Bank regulations, which are just a more subtle form of capital controls, are neither on CFA exams.

Sir, John Dizard writes Investment managers will “wind up shocked, sputtering something about what happened to them could not have been expected because it was a seven, eight or nine sigma event… [since] Capital controls are not on the CFA exam, or accounted for by standard, or even the most sophisticated, probabilistic risk management models.” “A [capital control] plan till you get punched in the mouth” April 6.

Well neither are bank regulations, just another more subtle form of capital controls, part of a CFA exam, which is why subprime mortgage CDS, Cypriot bank deposits, investment-grade EM corporate debt, real estate in Spain and other similar turn out to be shockers.

Had it been on CFA’s curriculum, then anyone could have understood that, allowing banks to leverage up especially much with what was perceived as “safe”, would have to end in tears.

PS. In October 2004, in a letter published by FT I wrote and warned about how “our bank supervisors in Basel are unwittingly controlling the capital flows in the world.”

@PerKurowski

In 1988, US bank regulators enlisted the “Home of the Brave” to the causes of risk aversion and communism.

Sir, Lawrence Summers writes: “we may be headed into a world where capital is abundant and deflationary pressures are substantial. Demand could be in short supply for some time… the priority must be promoting investment, not imposing austerity”, “It is time the US leadership woke up to a new economic era”, April 6.

That is correct, but, when Summers opines the remedy to be: “The present system places the onus of adjustment on ‘borrowing’ countries. The world now requires a symmetric system, with pressure also placed on ‘surplus’ countries”, I disagree. What the US most needs is to get rid of its regulatory asymmetry, that which is expressed by requiring banks to hold more equity against assets perceived as risky than against assets perceived as safe.

Summers mentions that because China is launching a development bank, and some of US’ allies will join it, that “This… may be remembered as the moment the United States lost its role as the underwriter of the global economic system”. Not true!

It was in 1988, when the US signed up on the Basel Accord that stated the risk weight which determined the equity requirement for banks was to be zero percent for sovereigns, and 100 percent for unrated citizens, that the ‘Home of the Brave’ gave up the willingness to take the risks that had allowed it to become the underwriter of the global economic system.

In essence that was also the date when the US went statist, or, in more direct terms, became communistic.

@PerKurowski

The deafening silence of universities on The Basel Committee Distortion is scary.

Sir, I refer to John Kay’s “Angry economics students are naïve- and mostly right” May 21.

When John Kay invests his capital he looks at risk and returns when deciding what to do. How would it impact his decisions if suddenly the government told him “Citizen Kay, if you invest in what is perceived ex ante as “absolutely safe”, I will pay you additionally a couple of hundred basis points.”? Would he also think that subsidy carries no cost?

Allowing banks to hold less capital when lending to “the safe” than when lending to “the risky” causes banks to earn much higher risk-adjusted returns on equity when lending to “the safe” than when lending to “the risky”, and this means, no doubt about it, that banks will lend too much to “the safe” and too little to “the risky”.

And so though I am not an angry economic student, I am an economist very angry with our universities for ignoring the distortions caused by the risk-weighted bank capital requirements in the allocation of credit in the real economy. Their deafening silence on this issue makes it so much harder to extract an explanation from the regulators who in my mind are either blind or plain stupid.

That you for instance can obtain an MBA from Harvard, or get a CFA certification, without having been made aware of the existence of The Basel Committee Distortion, and much less of its financial consequences, is truly scary.

I did not take Simon Kuper for a baby-boomer.

Sir, I have admired many of Simon Kuper articles, and there is no doubt he is a rising star that could help to rejuvenate your paper. That said his “Smile if you live in Europe” May 4, left me a bit surprised, as I did not take him for a baby-boomer content with being able to obtain a certainly splendid caffé macchiato at a very good price.

I say that because when you are young, more than where you find yourself, is where you are heading that matters… and Europe, for the time being at least, is heading down, down, down.

And as I have explained to you Sir some couple of hundred times, that is much a result of silly bank regulations which allow banks to obtain a much larger expected returns on their equity when lending to The Infallible than when lending to The Risky.

And as you must certainly be aware of, the value of any portfolio which does not include a hefty dose of risk-taking, is destined to wither away, and therefore, although quite appropriate for oldies with few years left of living according to actuarial tables, is something highly inappropriate for the young. 

In fact had a certified financial advisor proposed a portfolio to a young person with the ingredients regulators establish for their banks, he would have his certification immediately removed. So no, if in Europe, and if young, don´t smile but kick out the current batch of bank regulators… as fast as you can.