COP21: Bank capital requirements based on sustainability and job-creating ratings would have been a major step forward

Sir, Martin Wolf commenting on the Paris COP21 agreement on limiting the risks of climate change writes “The provision of needed finance is an aspiration, not a bankable commitment” “One small step forward for humankind” December 16.

Indeed, sadly the agreement missed something I have been proposing for quite some time.

Our banks, one of our most important agents to bring us forward, have been told by their regulators that if they hold assets perceived as safe from a credit point of view, they will be allowed to leverage their equity and the support they receive from society much more than if they hold assets perceived as risky.

Since bankers with interest rates and size of exposures already clear for credit risks, it is quite nutty to require that perceived risk to be cleared for again in the capital.

The net result of it is permitting banks to earn higher risk adjusted returns on equity when financing the safe than when financing the risky. And expected credit risk is an expected credit risk that should be managed by the banks if they want to stay open, and has not one iota to do with whether a borrower has something that is worthy to be financed.

In general terms, and since it requires hubris, I am opposed to any type of distortion of bank credit allocation to the real economy. But, if I had to distort, I would only do that in pursuit of a good purpose, like helping the sustainability of our planet and creating jobs for our youth.

I am absolutely sure that if COP21, in Paris, had come up with an agreement that instructed bank regulators to forget credit ratings and use sustainability and job creation ratings to set the capital requirements for banks instead – more sustainability and more job creation less equity and therefore higher ROE - then Wolf could have written about “A major step forward for humankind”

Of course that would have required explaining how purposeless and useless current bank regulations are, and there are many who do not want that to be understood. Regulators because they might be held accountable, bankers because that would signify having to give up a dream come true, making their big profits on what they think (or can make out to be) safe.

@PerKurowski ©

Keep bank regulators like FSB’s Mark Carney out of global warming or we’re all toast

Sir I refer to Pilita Clark’s “Carney urges ‘net zero’ company strategies” December 5.

In Basel II a corporate asset that is rated AAA to AA carries a 20% risk weight, while a similar asset rated below BB- is risk weighted 150%. That means that the capital a bank has to hold against a corporate asset rated AAA to AA is 1.6% (8%x20%), while against an asset rated below BB- it needs to hold 12% in capital… 7.5 times more.

Anyone who believes that assets rated below BB- are more dangerous to the banks than assets rated AAA to AA, even a mind-blowing 7.5 times more dangerous, has not the foggiest idea about risk-management.

The safer an asset is perceived, the larger is its potential to deliver unexpected losses, those losses that bank capital is to help cover.

And that is why Mark Carney, the chair of the Financial Stability Board, instead of appointing “Michael Bloomberg, media billionaire… to head a task force aimed at helping investors judge how companies are managing the risks that global warming poses to business”, should better see that himself and all his colleagues take a Risk Management 101 course.

Sir, as I have said many times before... if climate change/global warming regulations is to be handled by a task force in any way similar to how the Basel Committee and the Financial Stability Board handle banks… then we're all toast.

PS. If bank regulators want to help out then they should scrap the capital requirements based on credit risks that are anyhow cleared for, and make these based on sustainability (and job creation) ratings

@PerKurowski ©

Do current debates on climate change consider sufficiently demographic projections?

Sir, I refer to the different opinions expressed in FT on the UN Climate Change Conference in Paris.

IMF, in a Staff Discussion Note of October 2015, “The Fiscal Consequences of Shrinking Populations” writes: “Declining fertility and increasing longevity will lead to a slower-growing, older world population... This, in turn, contributes to a more sustainable pattern of development and reduced pressures on the environment.”

And the World Bank, in its advance of the “Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change” mentions: “Demographic trends and related policies will have implications for the global environment and for the effectiveness of adaptation and mitigation strategies. Family planning and reproductive health policies may help mitigate the negative effects of climate change by reducing population growth, especially in pre- and early-dividend countries. Education is not only likely to lower fertility, it can also have a major impact on the effectiveness of measures aimed at tackling the negative effects of climate change…”

And so Sir, it looks clear that if we have an aging world with falling population our economical challenges will increase but our climate change challenges might lessen. And vive versa if we have a world with growing population it might be easier on the economy but climate change challenges might worsen.

Is the current debate on climate change considering sufficiently this relation?

What if in 40 years the world has to explain to its pensioners that there is no money for them, because it was quite unnecessarily spent on problems derived from a climate change scenario that did not include demographic projections? 

@PerKurowski ©

COP21 Paris, do not let a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

Sir, Narendra Modi is walking on a very fine and dangerous line between the “it is all humans’ obligation to encounter any global threat that could result from affecting the environment of our planet” and it is the responsibility of the rich. “Do not let the lifestyles of the rich world deny the dreams of the rest” November 30.

Of course, when it comes to assigning financial resources to mitigate or combat climate change, the rich countries have more to give. But I would always hold that the starting point of all these efforts must be that the poor and the rich, as humans, have an equal right to participate in fighting anything that threatens humanity… and that the right and duties of the poor are not lesser because they are poor.

Let not a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

PS. Narendra Modi would benefit from understanding that bank regulators' credit risk aversion is much worse for the opportunities of India to develop than any coal aversion by self appointed climate change regulators.

PS. You want to see some real anti-climate change action? Throw out credit risk capital requirements for banks and adopt SDG weighted capital requirements for banks.

PS. And a renewed warning. If anything like a Basel Committee for Banking Supervision takes over the worldwide regulation on climate change… we are toast.

@PerKurowski ©