apply the sum their risk aversions, then we would run the risk of making real monumental wimps out of our kids?

Sir, it is very clear that our bank regulators are digging themselves and our banks ever deeper in a horrible hole of their own creation. That could be because they do not want to admit their mistakes or, much worse, God help us, because they still do not understand their mistakes.

Two questions Mr. Kay, on “strict liability” and bank regulators.

Sir, John Kay makes a convincing case for applying “strict liability” to bankers, especially when ending with that clarifying principle “if you take the bonus, you take the rap”, “If you do not want to do the time, prevent the crime” August 6.

That said I have two questions to Kay with respect to “strict liability” and their applicability to bank regulators.

First, suppose a regulator knows very well that allowing for lower capital requirements for banks on assets perceived as absolutely safe than on assets perceived as risky could, in the long run, risk the buildup of dangerously large exposures to what is now perceived as safe, but he allows it anyhow because he does not want to be held responsible for any bank failure under his watch…. are we talking about something for which “strict liability” could be relevant?

Second, if you as a bank regulator are explained something, like that which is contained in the Basel Committee on Banking Supervision’s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, and you do not understand it, but yet, without asking for clarification, because you do not want to see as if you do not understand, you approve of any regulations based on that information, and disaster ensues… are we talking about something for which “strict liability” could be relevant?

In the case of bank regulators, should not something like “if you take the promotion, you take the rap” also apply?

We used to drill for the A-bomb threat… but got hit by the AAA-bomb.

Sir, I belong to that generation that Gillian Tett refers to and who in the 50s and early 60s crouched under tables preparing for the A-bomb threat, “From fire drills to firearm drills” May 31,

50 and some years later I am now wondering what drills could be useful for a society in order to avoid that kind of AAA-bomb the Basel Committee launched at our banks, when they allowed these to leverage their shareholder’s equity a mindboggling 62.5 to 1 times (or infinitely in the case of sovereigns) only because something got an AAA credit rating issued by humanly fallible credit rating agencies.