The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

One day future historians will recount, and Paris’ Musée de L’Homme exhibit: “1988 Basel I: When Regulators introduced Financial Communism”

A real review of UK’s financial system requires breaching the etiquette rules of a mutual admiration club

Sir, I refer to Huw van Steenis’ “An opportunity for the Bank of England to rethink its priorities” June 21.

Is he really recommending among other for banks to “use machine learning”, so that they can better cope with even more voluminous regulations…like that on climate change that has become so fashionable nowadays?

Well no Sir. “A review of the UK’s financial system to strengthen the BoE’s agenda, toolkit and capabilities” should, foremost, include a review of the credit risk weighted bank capital requirements. 

That could start by asking Mark Carney, why do you believe that what is perceived as risky is more dangerous to our bank system than what is perceived as safe.

You could follow it up with: Does the use of this not guarantee especially large bank crisis, caused by especially large exposures to what was perceived (or decreed, like the Eurozone sovereign's 0% risk weight) as especially safe, and ended up being especially risky, against especially little capital?

You could follow it up with: Favoring so much bank lending to the safer present over that of the riskier future not risk weaken our real economy? 

But of course, asking those questions and similar that shall not be asked is not comme il fautin the central-bankers’ and regulators’ mutual admiration club.

Sir, one single capital requirement 10-15% on all bank assets would serve us much better than the BoE’s entire current rulebook, distorting less the allocation of credit and bringing back into banking all that “risky” activity that has been expelled by regulators to be handled by other intermediaries. 

But how would then ten thousands of regulators justify their salaries? 

PS. My letter to the Financial Stability Board

@PerKurowski

We need to rethink productivity data, in light of so many “working hours” spent consuming distractions.

Sir, referencing Chris Giles’ and Gavin Jackson’s “Surge in low-value jobs magnifies UK productivity problem” of August 13, I believe that whenstating “increases in low-wage jobs in bars, social work and warehouses have served to hold back UK productivity growth” it hints at sort of causation that might not really be there.

I say so because we have entered a new era that requires redefining entirely the ways we measure productivity. 

Some months ago, in Bank of England’s “bankunderground” blog, we read a post by Dan Nixon titled “Is the economy suffering from the crisis of attention?”. It said, “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

Nixon, answering the question posed in the title wrote, “The most obvious place to look would be in productivity growth, which has been persistently weak across advanced economies over the past decade.”

But, what if instead of being recorded as distractions during working hours, these were to be recorded as a private consumption that reduces the effective working hours? Would that not increase GDP and reduce working hours, and thereby point instead to a dramatic increase in productivity?

In the same vein, would then not real-salaries, instead of stagnating, have been increasing a lot?

And what about our employment and unemployment data if the time used to consume distractions during working hours would not be counted as work? 

Sir, it behooves us to make certain how we measure the economy gets updated to reflect underlying realities. 

Perhaps then we are able to understand better the growing need for worthy and decent unemployments.

Perhaps then we are able to better understand the need for a Universal Basic Income, not as to allow some to stay in bed, but to allow everyone a better opportunity to reach up to whatever gainful employments might be left, like those “low-wage jobs” that it behooves us all, not to consider as “low value jobs”

@PerKurowski

To be able to make our banks safe, at no cost, is a dream that passionately blinds way too many, like the Financial Times.

Sir, with respect to Bank of England’s interest rate increase you explain it with “The decision had all the hallmarks of a committee that has decided that it will only be comfortable when rates are at a higher level that feels more natural”, and so sees what it wants to see, and so you argue “It is far better for central banks to be more clearly and dispassionately guided by the data” “A rate rise and a Bank of England false step” August 3.

Of course, except those for some special reasons need blissful blindness, it is better for most “to be more clearly and dispassionately guided by data”. 

But let me ask you Sir: What data, during the last decades have you seen that in any way shape or form could support the current pillar of bank regulations, namely that what is ex ante perceived as risky is more dangerous to our bank systems ex post, than what is perceived as safe? 

None? Might it then not be that you are also too passionate about hoping to make our banks safe at no cost, so as to understand the data, or the lack of it? Or are you perhaps so passionate you do not even want to see any data that contradicts it.

Yes, I am obsessive about the distortions in credit allocation that the risk weighted capital requirements for banks cause, but Sir, you are just equally, or even more, obsessive with ignoring it.

@PerKurowski

The risk weighted capital requirements doomed our banks to impotence, and our economies to obesity.

Sir, I would like to make some of my own observations on two terms of those exposed by Robert Shrimsley in “Menopause, impotence and other useful economic terms” May 18.

Shrimsley writes: “Impotence: An underperforming economy is distressing for all parties. This kind of dysfunction can be either structural or cyclical or psychological”. 

Indeed but it can also be physiological. When the Basel Committee introduced risk weighted capital requirements for banks they impeded banks from feeling any attraction to what’s perceived as risky, like the entrepreneurs. That has our banks only masturbating by lending to what’s “safe”, like houses and sovereigns… and all the Viagra in the world won’t help. Our only salvation lies in a delicate intervention that removes this regulatory object that causes this ED; so that banks can, little by little, throwing out the equity minimizers and reincorporating some savvy loan officers, learn again to perform their societal duties.

Shrimsley writes: “Obesity: This is an economy…which has given up going to the gym and is too heavily dependent on house price inflation and junk commodities like lightly regulated financial products” 

When regulators told banks that if they only stayed away from what is perceived as risky, what bankers don’t like, like risky entrepreneurs and broccoli; and went for what’s safe, what bankers love, like residential mortgages and ice cream, then they would be rewarded with the chocolate cake of higher expected risk adjusted returns on equity…they guaranteed the economy to become obese.

@PerKurowski

What if workplace distractions were considered part of consumption instead of part production?

Sir, Tim Harford, who has blocked me on Twitter writes: “Bank of England’s unofficial blog…compared plunging productivity with the soaring shipments of smartphones. Typical productivity growth in advanced economies had hovered steadily around 1 per cent a year for several decades, but has on average been negative since 2007. That was the year the iPhone started to ship.” “Computers are making generalists of us all”, December 6.

That iPhone and many of its close or distant cousins, cause a lot of distractions. If that time distracted was classified not as time of production but as time of consumption, and outputs remain fairly the same, would that not point at much higher productivity and much higher real salaries?

https://teawithft.blogspot.com/2017/11/what-does-going-from-10-to-50-level-of.html

https://teawithft.blogspot.com/2017/12/the-distraction-factor-forces-us-to.html

PS. Harford writes here also a lot about Power Point presentations. Here my long ago take on it

@PerKurowski

Bank credit should flow to where it most benefits the economy, but regulators only care about avoiding credit risks

Sir, Minouche Shafik, a deputy governor of the Bank of England writes: “We need to make sure the parts that are growing are safe and sustainable so that globalization evolves in ways that direct capital to where it has the most benefit for the world economy” “Globalization is changing, not going into reverse” April 15.

Of course she is right. The question though is why then do regulators insist with their risk weighted capital requirements for banks? These have absolutely nothing to do with directing credit to where it has the most benefit for the economies. These have only to do with having banks avoid lending to those ex ante perceived as risky. And of course that distortion of credit allocation does nothing to promote financial stability, as it only guarantees that those perceived, decreed or concocted as “safe” will get too much credit, while those perceived as risky, like SMEs and entrepreneurs, will get too little.

Worse yet, since major financial crisis never ever detonate because of excessive exposures to something perceived as risky, but always because of excessive exposures to something erroneously perceived as safe, that regulation just makes it all worse, since the banks, when suddenly caught with their pants down, will then have especially little capital to cover up with.

Bank regulations need a complete overhaul. And that begins with asking regulators what is the purpose of banks, to see if we agree.

PS. When will finance ministers dare to ask the regulators The Question?

@PerKurowski ©

Andrew Bailey, and what about the highly irresponsible conduct of bank regulators?

Sir, I refer to Andrew Bailey’s “Irresponsible conduct carries consequence in British finance” February 23. I agree with all but, what about the regulators?

Bank regulators decided that lending to those perceived as risky, from a credit risk point of view, required banks to hold much more equity than lending to those perceived as safe. That was an extremely irresponsible thing to do.

Not only did it mean that lending to the safe then generated much higher risk adjusted returns on bank equity than lending to the risky; something which completely distorted the allocation of bank credit to the real economy; but it also meant that banks would be standing there naked, with little equity, precisely where all major bank crises have always occurred, namely the terrain of excessive exposures to what ex ante was perceived as “absolutely safe” but that ex post can shows its other real colors.

Do I want to jail these regulators? No! We are living in different times. But I surely do not want to see these failed regulators also hide behind “an accountability firewall”, which permits them to keep on regulating… and sometimes even being promoted.

Let them just parade down our avenues wearing cones of shame.

Britain, get the busybody besserwissers out of your Bank of England… fast!

Sir, I am shocked, and utterly concerned about my very dear Britain’s future. How on earth have you allowed yourself to be trapped by such besserwisser-busybodies hands, as is reflected in Pilita Clark’s by the “Bank of England seeks answers from insurers over climate change” October 28.

Truly mindboggling. If BoE is so concerned about climate change, then why does it not suggest that capital requirements for banks should be based on our planet-earth’s-sustainability ratings, instead of silly, purposeless, credit-risk ratings, those which are already being cleared for by banks with risk premiums and size of exposures?

BoE, of course prudential bank regulations is not everything, especially when totally imprudent

Sir, Chris Giles writes “The Old Lady is right that prudential policy is not everything” June 19. Absolutely! And this is especially so when the prudential policy applied, is the wrong one.

Prudential bank regulations rule 1.

Whatever you do, beware of the dangers of distorting the allocation of bank credit in the real economy; precisely like what is being done now with the risk-weighted capital requirements for banks.

Prudential bank regulations rule 2.

Never forget that in the financial world what is perceived as “risky” is a thousand times less dangerous than whatever is perceived as “absolutely safe”; something which regulators have completely ignored with their current risk-weights in the risk-weighted capital requirements for banks.

If one gets ones prudential regulations right there is less need for monetary policies. If one does not get ones prudential regulations right, no monetary policy can make up for it… in fact it could make things much worse... adding to the distrust of the financial system the distrust in the currency.

Mark Carney, do not use shadow banks to hide the mistakes committed by the regulators of the banks in the sun!

Sir I refer to Mark Carney’s “The need to focus a light on shadow banking is nigh” June 15.

Carney writes “In the run-up to the crisis, opacity in shadow banking fed an increase in leverage and a reliance on short-term wholesale funding. Misaligned incentives in complex and opaque securitisation structures weakened lending standards…The goal is to replace a shadow banking system prone to excess and collapse with one that contributes to strong, sustainable balanced growth of the world economy… As the G20 completes work on the core of the financial system, reforms to shadow banking must, and will, progress. Now is the time to take shadow banking out of the shadows and to create sustainable market-based finance."

Mr. Carney what on earth had shadow banking to do with the crisis? The current crisis was set off by an incredible misalignment of incentives caused by adopting risk-weighted capital requirements, in conjunction with assigning a risk perception monopoly to some very few human fallible credit rating agencies.

Does Carney really believe that the problem with the AAA rated securities backed with lousily awarded mortgages, the bubble of the real estate sector in Spain, the excessive loans given to sovereigns like Greece, and similar which could be financed by banks against basically no shareholders’ capital had much to do with the shadow banking?

No way José!

The only way G20 can do something worthwhile in terms of reform, is to accept with much humility that the risk-weighted capital requirements not only distort the allocation of credit in the real economy but are also, from a medium term financial stability perspective, utter nonsensical... since major bank crises never occur from excessive exposures to what is ex ante perceived as risky.

FT, perhaps you should ask for some time out in order to collect your marbles.

Sir I refer to your “The BoE’s big test is yet to come” March 6.

You write “QE has increased wealth inequality” true, but then, sort of as an excuse, you hold that “some of this inequality is temporary and will be reversed when the monetary support is withdrawn”. A truly astonishing statement that can only be interpreted in the animas of Keynes’ “in the long run we are all dead”.

And then you write: “QE… failed to produce the kind of sharp rebound policy makers had hoped for… The banks have failed to lend to smaller enterprises, which would have helped to spur growth”. True, but then again, as a sort of excuse you hold that “the BoE does not decide what banks… do with their money”. And that Sir you should know by now, at least from my over 1000 letters to FT on the subject, is a completely false statement.

BoE, by approving of different capital requirements for banks for different assets, based on ex ante risk perceptions, allow banks to earn different risk-adjusted returns on equity for different assets… and if you think that does not represent the kind of carrots and sticks that make banks decide what to do with their money, then you might be in need of some time out in order to collect your marbles.

With regulators like Mark Carney there is no future in finance for the City, or for the rest of the economy for that matter

Sir, John Gapper writes that Mark Carney, the new “Bank of England governor, has arrived from Canada with a dose of can-do spirit”, “Carney is wise to nurture the City´s future in finance” October 31.

“Can-do spirit”? Ha! There is nothing as far from a can-do spirit than capital requirements for banks which are higher for what is perceived as safe, than for what is perceived as risky. These not only guarantee that banks will not finance the future but mostly refinance the past, but also guarantee the kind of distortions that will make it impossible for the banks which are not in the shadows, to survive.

How can we have reached a point where we can write about “a knowledge industry that has been vital to growth and trade since the 19th century” blithely ignoring there is no way that 19th century banks could have done what they did, with current regulations.

Let me try to explain the regulatory lunacy again, in terms of knowledge. If banks know (or believe they know) the risks, and adjust for these in interest rates, size of exposures and other terms, what business have regulators adjusting for exactly the same “know” in the bank capital?

The role of a banker is to stop his bank from failing”, while the role of a regulator is to see how to stop bankers from failing to stop their banks from failing, and, if banks fail, to see that the hurt will be contained as much as possible. In other words: Though a banker might very well look at credit ratings, a regulator must not look at these, but at how bankers look at credit ratings. Why is it so hard for Mark Carney and his colleagues (and John Gapper and his colleagues) to understand that?

PS. From Edward Dolnick’s “The Forger’s Spell” I extract that the psychologist Leon Festinger once marveled: “A man with conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point”. Does this apply to me, or to the bank regulators and Financial Times journalists, or to all of us?

Mark Carney. Risk-weighted bank capital requirements, is extremely improper regulatory behavior.

Sir, I refer to Martin Wolf’s “Carney’s risky bet on big finance” October 30.

According to Basel II, if a bank expected a risk adjusted margin of 1% on a loan to Greece, or on a AAA rated security then, since that was risk weighted 20%, it would be required to hold only 1.6% in capital, and so it would be able to earn an expected risk adjusted return of 62.5% on its equity.

But, also according to Basel II, if a bank expects a risk adjusted margin of 1% on a loan to medium and small unrated businesses then, since that is risk weighted 100%, it would be required to hold 8% in capital, and so it would be able to earn an expected risk adjusted return of only 12.5% on its equity.

Sir, what would you expect the banks to do in such circumstances? Is this the “organized properly, a vibrant financial sector bring substantial benefit” that Mark Carney was referring? If so, Carney has no idea of what “properly” means.

And the ex ante perceived risks-weighting of capital requirements remains the pillar of Basel III, even though, with its leverage ratio, a floor of 3% capital (equity), and a roof of 33.3 to 1 leverage, has been set as an AVERAGE for the banks.

Martin Wolf feels that “Far more equity is required”. I agree, though it has to be something achievable and not a pie in the sky request of 30%, but, before that, risk-weighting needs to disappear. With more basic capital required, unless of course it becomes close to 100%, the more distortions could the risk-weights produce.

Mark Carney states “our job is to ensure that [the financial sector] is safe” He is so completely wrong! His job is to help to ensure that the real economy is safe, and, for that, the health of the financial sector is only one part of the puzzle.

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.

Bank of England must allow its banks to finance UK´s future and not just make these refinance its seemingly safer past.

Sir, Martin Wolf writes “The job of policy…is to shift the economy on to the better path. This means taking risks.” “Why the Bank of England must gamble on growth” October 25.

For me, more important than that is for the Bank of England to get out of the way of avoiding private risk-taking, like it does when subscribing to Basel’s silly capital requirements for banks based on ex ante perceived risk, more risk more capital (equity) less risk less capital (equity).

That allows the banks to earn much much higher expected risk adjusted returns on equity when lending to sovereigns, housing and the AAAristocracy, than when lending to medium and small businesses, entrepreneurs and start-ups. And that has of course caused havoc in the allocation of bank credit to the real economy… which of course hinders the chances of sturdy growth.

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… or it just might be that he does only want the public sector to have the right to risk it.

Before sending watchdogs into the shadows, should we not get better ones for banks in the light?

Sir I refer to Sam Fleming and Patrick Jenkins reporting Paul Tucker saying “it would be ‘absolutely disastrous’ if the economic fragility of banks was recreated outside the mainstream banking sector”, “Watchdogs urged to look in the shadows”, October 18.

I do not agree. What we should really be scared of are for our truly bad watchdogs now also going for the shadows, after having messed up so much the banks in the light. Just as an example, in the shadows, no one would even dream of leveraging 30 to 50 times, like supervised banks were allowed to do, and did.

Sir, let me ask you one question, please!

If you were a regulator, what would you think poses the greatest dangers for us with the banks, the possibility of their excessive exposure to something rated AAA to AA and which then, ex post, turns out to be risky, or their “excessive” exposure to something rated below BB- ad which would, ex post, turns out to be even more risky than that?

I dare venture you would answer the first, since you would know there would be very few or no "excessive exposures" at all to anything rated BB-. And, if so, the banks would have collected a lot of risk premiums too... which is also capital (equity).

But the risk-weights of our current watchdogs are 20% for the first and 150% for the latter, meaning banks need, according to Basel II, only to hold 1.6% in capital against the first but 12% against the latter, which means banks are allowed to leverage 62.5 to 1 with AAA to AAs but only 8 to 1 with something rated below BB-. Explain that!

You see, the Basel Committee's risk weights measure the risks for the banks of their assets and borrowers, but not the bank risks for us. You see, our and bank regulators’ problems with banks, have absolutely nothing to do with banks and bankers getting it right, and absolutely all to do with banks and bankers getting it wrong!

Before sending watchdogs into the shadows, should we not get better ones for banks in the light?

Scary stuff! Mark Carney’s speech evidences he still knows too little about the real economy.

Sir, Mr. Mark Carney, in his speech in Nottingham on August 29, 2013, which you commented on in "Carney toughens his dovishness" he said the following:

“The Bank of England has established a threshold for the capital base of the major banks and building societies after taking account of likely future losses, fines for past misconduct and prudent calculations of risk. That threshold, a capital base of 7% of their riskweighted assets and at least 3% of their total assets, must be crossed if the system is to be able to support and sustain the recovery”

And so Mr. Mark Carney, none less than the Governor of the Bank of England and the Chairman of the Financial Stability Board, believes it is ok to allow the banks to earn higher risk adjusted returns on their equity when lending to “The Infallible”, to the AAAristocracy, than when lending to “the risky”, namely the medium and small businesses, the entrepreneurs and the start-ups, because, as you should know by know, that is precisely what the risk-weighing of assets does.

With that he evidences again he has still knows to little about the needs of the real economy. For it “to be able to support and sustain recovery”, the “risky” risk-takers need to be offered access to bank credit in competitive terms. This is indeed quite scary stuff.

Central Bank´s forward guidance has a ring of the blind leading the blind.

Sir, John Authers concludes his “BoE guidance signifies more work for investors”, August 10, writing: “The effect of the extra guidance from Mr Carney and other central bankers is to force investors to watch the economy more closely and make their own decisions”.

Indeed, though investors should always watch the economy and always make their own decisions, it now becomes even more complicated with forward guidance, because that is something akin to the blind leading the blind, and because therefore the investor now also needs to concern himself with what the central bank blind sees.

Like banks were forced to heed the opinions of some few credit rating agencies, which led many of them down the wrong path, are investors now supposed to heed the opinions of some few central bankers? Would we all not be better off, if central bankers would just shut their mouths up, and allow for a diversity of investors to guess what they might be up to? That at least sounds as leveraging systemic risks less.

And, if then a central bank guides you down the wrong path, what on earth is a poor investor to do?

Until the financial transmission channels are repaired, BoE’s monetary injections are wasted

Sir, Chris Giles hold that “There will not be a better time than now to spend some of the BoE’s monetary policy credibility in search of a more robust recovery”, “Carney has a chance to kick-start the weak British economy” August 1.

Wrong! Anytime after the financial transmission mechanism, demolished by capital requirements for banks based on perceived risks that have already been cleared for with other means, has been repaired, is better.

Meanwhile any monetary injections would mostly flow to dangerously overpopulate the havens officially considered as safe, and too little would flow to the risky actors of the real economy who most stand a chance of knowing what to do with those injections.

Is Mark Carney allowed not to tell the truth in order to make consumers and companies feel more relaxed?

Sir in “Mark Carney’s risky revolution” July 31 with respect to “forward guidance” you write that “Mr Carney believes guidance can provide extra monetary stimulus at a time when interest rates are already ultra-low. Consumers and companies will feel more relaxed about borrowing if the central bank reassures them it does not intend to hike rates soon.”

That begs the question whether Mark Carney or any other Bank of England governor must tell the truth and only the truth, or is he really allowed bending the truth, in order to have consumers and companies feeling more relaxed?

Is that why they hired a Canadian?