Does not common sense dictate that in good times we want our banks to be weary about what they perceive as safe? Does not what’s seen as risky take care of itself?

Joe Rennison writes: “Investors and rating agencies have warned that companies might struggle to refinance huge debt burdens, resulting in downgrades from triple B into high yield or “junk” territory.” “BIS sounds alarm on risk of corporate debt fire sale” March 6.

What does that mean? Namely the risk that ex ante perceptions of risk might, ex post, turn out really wrong.

Also, “Bond fund managers could then have to sell the bonds as many are bound by investment mandates barring them from holding large amounts of debt rated below investment grade. ‘Rating-based investment mandates can lead to fire sales,’ warned Sirio Aramonte and Egemen Eren, economists, in the BIS quarterly review released yesterday.”

And what does that mean? Clearly procyclicality in full swing! Just like the insane procyclicality caused by the risk weighted capital requirements for banks.

Sir, does not common sense tell you that in good times we want our banks to be weary about what they perceive as safe, as what they perceive as risky takes care of itself? And in bad times, do we not want our banks not to be too weary of the risky, and burdened with having to raise extra capital when it could be the hardest for them?

Sir, so what are regulators doing allowing banks to hold less capital against what they in good times might wrongly perceive as safe, and imposing higher capital on what they would anyhow want to stay away from, especially in bad times?

Sir, for literally the 2,781 time, why does not the Financial Times want to dig deeper into unavailing what must be the greatest regulatory mistake ever? 

Are you scared of then not being invited to BIS’s Basel Committee’s and central banks’ conferences? “Without fear and without favour” Frankly!

@PerKurowski

Flags need also to be raised, when influential multilateral financial institutions help to blow up bubbles

Agustín Carstens, the general manager of the Bank for International Settlements writes: “A decade of unusually low interest rates and large-scale central bank asset purchases may have left many market participants unprepared, and contributed to a legacy of overblown balance sheets” “It is precisely when pressure starts to build that flags need to be raised” June 26.

Indeed, but to that we should add the presence of extraordinary low capital requirements for banks when lending to what’s perceived as safe, like to house buyers and sovereigns. These have helped to explode the exposure to this type of loans, as well as distort the signals sent to the markets, something that of course has also helped to inject a lot of liquidity. 

Carstens also opines: “At the BIS, we have come to appreciate how unrewarding it can be to flag risks when markets are running hot. Yet that is precisely when risks tend to be highest.” 

Indeed, that is the same difficulty all influential institutions like the IMF face since, whenever they flag a risk, they could be accused for helping to set off a crisis. But now they all have themselves to blame for making the flagging problem so much worse. By assigning risk-many sovereigns a risk weight of 0% they painted themselves into a corner. When you know that risk weight is absolutely wrong, how do you go about to change it without scaring the shit out of the markets?

@PerKurowski

Whoever thinks banks are now better regulated for sure, must surely be too easily impressed by complexity

Sir, Martin Wolf “argues against premature monetary tightening. Let us establish strong forward momentum first”, “Risks remain amid the global recovery” July 5. 

I would heartily agree, if only all that easy money was flowing more towards investments in the future. It is not! The current risk weighted capital requirements give great incentives for that not to happen.

And when Wolf opines “the core western financial system is far better regulated and capitalised than it was in 2007”, how on earth does he know that?

When regulators regulate based on the same risks bankers perceive, and not based on the possibility that those risk are badly perceived or badly managed, or on unexpected events, we have no firm basis for opining something like that. That is unless we are in awe, like Martin Wolf must be, of any increased regulatory sophistication and complexity; like that reflected in Basel Committee’s “Minimum capital requirements for market risk” of January 2016, and that are now, June 2017, the subject of consultative document titled “Simplified alternative to the standardised approach to market risk capital requirements”.

Sir, the world urgently needs bank regulators who are not solely fixated on avoiding crisis but who also understand the vital importance of good banking between the crises.

As is, the time bankers should allocate to ask that all-important question of “What do you intend to do with the money if we lend it to you?”, will be taken up more and more with trying to understand and fill out regulatory material.

And what has easy money done to equity markets? Corporations engaged in short termism have taken on debt in order to pay out dividends and repurchase shares. Is that something good?

Wolf writes: “The BIS talks, sensibly, of building resilience. A part of this lies in ensuring that growth becomes less dependent on debt.” Yet by treating it only as one task of many, Wolf sort of diminishes its relative importance. Debt finances much anticipation of demand, when that debt hits the wall of having to be repaid, future demand will fall.

Sir, as I see it, never ever has a generation used up so much public and private borrowing capacity for its own short-term benefits. Social security and pension plans, sold by governments on the basis of an expected 7% real return, are by the minute taking on more characteristics of Ponzi schemes, using fresh money from future retirees to pay out benefits of the current.

http://subprimeregulations.blogspot.com/2016/08/statist-baby-boomers-want-us-to-extract.html

@PerKurowski

To understand risk-weighted capital requirements for banks distort, is not geeky, just thinking outside The Group.

Sir, Gillian Tett mentions that Hyun Song Shin, and economic adviser at the Bank for International Settlements, “believes that modern economists have a crucial blind spot: they tend to ignore how the financial system really works, since they operate with idealised models of money and investor incentives.” “A blind spot masks the crisis danger signs” March 17.

Of course! As I had written to FT, in thousands of letters, the risk weighted capital requirements for banks has completely distorted the allocation of credit.

That distortion has similarity to those found in a “BIS study of German life insurance companies, which have recently accounted for 40 per cent of government bond purchases, concluded these were gobbling bonds not due to deflation forecasts, or an enhanced appetite for risk… but because “accounting rules and solvency regulation” forced insurers to match assets to liabilities.”

But then Ms. Tett goes into writing of the “kinks in how these rules work (too complex to spell out here)… The result was a bizarre, self-reinforcing feedback loop that traders describe as “negative convexity” (and George Soros, the hedge fund manager, calls “reflexivity”). This sounds geeky.”

No Ms. Tett, it’s not geeky at all! It just requires simple 101 economics to understand that if banks are allowed to leverage more with some assets than with others, that is going to produce a complete different set of expected risk adjusted return on assets than those that would be present in the absence of such regulatory distortion... and of course willingness to think outside The Group.

For instance, if the sovereign has a zero percent risk weight, and an SME a 100% one, this means banks need to hold much less capital when lending to a sovereign than when lending to a bank. Ms. Tett, honestly, is it really geeky or should it not be quite simple to then understand that the sovereign is going to be favored more than he would ordinarily been favored, and that the SME will find it more difficult than usual to access bank credit?

Sir, day by day we are getting closer to some real fundamental problems, like:

Who sold the regulators that fake idea that what is perceived as safe is more dangerous to the bank system than what is perceived as risky.

Who were the regulators who believed such crap and did not even care about defining the purpose of banks before regulating these?

Where were all the economists (and journalists) that should have raised the question that needed to be raised?

Sir, with an insistence for which I am not ashamed to be called an obsessive, I have and still do my part. Are you doing yours? 

@PerKurowski

ECB’s Mario Draghi, as a bank regulator, is he taking us all for a ride? Is he unwittingly (dumb) or wittingly (bad)?

Sir, Claire Jones quotes Mari Draghi with: “The last thing we need is a relaxation of regulation… The idea of repeating the conditions of before the crisis is very worrisome.” “Draghi pushes back against protectionist programme” February 7.

As the former Chairman of the Financial Stability Board, and as the current Chairman of the Group of Governors and Heads of Supervision to which the Basel Committee for Banking Supervision reports, Mario Draghi is as responsible for bank regulations as anyone can be.

And so this is a man who clearly believes that what is rated AAA to AA represents such little risk for the banking system that it merits a risk weight of only 20%, while what is rated below BB- is so dangerous that it must be risk weighted 150%. That is of course sheer lunacy.

And so this is a man who clearly believes that a sovereign can have a risk weight of 0%, while the citizens who give the sovereign its strength must be risk weighted 100%. That is of course run-away statism.

And that’s why we got hit with the AAA rated securities backed with mortgages to the subprime sector in the USA and Greece with way too much sovereign debt.

Sir, now I dare you to read the latest document issued by the Basel Committee, titled “Frequently asked questions on market risk capital requirements” and then dare, without fear and without favor, answer me this very straightforward question, with a Yes or a No. Do you think the Basel Committee is digging us out, or digging us further down, in the regulatory hole they have placed us in?

Sir, in my mind it is perfectly clear in that Mario Draghi has no moral authority whatsoever, to lecture anyone about manipulation or protectionism.

The risk weighted capital requirements for banks is an outright manipulation of the access to bank credit that discriminates against the risky, like SMEs and entrepreneurs, and protects the interests of the banks and of those perceived, decreed or concocted as safe. 

@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 ©

It was the regulatory culture and not the banking culture that went wrong. The regulators need a real bashing.

Michael Skapinker writes about “the recent decision by the UK Financial Conduct Authority to drop its probe into the culture of banking is wrong, and why members of the Treasury parliamentary committee are right to call for hearings into why it did so.” “Bankers need a (metaphorical) bashing — as do the rest of us” January 7. He also opines that: “Lax regulation led to the 2008 banking crisis.”

Sir, what if FCA’s probe into the culture of banking would have come up with the following:

“The culture of bankers has not changed; as usual they do their best to provide their shareholders with the highest risk adjusted returns on equity possible.

This time though, the regulators, the Basel Committee, allowed banks to leverage their equity differently with assets, depending on the ex ante perceived risk of these. For instance with Basel II, they authorized a leverage of over 60 to 1 for any AAA to AA private asset but only 12 to 1 in the case of a loan to an unrated corporation.

That meant of course that the risk adjusted returns on equity for safe assets shot up in the sky. An expected 0.5 percent risk adjusted margin to something safe could produce a 30 percent on equity, while a loan to a risky SME or entrepreneur, with the same expected risk adjusted margin, would only yield about a 7 percent ROE.

And so banks, naturally, as should have been expected, went overboard in exposures to for instance AAA rated securities and loans to Greece. And assets perceived ex ante as safe but that ex post turn out to be risky, is precisely the stuff bank crisis are made off. In this particular case the crisis ended up so much worse by the fact that banks were holding very little capital when the ex post realities set in.

Another unfortunate consequence has of course been that banks have either completely abandoned the lending to the risky, or are charging them extra premiums in order to compensate for the regulatory distortions.

We have to make a note that the distortion that caused the crisis remains in effect with Basel III.

In order for regulators to introduce the necessary correction, we want to remind them of the following:

Bank capital is to cover for unexpected losses and so, to have these based on expected credit risk, a risk already cleared for by banks by means of interest rates and size of exposure makes absolutely no sense.

The safer and asset is perceived the greater its potential to deliver unexpected losses.

The regulators should not worry about the credit risk of bank assets but about how banks manage those risks, and a good place to start is by not introducing distortions that makes it more difficult for them.

In conclusion “lax regulations” had nothing to do with causing this crisis. It was all about seriously bad regulations. Of course we feel sad about it, but our bank regulation colleagues must be held accountable for what they did, otherwise the moral hazard becomes just too big to handle.

Yours truly”

Sir, could it not be that FCA has abandoned its probe into the culture of banks because its conclusions would reflect very badly on the culture of regulators?

Skapinker with respect to the malpractice that is allowed to go undetected, like because of the silence of the media before the 2008 crisis writes: “One part of society needs to step in when another does not. It is through their actions that the system is kept honest, more or less, or at least honest enough for it to keep functioning”

Absolutely, but why has FT not helped me to do so? How can you be so sure I am wrong… or is it something else?

@PerKurowski ©

The regulators odious discrimination against the fair access to bank credit of the risky is unacceptably abnormal

Sir, Martin Wolf refers to: “A more sophisticated view…of the Bank for International Settlements. It believes that… one should be prepared to tolerate prolonged cyclical unemployment over the medium term, in order to prevent a build-up of damaging financial excesses over the longer term” “Keep rates low — the world is still abnormal” September 9.

Clearly Wolf does not subscribe to that sick priority as he writes: “central banks should continue to focus on stabilizing the real economy, though more needs to be done to curb financial excesses”

But if I were allowed to question the Bank of International Settlements I would ask:

Do you really think that tolerating prolonged cyclical unemployment over the medium term will prevent a build-up of damaging financial excesses over the long term? Could it not be the other way round, as fewer and fewer asset types would then be perceived as safe, and, as a consequence, be turned into damaging financial excesses?

Wolf concludes: “Our world is not normal. Get used to it.”

Absolutely, our world is clearly not normal when regulators are allowed to come up with something so idiotic like the portfolio-invariant-credit risk weighted capital requirements for banks, and which so odiously discriminates against the fair access to bank credit of those perceived as risky… like SMEs and entrepreneurs. But NO! I do not accept I have to get used to it.

Again Mr. Wolf, though you have admitted I have told you so, you still do not get it. Financial excesses are built with assets perceived as safe, ex post turned risky… not with ex ante risky assets.

@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

Our economies are drowning for lack of oxygen in overpopulated safe havens.

Sir, I refer to John Dizard’s “Central banks enlist ageing populations in the competitive devaluation game”, March 28.

Dizard discusses Bank of Japan’s paper “Demographic Changes and Macroeconomic Performance — Japanese Experiences”; IMF’s “Is Japan’s Population Aging Deflationary?” and a paper by BIS titled “Can Demography Affect Inflation and Monetary Policy?”

One aspect not discussed in connection to this demographic change, is that since increased risk-aversion goes with the investment objectives of an aging population, the demand for safe havens relative to risky bays should be increasing.

Add to that the sad fact that bank regulators decided, on their own, that it was more important for our banks to avoid risks instead of to allocate bank credit to efficiently to the real needs of the economy, that of course also adds immensely to the demand for safe havens.

And it is only getting worse. Now by means of added Basel III liquidity requirements for banks, and Solvency II regulations for the insurance sector, which all-predicates risk-aversion, the demand for what’s “safe” must grow even more.

And, since any safe haven can become extremely dangerous if overly populated, it should be clear that an amazing scarcity of financial safety is lurching around the corner. Poor widows and orphans financially they will be more widowed and orphaned than ever.

But also poor the coming young generations, those who will be denied that societal risk-taking that could help them to have a good future with plenty of jobs.

@PerKurowski

We’ve fallen into the dangerous and spooky hands of an inept bunch of amateurish masters of the universe.

Sir, I refer to Andrew Sentance’s “We expect too much of the new masters of the universe [central bankers]” February 28.

Sentence asks “Are we now too optimistic about the abilities of the financial system’s new overlords?” I would answer: Absolutely! We have landed in the hands of some very inept masters of the universe. And one very clear example of that is how they try to regulate banks by means of their credit-risk-weighted equity requirements and which, to top it up, are even portfolio invariant.

I just ask: What on earth has a regulator to do with the perceived risks of banks’ assets, when what he should be exclusively concerned with is with how bankers perceive those risks and manage these.

Our banks are currently like in a car with two steering wheels; the first one controlled by bankers, and the second by regulators who are responding, simultaneously, to basically the same risks the banker sees. And so of course we must crash either because banks embrace excessively what seems safe, or because of an excessive aversion to what seems risky.

And yes, to have central bankers inducing negative interest rates, and announcing inflation targets, and not realizing that this is a haircut like any other haircut, is something quite spooky to say the least.

@PerKurowski

FT, for the time being, forget the unaccountable bankers… we’ve got a much bigger problem at hands.

Sir I refer to your “Hold Britain’s banks to higher standards: New rules on personal accountability are tough but necessary” October 9.

In it you write: “The regime also brings in a new criminal offence of reckless misconduct that causes a financial institution to fail. This would carry a sentence of seven years’ imprisonment and an unlimited fine”,

And then you state: “Those grumbling about perverse regulation should acquire some perspective. Blowing up the nation’s physical infrastructure would carry the severest penalties. Recklessly damaging its financial plumbing can be just as damaging, but has been punishable at most by social opprobrium and a moderation of compensation from previously outlandish highs. No top banker has been punished for the enormous losses that caused the crisis.”

But, as you very well know, I hold bank regulators as the prime responsible for the crisis, having approved incredibly distorting credit-risk weighted capital (equity) requirements which they did not and have yet not been able to understand. And so, if I am right, is not the regulators lack of accountability so much worse? If I am right, and a banker responsible for a failed bank should get seven years... how many years in prison do these failed regulators deserve?

And FT, dare look at it… don’t turn away cowardly. The unrepentant chairman of the Basel Committee when Basel II was approved, is now the General Manager of the International Bank of Settlement; the unrepentant former chairman of the Financial Stability Board, is now the President of the European Central Bank; the current unrepentant chairman of the Financial Stability Board is also Governor of the Bank of England; and the clearly unrepentant current chairman of the Basel Committee is also the Governor of the Swedish Riksbank.

And FT don’t tell me you are unaware that there is a 100 percent correlation between what got banks in trouble and what these regulators allowed the banks to hold against extremely little equity… only because they perceived these assets, ex ante, as “absolutely safe”, and because of their hubris they never doubted their perceptions.

And FT, don’t tell me you are unaware of that secular stagnation, deflation, mediocre economy and all similar creatures, are direct descendants of that silly risk aversion displayed by our unaccountable to anyone failed bank regulators.

So FT, forget the bankers… if only for the time being... we got a much bigger and serious problem at hands.

Do I feel these bank regulators should be jailed? Of course not! I just feel they should go home, in shame, put on their dunce cap, and then beg the forgiveness of all those young who because of them will now become part of a lost generation.

PS. And, by the way, when journalists and columnists of an important paper withhold important arguments only because they do not like the messenger, or the messenger does not stroke their ego sufficiently, does that have no implications when it comes to personal accountability?

Eurozone cannot afford ill-targeted quantitative easing.

Sir, I refer to your “Eurozone needs quantitative easing” July 21. No! It cannot handle more distortions.

Before getting rid of the capital controls that risk-weighted capital requirements for banks represent, and which channels new liquidity to whatever is officially perceived as absolute safe, and not to where the economy most needs bank credit to go, any Eurozone quantitative easing would be plain foolish… and set the eurozone up for something even worse.

And to top it up, you suggest that quantitative easing should be carried out through the purchase of government bonds, as if the zero risk weighting of eurozone government bonds is not distortion more than enough.

Why does Martin Wolf keep mum about the horrendous mistakes with risk-weighted capital requirements for banks?

Sir, until about two years ago I had written way over a hundred letters to Martin Wolf where I explained the profound mistakes of the risk-weighted capital requirements for banks present in Basel II. At that point he told me, in no uncertain terms, not to explain it to him anymore since he already understood it. And since that time, as you know, I have not copied Wolf with the letters I have been sending to you commenting on his articles.

But still, week after week, like in his “Bad advice from Basel’s Jeremiah” July 2, Wolf steadfastly refuses to discuss the possibility, I would say the certainty, that these capital requirements seriously distorts all monetary and fiscal policies enacted to ease the consequences of the financial crisis, rendering these useless.

And so Sir, I have to either conclude that Martin Wolf has not understood one iota of what I explained to him, something which might be entirely my fault, or he has some other reasons for keeping mum about it.

PS. Again I will not copy Martin Wolf with this letter. You decide Sir what to do.

And the lesson number one is....

Sir, Martin Wolf in “The lessons to be learnt from today’s financial crisis” July 2, 2008 quotes the Bank of International Settlements annual report stating “loans of increasingly poor quality have been made and then sold to the gullible and greedy”. Although I find it hard to think of a market that does not use greed as one of its main motors it is really the “gullible” part of it all that really blows my mind.

Who on earth is BIS to talk about gullibility. Was it not the Basel Committee on Banking Supervision that BIS hosts that set up a system based on credit risk assessments and that appointed the credit rating agencies as the supreme risk measurers? If we normal citizens and investors are gullible of anything it has been of believing that the Basel bank regulations had taken care of the problem once and for all, and that the credit rating agencies knew what they were doing.

BIS also mentions “the inherent procyclicality of the financial system” to argue for tighter monetary conditions when credit soars…but not a word about how the risk rating and the consequent “massive re-rating of risk” can send cyclicality soaring to the moon.

No, if there is a first lesson to be learnt it is that central bankers and bank regulators are, no matter how knowledgeable and pompous they act, only humans prone to err, and so it behoves us not give them too much powers, which is what makes them truly scary and dangerous.

PS. A letter on this theme to FT back in 2004.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is dangerous nonsense.

Long live the Balkanization of criteria!

Sir "Davos call for end to fragmented financial regulation" is a first page story on you January 26 issue since Malcolm Knight the chief executive of the Bank for International Settlements complained about "the Balkanisation of regulation". Mr Knight might have a point, but, long before that discussion, we need to fully deal with the issue that the detonator for the current crisis was his institution's empowerment of some few credit rating agencies and their methodologies; and which resulted in giving the subprime-mortgages backed securities the wings to fly all over. From this perspective, a Balkanisation of criteria is also urgently called for. 

Yes of course, put some order in the house, nothing wrong with that, but, please, not by trusting some governess ordering your children telling around. Haven't you seen what monsters you have contracted? "Put up a couple of billions before next week or I down-rate you!" (Where is Maria?...The children need her!)

PS. In a statement delivered as an Executive Director at the World Bank on April 3, 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."

Laziness and arrogance

Sir, In “Lots of unknowns”, June 25 you write that now the Bank for International Settlements, the central banker’s central bank, says that “our understanding of economic processes may even be less today that it was in the past”

That is something they should have discovered long time ago had they not been so busy taking credits for the counter inflation benefits brought about by globalization; and driving banking risks out of banking to such an extent that so many of the risks were forced to hideout in the more informal world of the hedge-funds and in the algorithms of some derivatives. In order for them to be able to monitor the world’s financial flows, from their desks, they reduced the relations between borrowers and creditors to digital data, and they chained much of the world’s financial flows to the opinion of some hired credit rating agencies.

Now, when crisis is breeding around the corner, the most important thing to ascertain is that when the fire breaks out we do not send out the firemen who installed the sprinkler system and that are more interested in covering their shoddy piece of work.

Boy, were they arrogant. Even a World Bank was ordered to shut up and harmonize with the International Monetary Fund, one of the most famous clubhouses of the central bank’s bankers.

Stop right there! Who is the real complacent here?

Sir, does the Bank of International Settlements (BIS) really think they will now have done their part by warning the hedge funds?, May 21. BIS mentions problems such as “some erosion of counter party discipline” and “other signs of complacency” on behalf of the investment banks. Well if the regulators in BIS do not know that those risks are a fundamental part of any human behaviour then they are either totally incapable of supervising the banks they have themselves over the last few years fallen into the mother of all the complacency behaviours.