The risk weighted capital requirements give banks great incentives to hide risk from their regulators.

Sir, Eric Platt and Alistair Gray write “US regulators have joined investors in voicing concern over risky bank lending… particularly when projections make a company appear more creditworthy… ‘The agencies continue to see cases of aggressive projections used to justify pass ratings on transactions that examiners consider non-pass’… although they said the number of cases was “at much lower levels than in prior periods” “Wall Street watchdogs sound alarm over risky bank lending” July 4.

In good old banking days, around 600 years, before Basel Committee’s risk weighted capital requirements, bankers argued their clients riskiness in order to collect higher risk premiums. Now banks argue more their clients safety, in order to convince regulators that they can hold less capital. That distortion makes the efficient allocation of bank credit to the real economy.

“The Fed and its fellow regulators… give deals a pass or non-pass rating which is then used to build a picture of banks’ lending activities.”

Considering that bank crisis only result from unexpected events or excessive exposures to something perceived, concocted or decreed as safe, and never ever from something perceived as risky, does this pass or non-pass rating activity make any sense? Absolutely not! It is as silly as can be… except for those who earn their livings from working on bank regulations. 

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

“the agencies said that risks had declined slightly but remained “elevated”. Lending considered to be non-pass had fallen from 10.3 per cent to 9.7 per cent of the overall shared national credit portfolio” As I see it, we could just as well argue that where the real dangers lie, increased from 89.7% to 90.3%.

Sir, again for the umpteenth time, without the elimination of the insane risk weighted capital requirements, there is no way our banks will recover their sanity. I am amazed on how you have decided to keep silence on this.

@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

On FT’s Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance

Sir, I refer to Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance this month”; as “decoded by a sceptic”, “Trump’s battle with red tape will hurt consumers and world” February 14.

1. “A swipe at the Consumer Financial Protection Bureau, the new body that has returned $12bn to more than 25m Americans ill-treated by financial groups.”

That comes to an average of $480 per person, which leaves open the questions of: At what cost? Should Americans because of CFPB’s feel safer and, if they do so, are they really safer? What has happened to good and useful old “Caveat emptor”?

2. “Mr Gary Cohn blamed regulatory capital requirements for a shortage of credit to the economy: “Banks do not lend money to companies . . . because they’re forced to hoard capital,” he said. Nonsense, given that equity capital is free to be used for lending.” What? Has Patrick Jenkins not yet understood how for instance requiring banks to hold more capital against “risky” SMEs than against the sovereign and the “safe” AAA-risktocracy, distorts the allocation of bank credit?

3. “There has in any case been pretty strong credit growth, about 6 per cent a year since 2012.”

Credit for what? Yes: for corporation repurchasing their shares; for more loans to “safe” sovereign; for increased automobile financing portfolios; for residential mortgages… but what about the financing of the riskier future our kids and grandchildren need to be financed?

4. “It may also be a pop at the Financial Stability Oversight Council, the only US federal body that assesses risk across banks and non-banks… disbanding FSOC, would… be dangerous”

No! All those involved with bank regulations that do not understand the fundamental reality that what is perceived as very safe, is much more dangerous to the bank system than what is perceived as very risky, should be disbanded… the faster the better.

5. “Enable American companies to be competitive with foreign groups in domestic and foreign markets. A natural adjunct of the president’s all-encompassing call for national greatness… is likely to translate into… deregulation.”

What? If banks have needed to hold the same amount of capital against loans to Greece or AAA rated securities that they needed to hold against loans to SMEs and entrepreneurs we might have had other type of crisis, but not the 2007/08 one, nor would we be suffering such lazy economic responses to all the huge stimuli doled out?

6. “be in no doubt: this president will deregulate”

If that means to take away what distorts the allocation of bank credit to the real economy then welcome, not a moment too soon. To just modify the regulations is not to deregulate, but only to neo-misregulate.

7. “Restore public accountability within Federal financial regulatory agencies”

That would be not a second too late. Not only the Federal financial regulatory agencies, but also most of the world’s bank regulators, refuse to answer some simple questions such as: Why do you assign a low 20% risk weight to the so dangerous for the banking system AAA rated, and a whopping 150% to the so innocuous below BB- rated?

@PerKurowski

Tim Harford explains why a kakocracy, like that of the Basel Committee on Banking Supervision, is likely to endure

Sir, Tim Harford writes about “Kakonomics – the economics of rottenness. There are corners of the economy where poor work is the norm, not the exception.”, “The hazards of a world where mediocrity rules” September 10.

Harford argues “a true kakonomy is collusive, a tacit agreement to be mediocre at someone else’s expense …Once a kakocracy has been established, it is likely to endure: recruiters will be careful not to hire anyone who might not only rock the boat but also repair the leaks and fix the outboard motor.” 

If as a regulator, at the huge cost of distorting the allocation of credit to the real economy, you introduced risk weighted capital requirements for banks to make these safe, one could assume you would be able to answer the following question: When and where did the last bank crisis resulting from excessive exposures to something believed ex ante as risky occur?

So, if the Basel Committee the Financial Stability Board and all those other involved with bank regulations like the Fed, BoE, ECB, IMF, FDIC and similar can’t answer that question, would it be wrong of me Sir to suspect they all constitute a regulatory kakocracy?

Sir, if you yourself have steadfastly refused to listen and voice my arguments on this issue, perhaps so as not wanted to be seen as rocking the boat, would it also be wrong of me to believe you could belong to that same kakocracy?

Is a bank regulation kakocracy dangerous? You bet!

PS. Of course I do not base my suspicions on just one unanswered question.

PS. How resilient is the bank regulation kakocracy? If it is as willing to go to any extreme measures to defend its kakonomics, as the current Venezuela Chavez/Maduro government does, then we’re in serious trouble.

@PerKurowski ©

FDIC’s Thomas Hoenig is miscast in his current role. Standing up for “The Risky” he would achieve much more

Sir, I refer to: “Corporate person in the news: Thomas Hoenig: A US ‘sentinel on the front lines of the banking system’” April 16.

It states: “In 2010 Hoenig cast eight consecutive dissenting votes against the easy money policies of “quantitative easing”, arguing that they could pave the way for another crisis.”

That to me sounds like a man of character that would do much better if representing the totally unrepresented “risky” bank borrowers; like the SMEs and entrepreneurs.

If he did that, it would be easier for him to understand how absurd it is allowing banks to hold laughingly little capital against some assets, only because these have been perceived, decreed or concocted as safe. Representing The Risky he would be able to argue: “We have never ever caused a major bank crisis. That has been entirely the doings of those ex ante erroneously perceived as safe”

If he did that he would have understood that the strongest argument for banks holding more capital, is the discrimination the little capital required when lending to The Safe causes against The Risky’s access to bank credit.

And had he been able to get rid of the minimalistic capital requirements for the safe assets then, as a big bonus, he would have helped to get rid of the most important growth hormone for the too-big-to-fail banks.

And many, especially the young, would love him. By combating that credit risk aversion so anathema to the Home of the Brave and that is diminishing its economy, he would have helped to restore that risk taking that made America great… and so help create a new generation of jobs.

@PerKurowski ©

Why does not FT, “without fear”, debate the distortions the credit risk weighted capital requirements for banks cause?

Sir, Martin Wolf writes that if that if “hysteresis” — the impact of past experience on subsequent performances” is the cause for the economy failing to recover its “Possible causes [could] include: the effect of prolonged joblessness on employability; slowdowns in investment; declines in the capacity of the financial sector to support innovation; and a pervasive loss of animal spirits” “In the long shadow of the Great Recession” November 11.

For more than a decade I have tried to explain for Mr. Wolf that, if you allow banks to hold less capital against assets that ex ante are perceived as safe than against assets perceived as risky, you allow banks to make higher expected risk adjusted returns on equity on safe assets than on risky, and that of course will decline the willingness of the financial sector to support innovation and erodes the animal spirit. When banks make the good returns on equity, on for instance financing houses, why on earth should they go an finance what requires them to hold more capital and is therefore harder to achieve good ROEs for?

But Martin Wolf, and FT, has never wanted to accept that as a serious source of distortion in the allocation of bank credit. I have never understood why. I dare him, or FT, or any bank regulator for that matter, to a public debate of that issue… come on, show us some of the “without fear”

Thomas Hoenig the Vice Chairman of FDIC has recently said: “Using simple leverage measures instead of risk-based capital measures eliminates relying on the best guesses of financial regulators to guide decisions.” I pray he is able to convince his colleagues of that. The world has had more than enough of that reverse mortgage regulators imposed and that makes banks finance more the safer past than the riskier future.

When I think of those millions of young people who will never get a chance of jobs that help them fulfill dreams, thanks to these hubristic and outright incapable regulators, I get so sad and mad.

PS. Here is a letter that Washington Post published today.

@PerKurowski ©

Failed bank regulators, Mario Draghi, FSB, should not be given a chance, ECB, to cover up for their mistakes, Greece

Sir, Ferdinando Giugliano, Sam Fleming and Claire Jones write: “Mr Draghi is adamant that rules, not politics, have dictated its approach to Greece and other member states.” “Peak Independence?” November 9.

Thomas Hoenig’s the vice chairman of FDIC in a speech delivered on November 5 stated: “Some sources of risk undoubtedly have been fed by current regulations designed to direct banks’ activities in accordance with regulators’ views. For example, banks levered up on sovereign debt of nations such as Greece due to the zero risk-weighting given by “risk-based” rules.”

Clearly FDIC’s vice chairman agrees with what I have been saying for years, namely that it was the Basel Committee, and their associates, who did Greece in.

Mario Draghi the now President of the European Central Bank and the former chairman of the Financial Stability Board, should never have been placed in a position where he could try to cover up for his participation in the mistakes that brought Greece down.

As is the fatal credit risk weighted capital requirements for banks still conspire against all Greek SMEs and entrepreneurs having fair access to bank credit, in order to help their land crawl out of the hole its in.

PS. When I think about all those “risky” who because of regulators have not had fair access to bank credit in order to try to create the new jobs the new generation need… I get so… sad/mad

@PerKurowski ©

Stimulus, stimulus and more stimulus? Lawrence Summers, FT, IMF, can’t you see the economy has been made frigid?

The world has been given fiscal deficits, massive liquidity injections with the QEs, and extraordinary low rates… and all we get is a blah economic response. I know why, but most decision makers (including journalists) do not. That is because as Lawrence Summers explains the “policymakers… ignore adverse market signals [that] are inconsistent with their preconceptions”. “FT Big Read: Global Economy: The case for expansion”. October 8.

So here is the why… for the umpteenth time:

Bank regulators, Basel Committee, FSB, Fed, IMF, FDIC and others, by imposing as the pillar of their regulations loony portfolio invariant credit-risk weighted capital requirements, gave banks a risk-taking antiaphrodisiac, meaning an ingredient that kills the libido, the opposite effect caused by Viagra or Cialis. And it is not that banks needed it; they were already quite adverse to ex ante perceived credit risks. Ask Mark Twain.

And boy have the adverse market signals been ignored. All assets that caused the crisis were, as is usual with bank crises, those that were perceived or declared safe, like AAA rated securities and loans to sovereigns like Greece, and that banks, in this case, on top of it all, were allowed to hold against basically no capital at all. And having banks been given the incentives to go to safe havens by the risk adverse regulators, experts now even call it “excessive risk-taking” when, as a result, banks ended up in dangerously overpopulated safe havens.

And all those “risky” bays where SMEs and entrepreneurs reside, and which could provide much growth, they are left, equally dangerous, highly unexplored. When have you seen a stress test of a bank’s balance sheet that has included looking at what should have been on it?

So No! Professor Summers… and you all! Before giving Lawre economy more stimulus first rid banks of this regulatory antiaphrodisiac… and, thereafter, give them perhaps even some aphrodisiac in order to increase their willingness to take risks on projects that can help the sustainability of planet earth or the creation of the jobs our children and grandchildren will need.

@PerKurowski ©  J

Without the endorsement by regulators, banks would never have leveraged their equity 60 times to 1 with any asset.

Sir, Gary Silverman writes: “exempting the derivatives known as credit default swaps from more rigorous federal regulation…[was] one of the biggest mistake leading to the financial crisis”, “Why it is wrong to forget Lehman’s fall” September 20.

That is not so. Again, for the umpteenth time, I will explain prime cause of the financial crisis, namely the capital requirements for banks, and this by using the examples of Lehman Brothers, AIG and Greece.

The regulators in June 2004, with Basel II, decided that against AAA rated private sector assets, and against any sovereign rated as Greece was until November 2009, banks needed to hold only 1.6 percent in capital, meaning banks could leverage their equity with those assets over 60 times to 1. In comparison, when holding “risky” assets like loans to entrepreneurs and SMEs, banks were only allowed to leverage 12 times to 1. 

On April 28, 2004 the SEC decided that what was good for the Basel Committee was good enough for them, and so allowed Lehman to leverage over 60 times to 1 with AAA rated securities guaranteed with mortgages to the subprime sector… Since Europe were allowing their banks to do the same… the demand for these AAA securities became so huge that it overpowered all the quality controls in their manufacturing and packaging process… and Bang!

If AAA rated AIG guaranteed an asset, banks could also dramatically reduce the capital they needed to hold against that assets, and this overwhelmed AIG’s capacity to resist selling “very profitable” loan default guarantees… and Bang!

And Greece was of coursed offered loans in such amounts, and in such generous terms, so that its governments could not resist the temptations… and Bang!

As can be seen the above has nothing to do with deregulation, or with exempting anything from rigorous federal regulation, and all to do with imposing extremely bad and distorting regulations. On their own, and without the direct endorsement of regulators, banks would never ever have dreamt of leveraging their equity 60 times or more, with any asset… no matter how safe it looked.

If we are not going to spell out the real reasons why Lehman Brothers fell, then we better all forget Lehman’s fall.

PS. Here are 7 questions US Congressmen and Governors should ask bank regulators.

@PerKurowski

Sir FT, who is more likely to engage in predatory bank regulations, men or women?

Sir, I have some questions to you in reference to Brooke Masters’ “Women regulate banks run by men” in Your FT Special Report on Women in Business of September 15.

An audit report from the office of inspector general of the FDIC broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers”. Since current risk-weighted capital requirements for banks cause additional discrimination against borrowers deemed as risky, this could also be deemed as predatory regulations.

So Sir, who do you believe is more likely to engage in such regulatory deviances, men or women?

Who is more likely to understand that those financial excesses that can endanger banks is not built with what is perceived as risky but what is erroneously perceived as safe, men or women?

Who is more likely to understand that the cost of introducing such risk-adverse regulations that cuts off bank credit to SMEs and entrepreneurs will be paid by future generations, men or women?

Who is more likely to understand that this sort of discrimination can only increase whatever inequalities exist, men or women?

And when finally understanding how stupid these current Basel Committee regulations are, who is most likely to say “sorry”, and then rectify, men or women?

Sir, just to make it clear, I do not hold any clear opinions in this matter… I am just asking about yours... do you dare giving it? 

@PerKurowski

Nonsense! Why should ECB worry about banks' risk models being right, when its problem is when these are wrong?

Sir, I refer to Laura Noonan’s “ECB doubles the time needed for ‘intrusive’ review into banks’ complicated risk models”, August 18.

All those studies are utter nonsense. Let us suppose banks’ risk models work well. Would ECB have any problem with that? No! Its only problem is when those risk models do not function. And, so if you are going to ask banks to hold capital, it is precisely against that or any other unexpected risk… and frankly, who can evaluate those risks?

Noonan writes: “various studies have found widespread differences in banks’ Risk Weighted Assets models… The 123 banks together have more than 7,000 internal models”. Though all those models are most certainly used to justify lower capital needs of banks, I still find that slightly comforting… since, this way, there are less risk these could all be wrong in the same way.

Because when I read: “Harmonising supervisor’s approaches — including to risk models — was a priority, said the ECB.”, that scares me even more, because the possibility of introducing a fatal not diversifiable systemic risk is much increased. 

In 2003, as an Executive Director of the World Bank, with respect to Basel Committee regulations I warned: "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.”

The absolute least we must require of ECB is that all the consultants who would be working at this, and who at the end of the day are paid by taxpayers, put up their conclusions on the web, so that we can really shame them if they get it wrong. (Or shoot them if they get it wrong… since as a consequence much people will most likely suffer… and even die).

In my mind, and pardon the vulgarity, with these studies ECB is just trying to cover its behind… at taxpayers’ expense.

I dare ECB to allow me, on a pro-bono basis, to formally record my complete criticism of the pillar of current bank regulations, namely the risk-weighted capital requirements for banks.

ECB, IMF, Basel Committee, FSB, Fed, FDIC, Systemic Risk Council, anyone involved, for the umpteenth time I warn you: One thing is a simple fixed capital requirement on all bank assets, which allows the markets to figure out and manage the risks as best as it can. Something entirely different is many, few, or even one single model that sets the risk-weights that determine the capital requirements of banks. That can only confound the markets making it impossible for anyone to better estimate the real risks… making it more possible for the last safe haven to become overpopulated, and us dying suffocated there for lack of oxygen.

Please regulators… you are playing around with extremely dangerous explosive material.

In 1999 in an Op-ED I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

In 2008 we already saw one AAA-rated bomb explode… and we sure do not need more of those. 

PS. Come to think about it. This ECB research project sound about the most useless navel gazing project I have ever heard of. A risk model, if it is worth anything, must be very dynamic, meaning the one you researched like an hour ago, could perhaps have very little to do with the one being used in this minute. Or, will the banks now require ECB’s or Basel Committee's permission to change the model they use?

PS. On the other hand ECB’s research project formally indicts the Basel Committee and FSB as being clueless about what they are doing.

Just one more thing!

So ECB, during 4 years you intend to contract many expensive consultants to check 7,000 different models that determine the risks weighted assets of banks, in order to determine the risk for banks.

So ECB: How many consultants will be checking the risks all these risk-weighted asset models imply in terms of possible bad allocation of bank credit to the economy? 

@PerKurowski

EDTF beware; disclosure requirements for banks can also be used as camouflaging material.

Sir, Oliver Ralph writes: “Maybe one day banks may be trustworthy enough not to have publish annual reports that are hundreds of pages long”, “Excessive disclosure by banks eludes comprehension” June 1.

Indeed but it is clear that publishing annual reports that are hundreds of pages long does not make banks more trustworthy either. One-way to concealed bad behavior, is to bury it under hundreds of pages of mumbo jumbo.

Ralph refers also to the Enhanced Disclosure Task Force’s (EDTF) “recommendation 7, which asks the banks to describe risks in their business models.” Would that cause banks to prepare their own homemade list of weights they assign to the risks in their business? That could shed some light on what risks the banks are not considering in their business model… but frankly, mostly it seems like generating profitable employment opportunities for bad and good fiction authors.

And I set all these efforts against the background of the regulators and the banks having colluded in producing that masterpiece of financial disinformation, which is the leverage that in the numerator does not use assets but risk-weighted assets instead.

Few days ago, a leading American newspaper, citing another leading American newspaper in its editorial expressed “banks are significant safer than they were prior to the 2008 financial panic, with an average of $13 in capital for every $100 in assets for member banks of the Federal Deposit Insurance Corp”. That is false! It should have stated for every $100 in risk-weighted assets; and it should have reported the real undistorted leverage too.

Since the risk weighing not only distorts information but also the allocation of bank credit to the real economy, something that is even more dangerous, the EDTF should start by clearing this out with the Basel Committee, before allowing banks more mumbo-jumbo material under which to hide.

The most incapable and failed risk-manager in history, insists on helping banks to manage their risks.

Sir, Caroline Binham and Lindsay Fortado report that US regulators now include qualitative assessments of banks’ risk-management, “Banks still struggling with finance ethics” May 15.

What a laugh… how sad. If ever there have been incapable and failed risk managers, those are the current bank regulators. Here follows but some illustrations of it.

First, they set the equity requirements for banks based on the perceived risks of bank assets, more-risk-more-equity and less risk less equity, as if that has any real bearing on the risk of a bank. The risk of a bank depends on how banks manage the risk of their assets. And, if push comes to shove, since all major bank crises have been caused by excessive bank exposure to what was ex ante perceived as “safe”, the opposite requirement, less-risk-more-equity, would have been more appropriate.

Then they also entirely ignored the risk that their regulations would distort the allocation of bank credit in to the real economy, in such a way it would weaken it… and that nothing is as dangerous to banks as a weak economy.

Sir, frankly, had there been no regulators or bank regulations how many European banks do you think would have been allowed to leverage 20 to 50 times or more their equity? Does not zero sound like a good guess?

In 1999 in an Op-Ed I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of our banks”.

And we still allow these clearly failed bank regulators to play Gods. Well shame on us!

@PerKurowski

Interest rates must go up… but that must also be compensated eliminating the distortions of bank regulations.

Sir I refer to Sam Fleming’s “Fed loses ‘patience’ and opens way to first rate rise in a decade” March 19. All the hullaballoo, by so many actors, around the Fed’s intentions, as if it was all up to the Fed to make the economy work, is just mind-blowing. 

I have no doubt interest rates should be increased, considerably, because rates lower than what the authorities are targeting the inflation rate, in your face, isn’t natural, in any financial market.

But, in order for that not to cause excessive recessionary impact, absolutely all the regulatory discrimination against the fair access of “the risky” to bank credit needs to be eliminated.

Please regulators, let the SMEs, the entrepreneurs, the start-ups ride to the rescue of our real economy, before its too late... these "risky" borrowers never ever caused a major bank crisis... as bankers are more than enough scared of their credit risk. 

How? There are different options… here is a link to one I suggested for Europe.

@PerKurowski

Bank regulators caused lenders to also argue borrowers’ creditworthiness. Not so smart!

Sir I refer to Frank Partnoy’ “The Fed’s magic tricks will not make risk disappear” March 5.

In it Partnoy to that “complex rules create incentives for banks to… hide risks”, and he is perhaps more right than he knows.

For instance, what did we have before Basel Committee´s credit risk weighted equity requirements? We hade the banks interested in arguing the credit risk of the borrowers, so to be able to charge them higher interest rates; and the borrowers interested in proving they were very creditworthy safe, so to get larger loans at lower rates.

This of course created a certain tension that could only benefit a regulator… and helped foster an efficient allocation of bank credit.

What do we have now? We now have bankers and borrowers on the same side. Now the banker also wants to convince the regulator that the borrower is very creditworthy, so as to be able to hold less equity when lending to it, and thereby generate higher risk-adjusted returns on its equity. That cannot be helpful for a regulator, and can only lead to an inefficient allocation of bank credit. Not so smart!

The most extreme example of the previous is the alliance between banks and sovereigns. That one is based on: “I the sovereign lend you the bank my full support; and in return you the bank lend me the sovereign a lot of money; and to facilitate all that we both assume that I am an infallible sovereign, and represent no credit risk whatsoever, and so therefore, you banker, need to hold no equity when lending to me.

So Sir, when it comes to gaming regulations, the regulators, who work for governments, they also know how to game regulations, in order to take care of themselves, by taking care of their bosses’ wishes.

PS. How do you fire a regulatory mandarin who sucks up to his boss so much that he defines him to be an infallible sovereign?

On bank regulations why can’t we get to the heart of its problems? Why can’t we keep political agendas out of it?

Sir, I refer to Edward Luce’s “Too big to resist: Wall Street’s come back” December 14.

Anyone who with an open mind reads Daniel Kahneman’s “Thinking, Fast and Slow” 2011, or this years “World Development Report 2015: Mind, Society, and Behavior” issued by the World Bank, should be able to understand the following with respect to current bank regulations:

Regulators (and ours) automatic decision-making makes us believe that safe is safe and risky is risky; while a more deliberative decision-making would have made us understand that in reality very safe could be very risky, and very risky very safe.

And so when so many now scream bloody murder about the influence of big banks in the US congress, because these managed to convince legislators to allow “banks to resume derivative-trading from their taxpayer insured arm”, they posses very little real evidence of what that really means… except, automatically, for the fact that it all sounds so dangerously sophisticated.

No, if there is something we citizens must ask our congressmen to resist, that is the besserwisser bank regulators who, with such incredible hubris, thought themselves capable of being risk-managers for the world, and decided to impose portfolio invariant credit risk weighted capital requirements for banks.

These regulations distorted all common sense out of credit allocation, and cause the banks to expose themselves dangerously much to what is perceived as “absolutely safe”, while exposing themselves dangerously little for the needs of our economy to what is supposedly “risky”, like lending to small businesses and entrepreneurs.

If we, based on what caused the current crisis should prohibit banks to do, it would have very little to do with derivatives, and all to do with investing in AAA rated securities, lending to real estate sector (like in Spain) or lending to “infallible sovereigns” like Greece.

Does this mean for instance that I do not agree with FDIC’s Thomas Hoenig’s objection to US Congress suspending Section 716 of Dodd-Frank? Of course not! But, before starting to scratch the regulatory surface, something which could create false illusions of safety, or even make it all much riskier… we need to get to the heart of what is truly wrong with the current regulations… Sir, enough of distractions!

And also enough of so many trying to make a political agenda and election issue out of bank regulations… as usual it would be our poor and unemployed or under employed youth who most would pay for that.

The IMF can do a lot for the world, by just denouncing the mistakes of their bank regulation colleagues.

Sir you argue “The world economy is not so much suffering from a global malaise as a host of local ailments…[but that] Sadly, the IMF can do little about that”, “Bleak words and difficult homework from the IMF” October 6.

On the contrary, the IMF can do a lot! It can for instance explain to the world that credit risk weighted capital requirements for banks do not make any sense, as they discriminate against the access to bank credit of those the economy most need to have access to it, “the risky”, the medium and small businesses, entrepreneurs and start ups.

PS. http://subprimeregulations.blogspot.fr/2014/10/comments-on-imf-global-financial.html

SEC, FDIC Worry less about bank´s living wills and more about how banks live!

Sir, Lex reports on the Fed and FDIC wanting “Bank’s living wills”, August 9.

Not only do I find bank living wills somewhat preposterous, as it would be up to the inheritors to decide what to do, not to those administrators of a bank that when a collapse might occur might have de facto been proven very bad.

And, what if the SEC and FDIC do not like the wills… will they pressure the banks so much that they might collapse because of that?

No, much more important than what happens to banks when they are gone is what they do when they are alive and kicking… and now, thanks in much to the distortions created by the regulators with their risk-based capital requirements, the banks are not allocating credit efficiently. And… excuse me, that´s a far more serious problem.

Are not living wills for banks’ just a nonsensical show to show off that something is being done?

Sir, Gina Chon and Tom Braithwaite report that Fed and FDIC demand better unwinding plans and are split over possible penalties “US rejects bank’s living wills” August 6.

And FT defines on its site those living wills as “Detailed plans that would enable banks to stipulate in advance how they would raise funds in a crisis and how their operations could be dismantled after a collapse”.

Frankly is not the whole concept of living wills for banks’ designed by the bankers themselves after a collapse just a show to show that the regulators are doing something?

I mean if I was a regulator, and wanted to go down that route, I would at least have a third party to look into what could be done in the case a bank passed away, and now and again confront the managers of the bank with those plans, in order to hear their opinions.

For instance there is a world of difference between a living will where the dead are going to be the own executors of the will, and one in which the dead will be dead and others will take care of the embalming.

And talking about that is it not the Fed or the FDIC that should state what contingent plan they really want… one where the bank is placed on artificial survival mode, and for how long, or one where it is sold in one piece, by pieces or even cremated?

To me it would seem that the Fed and FDIC need to give much clearer instructions about what they want those bankers currently working under the premise the bank will live on forever to do… as I can very much understand them being utterly confused.

OCC, before asking banks to raise their standards of risk management, should stop regulators' distorting parallel risk managing

Sir, Tom Braithwaite and Camilla Hall report that “The Office of the Comptroller of the Currency said it plan to raise the standards it expected for risk management at the largest banks”. “Goldman and City wreck Wall St hopes for escaping doldrums”, January 17.

Before doing that OCC should first consider the distortions the risk-weighted capital requirements for banks cause.

As OCC should know, bankers clear sufficiently well for perceived risks, by means of interest rates, size of exposures and contract terms. But current capital requirements those which the regulators order banks to hold primarily as a buffer against some “unexpected losses”, are based on the same perceptions of “expected losses”.

And so the system now considers twice the “expected losses” and none the “unexpected losses”. And as a result, the regulators have introduced a distortion that makes any high standard risk management that serves a societal purpose absolutely impossible.

And this is especially wrong when the capital requirements are portfolio invariant, because that ignores the benefits of diversification for what is perceived as “risky”, and the dangers of excessive concentration for what is perceived as “safe”.

OCC should understand that it has no problem if banks manage their risks well, only if they don’t, and so it makes absolutely no sense to base the capital requirements for banks, on the same perceptions of risk used by the banks.

OCC should understand that those who most represent “no-expected-losses” are in fact those most liable to produce the largest and most dangerous unexpected losses.

OCC, do the world a favor, throw out the risk-weights a simple straight leverage ratio and allow the bank to be banks again… not credit distributors in accordance with what the risk-weighting which produces different capital requirement tells them.

Sincerely it surprises me that, in the “home of the brave”, with a market that prides itself to be free and to give equal opportunities, OCC allows for capital requirements which allow banks to earn much higher risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky.

The implied discrimination does not seem to be compatible with the Equal Credit Opportunity Act (Regulation B).