About Italy, there are serious questions that FT, and others, should not silence.

Sir, I refer to “Draghi plots €221bn rebuilding of Italy’s recession ravaged economy” Miles Johnson and Sam Fleming, and to “Europe’s future hinges on Italy’s recovery fund reforms”, Andrea Lorenzo Capusella, FT April 22, and to so many other articles that touch upon the issue of Italy’s future, in order to ask some direct questions.

Do you think Italy’s chances of a bright future lies more in the hands of Italy’s government and its bureaucrats, than in hands of e.g., Italian small businesses and entrepreneurs?

I ask this because, with current risk weighted bank capital requirements, regulators, like Mario Draghi a former chairman of the Financial Stability Board, arguably arguing Italy’s government represents less credit risk, do de facto also state it is more worthy of credit. I firmly reject such a notion.

Yes, Italy clearly shows a stagnant productivity, but could that be improved by in any way increasing its government revenues?

Italy, before Covid-19, showed figures around 150% of public debt to GDP and government spending of close to 50% of GDP. I am among the last to condone tax evasion… but if Italian had paid all their taxes… would its government represent a lower share of GDP spending, and do you believe its debt to GDP would be lower?

One final question: Sir, given how Italy is governed, excluding from it any illegal activities such as drug trafficking, where do you think it would be without its shadow eeconomy, its economia sommersa? A lot better? Hmm!

PS. As you know (but seemingly turn a blind eye to), Italy’s debt, even though it cannot print euros on its own, has, independent of credit ratings, been assigned by EU regulators, a 0% risk weight.

If our pied-à-terre falls into the hands of a Climate Stability Board, we’re toast.

Climate change dangers require:

Spending fighting it, trying to hinder it 

Spending adapting to it, to avoid its worst consequences

Saving, in order to be able to mitigate its worst effects

How should we budget for that to best avoid ending up toast?

Sir, let me begin with a very brief take on the last three decades of bank regulations.

“A ship in harbor is safe, but that is not what ships are for” John A. Shedd. 

And neither are the banks, but that was ignored.

Before Basel Committee’s risk weighted bank capital requirements, everyone, whether perceived as a risky or as a safe credit, paid risk adjusted interest rates. After these were introduced, bank credit is allocated based on risk adjusted returns on equity.

The “safe”, meaning e.g., governments (bureaucrats/politicians), assets with high credit ratings and residential mortgages, pay relatively lower rates, because banks can leverage their capital/equity many times more with the net margin they provide. The “risky”, meaning e.g., small businesses and entrepreneurs, must pay comparatively higher rates, in order to compensate for the fact that banks must leverage less capital/equity with their net margins.

That has caused banks to overpopulate the safe harbors of the past and present, and to explore the riskier oceans much less than the future of our children and grandchildren needed.

Of course, all for nothing, since those excessive exposures that can become dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

And since current bank capital requirements are mostly based on expected credit risks banks should clear on their own; not on misperceived credit risks, 2008’s AAA MBS, or the unexpected, COVID-19, banks now stand there naked, though few dares to call out the Emperor on that.

So, how did we end up with all this? There are many reasons but, if I must pick one, that would be, “mutual admiration clubs”.

Sir, in November 2004 you published a letter in which I wrote: “The Basel Committee is just a mutual admiration club of firefighters seeking to avoid bank crisis at any cost - even at the cost of growth. Unwittingly it controls the capital flows in the world, and I wonder when will it realize the damage they’re doing, by favoring so much bank lending to the public sector.”

In “A new dawn for globalization” FT, Life & Arts, March 20, Mark Carney is allowed to write: “As chairs of the Financial Stability Board, Mario Draghi and I were at the forefront of efforts to reform the global financial system. Our aim was a system that once again valued the future, financed innovation and was prepared to take action in the event of failure. As its performance during the Covid-19 crisis has demonstrated, although far from perfect, the financial system is now safer, simpler and fairer”

If that’s not spoken as a member of a club that will not call him out on anything, what is?

And now Carney wants “a set of networks that can turn the existential threat of climate change into the greatest commercial opportunity of our time… and the Institute of International Finance’s Taskforce on Scaling Voluntary Carbon Markets is developing a large-scale, high-integrity carbon offset market.”

A new powerful mutual admiration club, backed enthusiastically by all climate-change fight profiteers. Scary indeed!

PS. As I read it, Pope Francis, when nailing his “Encyclical Letter LAUDATO SI’” to the web, denounced carbon credits to be just like the indulgences Martin Luther protested, when he nailed his “95 Thesis” to the church door.

PS. Why do you not ask Mark Carney to comment on Chris Watling’s “Now is the time to devise a new monetary order”, FT, March 19.

@PerKurowski

Should not the private marketing of $31tn sustainability investments at least get the same scrutiny as the Green New Deal?

Sir, Richard Henderson writes about a “$31tn push to … address the world’s ills — from climate change and child labor to the dearth of female executives.” “Europe leads $31tn charge into sustainable investing” June 1.

What? An amount about 40% of the world’s GDP, about 80% of Europe’s and the US’s GDP, to be invested, mostly by some few, into projects that might not have any chance to recover the investment, or that could produce a much lower than expected contribution to the solving of the problems than offered. It sounds just like an Alexandria Ocasio Cortez’ Green New Deal.

The Financial Stability Board has a Task Force on Climate-related Financial Disclosures (TCFD) because: “The Disclosure of climate-related financial information is a prerequisite for financial firms not only to manage and price climate risks appropriately but also, if they wish, to take lending, investment or insurance underwriting decisions based on their view of transition scenarios.”

As I see it FSB needs, even more than the TCFD, a task force to consider the risks of all these help-to-the world investments; at least to make sure that the final result is not that of mostly having enriched the intermediaries.

Sir, I do not take the threat to climate change lightly but, if we are going to be able to do something important about it, we must keep an eye on the spending. Otherwise the consequences could be even worse… like if not being able to prevent global warming then not either being able to afford mitigating some of its consequences.

And before $ trillions are poured into good intention but adventurous projects, lets make sure the market signal are working at full intensity, for instance by means of a very high revenue neutral carbon tax, that is shared out equally to all citizens.

Why does the private marketing of $31tn in sustainability investments not get the same scrutiny as the Green New Deal?

http://ourpiedaterre.blogspot.com/2017/04/solutions-that-share-out-all-benefits.html

@PerKurowski

A Neo-Inquisition is at work protecting mutual admiration clubs, like the Basel Committee for Banking Supervision

Sir, Ian Goldin writes “Today, the increasing depth of knowledge in any field means that greater specialisation is needed to master ideas. Yet this stifles creativity and the ability to grapple with real-world problems, whose messy complexity has less and less in common with the increasingly fragmented disciplines and professional specialisation” “Da Vinci code: what the tech age can learn from Leonardo” April 29.

Indeed, and that is most clearly evidenced by expert specialized regulators coming up, within the walls of a mutual admiration club, with risk weighted capital requirements for banks, which are based, not on the dangers bank assets could pose to the banking system, but simply on their ex ante perceived credit risk… as if bankers did not perceive these… as if bankers loved taking risks… as if not all major bank crisis had resulted from something ex ante perceived as safe turning up ex post as something very risky. 

Goldin rightly opines: “For progress to prevail, evidence-based, innovative and reasoned thinking must triumph. Genius thrived in the Renaissance because of the supportive ecosystem that aided the creation and dissemination of knowledge — which then was crushed by the fearful inquisitions. Today, tolerance and evidence-based argument are again under threat.”

Indeed those bank regulations, which blatantly failed in 1988, when AAA rating turned out wrong, and which are building up dangerous exposures to 0% risk weighted sovereigns and to 15%-35% residential mortgages, are still not discussed.

In response to a public request of comments on SMS financing, I sent a letter to the Financial Stability Board. It began this way:

“I have not found sufficient strength to sit down and formally write up my comments, because I feel I would just be like a heliocentric Galileo writing to a geocentric Inquisition.

The Basel Committee’s standardized risk weights are based on the presumption that what is ex ante perceived as risky is more dangerous to our bank system.

And I hold a totally contrarian opinion. I believe that what is perceived a safe when placed on banks balance sheets to be much more dangerous to our bank system ex post than what is perceived ex ante as risky; and this especially so if those “safe” assets go hand in hand with lower capital requirements, meaning higher leverages, meaning higher risk adjusted returns on equity for what is perceived safe than for what is perceived as risky.”

Sir, that letter managed to get nailed on FSB’s web-doors and I’m waiting to see what will be its destiny.

PS. In these days when the filthy rich are so much abhorred, there’s room to ask whether Leonardo da Vinci’s Salvator Mundi and Mona Lisa would ever have been painted if not commissioned by some filthy rich.

PS. In FT November 2004: “Basel is just mutual admiration club of firefighters seeking to avoid crisis”

@PerKurowski

“Any populism yours can do, mine can do better; mine can do populism better than yours” “No he can’t!” “Yes he can, yes he can, yes he can!!!!”

Sir, Simon Kuper ends his “Secrets from the populist playbook” March 16, with “Some new politicians, notably the new Democrat congresswoman Alexandria Ocasio-Cortez, can rival Trump for engagement. To some degree, we are all populists now.” “Secrets from the populist playbook”, March 16.

Indeed but the populists must also be measured with respect to the success they have when selling their populism.

For instance, our current bank regulators must be some of the most successful populists ever. Just think how they have managed to convince the world (most or all in FT included) that by imposing risk weighted capital requirements for banks, they are reducing the risks for our bank system. With that they have distorted the allocation of bank credit all over the world, weakening the economies and increasing the dangers of a systemic meltdown of our banks. 

Sir, I am from Venezuela, and so unfortunately I know too much about populists, but, when compared to the Basel Committee on Banking Supervision’s and the Financial Stability Board’s populism, Hugo Chavez was just a quite gifted amateur.

@PerKurowski

PS. My 2019 letter to the Financial Stability Board (FSB)

EU needs to find a president of the European Central Bank quite different from Mario Draghi… whatever it takes

Sir, you opine, “The most worthwhile tribute that European governments can make Mario Draghi, the president of the European Central Bank, is to find a successor who most closely replicates his attributes and has the best chance of continuing his success. There are few harder acts to follow in global policymaking than his. He has helped rewrite the central banking handbook, shepherding the euro through an existential threat from the sovereign debt crisis and the danger of a deflationary recession. “Next ECB chief should be in the Draghi mould” August 30. 

I disagree and believe that FT, at some point down the road, will have to eat up these words of praise for Draghi; who alsopreviously served as the Chairman of the Financial Stability Board from 2009 to 2011 and Governor of the Bank of Italy from 2005 to 2011.

Draghi, as a regulator, with the risk weighted capital requirements for banks was partt of the team that introduced a risk-aversion, which ignored all the valuable services banks provided, when acting as the societies’ designated risk-takers.

Draghi, as a regulator, ignoring conditional probabilities, supported risk weighted capital requirements for banks based on the perceived risk of assets and not based on how banks could manage those assets dependent on their own perceptions of risk. That distorted the allocation of credit, causing among other banks to fall over a precipice when chasing those AAA to AA rated securities they were allowed to leverage a mind-blowing 62.5 times with.

Draghi, as a regulator, was, is, a statist of first degree, for agreeing with risk weights of 0% for the sovereign and 100% for the citizen.

Draghi, as a European central banker, who must have known that the challenges the euro posed had not been taken care of, irresponsibly agreed when Greece was assigned a 0% risk weight, which caused its current tragedy.

What Draghi did in ECB, was just to act as the principal member of that kicking team that kicked the crisis-can down the road, willfully ignoring the fact that European grandchildren will suffer when that can begins to roll back on them.

Sir, in summary, the next ECB chief should know about the importance of risk taking, about conditional probabilities, should not be a statist, and should be able to refuse punishing a EU nation, like Greece, for the mistakes of EU authorities. 

So, whatever it takes, he should be very different from Draghi. I would hold that EU’s own chances of survival depends much on that. 

@PerKurowski

BoE’s FSB' Mark Carney should not be allowed to use Brexit cost estimates to distract us from the distortion of bank credit costs.

Sir, you write: Bank of England’s Mark Carney has come out with a “suggestion that average household incomes are £900 lower than they were expected to be before the Brexit referendum.” “A necessary statement of the obvious from Carney” May 26

But Carney is also chair of the Financial Stability Board, and he therefore belongs to those regulators who do not care one iota about distorting the allocation of bank credit to the real economy, since they are convinced banks will be safer with their risk weightedcapital requirements… all as if the health of the economy is not the most important pillar of a stable bank system.

First try to calculate how much more credit has been given to fairly unproductive but “safe” sectors, like housing, compared to with how much less credit has been given to potentially much more productive but “risky” ends, like loans to entrepreneurs. And then try to come up with a bill for that. Clearly that must have cost and keeps on costing the average household income inBritain, many multiples of £900; and the regulators are not in the least being held accountable for that.

But Sir, since FT has also steadfastly kept silent on the costs of misguided credit allocations, you might also share the same interest in distracting with Brexit 

@PerKurowski

Systemic risks in the financial sector keep growing. Yesterday risk weighted capital requirements and credit rating agencies. Today artificial intelligence

I refer to Izabella Kaminska’s discussion of a report published by FSB on the financial stability implications of artificial intelligence and machine learning in financial services. “When AI becomes too big to fail”, FT Alphaville, November 1 

1: “This warrants a societal discussion on the desired extent of risk sharing, how the algorithms are conceived, and which information are admissible.”

That is a discussion that should also have taken place before regulators, with their risk weighted capital requirements, created incentives for our banks, one societal prime risk-takers, to avoid all what is perceived as risky, like SMEs and entrepreneurs, and concentrate exclusively on what is perceived, decreed or concocted as safe. 

2:“Fintech and AI are being aggressively marketed as our best and only opportunity to diminish the concentrated power of the banks. The terms “new entrants”, “disruption”, “fragmentation” and “open access” form the foundations of the movement. And yet… none of these clever systems, if the FSB is to be believed, are necessarily clever enough to fend off the forces of consolidation that bring about systemic risks.”

What can I say except to repeat what I as an Executive Director of the World Bank opined when in 2003 I learned that the Basel Committee was going to put so much power in the hands of some few human fallible rating agencies… and now we are to switch into some, or one, hackable AI?

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.” 

“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.”

Monsieur Macron, more than a finance minister/ministry, Europe needs bank regulators who know what they’re doing.

Sir, Reza Moghadam lays out a proposal for a European finance minister/ministry that, though it “stops short of Mr Macron’s vision of fiscal union, with Europe-wide taxes and spending… focuses on the essential: a collective action mechanism for managing and stabilising economies in crisis.” “Macron is right — the Eurozone needs a finance minister” September 29.

Moghadam suggests the job description for that post should answer some key questions, and among these: “How can the risk of crises, and so fiscal payouts, be minimised? What would be the role of the minister in a crisis?”

The prime answer to the first question should be:

Getting rid of current risk weighted capital requirements for banks. These only guarantee that banks will hold the least capital, when a crisis, as usual, arises because of something that was ex-ante perceived as very safe turns out ex-post to be very risky.

The prime answer to the second question should be:

Make sure any stimulus, like QEs or low interest rates, flows freely so that the market has a chance to use it as efficiently as possible. This also requires getting rid of current risk weighted capital requirements for banks. These, by allowing banks to earn higher risk adjusted returns on equity on what is perceived safe than on what is perceived risky, seriously distorts the allocation of bank credit to the real economy.

Sir, in other words, much of what Europe could need from a finance minister, could be achieved by just firing the current inept bunch of bank regulators.

Basel II’s standardized risk weights of 150% for the below BB- rated and of 20% for the AAA rated, should be more than enough evidence on how little current regulators understand of banks and of finance.

Monsieur Macron, do you know bank regulators have decreed inégalité?

PS. Perhaps Monsieur Macron could ask his wife what has a better chance of causing those big bank exposures that can result in a major bank crisis, the ultra-safe AAAs, or the ultra-risky below BB-? I am sure Mme Macron would give him a more correct answer than what Mario Draghi would do; and this even though Draghi was the previous chairman of the Financial Stability Board and is now the chairman of the Group of Governors and Heads of Supervision the oversight body of the Basel Committee of Banking Supervision.

Perhaps Monsieur Macron should also ask Mme Macron what she thinks of 0% risk weights of sovereigns. Does she really think government bureaucrats know better than the private sector how to use bank credit efficiently? Reza Moghadam, who was previously at the IMF, has not expressed any sort of concern with that… but then again he is now the vice-chairman for sovereigns and official institutions at Morgan Stanley.

@PerKurowski

Free our economies from risk weighted bank capital requirements; foremost from the 0% risk-weighting of sovereigns

Sir, you write about the “US Federal Reserve and the European Central Bank, facing the relatively pleasant task of withdrawing stimulus after years of good economic growth.” “The Fed ponders the fractious politics of debt” August 25.

Sir, may I ask you, do you really think the economic growth we have seen could be qualified as good considering the immense stimulus given through QEs and low interests? If the growth had really been consistent with the amount of stimulus given we wouldn’t have these qualms about reducing central banks’ “swollen balance sheets”, would we?

And then you favour Janet Yellen and Mario Draghi with, “ECB and the Fed are fortunate in being headed by two competent policymakers”. I do not agree with your assessment. Both of them, when it comes to regulating banks, which is something they do, are simply clueless.

First: Basel II, for the purpose of capital requirements for banks, assigned a risk weight of 20% to what is rated AAA and one of 150% to what is rated below BB-. That clearly assumes that the ex ante perceptions about risks are not cleared for in any way, and that these would therefore be indicative of the ex post risks. That is plain stupid and those unable to understand that are not qualified to regulate our banks.

Second: Sovereign debts have been zero risk weighted while unrated citizens have been assigned a risk weight of 100%. That is unauthorized regulatory back door statism that subsidizes governments’ access to credit, and which is paid for by taxing, for instance SMEs and entrepreneurs, with in relative terms much less and much more expensive access to bank credit.

Third: Those who cannot understand that the risk-weighted capital requirements hinders the efficient allocation of credit to the real economy; and therefore its distortions wastes much if not all of any stimulus, should not have anything to do with QEs.

Fourth: Those who to the “swollen balance sheet built up by quantitative easing”, refuse to add the sovereign debt and the reserves held in central banks that are a direct function of preferential risk weighting, do not understand the magnitude of the difficulties we are facing.

Sir, day by day our banks, thanks to regulators, are dangerously overpopulating more and more whatever perceived, decreed or concocted safe havens there are. Equally dangerous for our real economies, they keep on underexploring the risky bays that could contain the real factors that could help us to a better future, or at least not a much worse one.

Sir, your steadfast silence on these regulatory failures seems to evidence complicity.

@PerKurowski

It is in our best interest to keep Yellen, Draghi and other failed regulators out of tackling financial instability

Sir, I refer to Sam Fleming’s and Claire Jones “Yellen to tackle financial stability at Jackson Hole” August 24. Is the title a Freudian slip? Does “tackle” not refer to a problem, such as financial instability?

I argue that since Yellen, as part of that bank regulatory brotherhood that with risk weighted capital requirements for banks helped to cause financial instability, is simply not capable enough to help out achieving financial stability.

The idea of requiring banks to hold less capital (equity) against what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential houses, than against what is perceived as risky, like SMEs and entrepreneurs, is absolutely cuckoo.

That means that when banks try to maximize their risk adjusted return on equity they can multiply (leverage) many times more the perceived net risk adjusted margins received from “the safe” than those from “the risky”. As a result clearly, sooner or later, the safe are going to get too much bank credit (causing financial instability) and the risky have, immediately, less access to it (causing a weakening of the real economy). 

Anyone who can as regulators did in Basel II, assign a 20% risk weight to what is AAA rated and to which therefore dangerously excessive exposures could be created, and 150% to what is made so innocuous to our banking systems by being rated below BB-, always reminds me of those in Monsters, Inc. who run scared of the children. I wish they stopped finding energy in the screams of SMEs and start using instead the laughters of these.

The report also includes a picture of some activists holding a “We need a people’s Fed”. Yes, we sure do! Assigning 0% risk weight to the sovereign and 100% to any unrated citizen is pure statist ideology driven discrimination in favor of government bureaucrats and against the people. But perhaps the activists depicted are not into that kind of arguments. 

Draghi and Yellen might discuss problems associated to ECB’s and Fed’s large exposures to sovereign that their QEs have caused. If they were honest about the size of the problem, they should in the same breath include all sovereign debts and excess reserves held by banks only because of a 0% risk weight. Sir, if that’s not financial instability in the making what is?

PS. Those in Monsters Inc. all finally figured it out. Our bank regulators in the Basel Committee and the Financial Stability Board have yet to do so, even 10 years after that crisis produced mostly by AAA rated securities backed by mortgages to the US subprime sector. and loans to sovereigns like Greece 😩

 

@PerKurowski

One day, Stanley Fischer, like most current central bankers and regulators, will ask himself, why did I not see that?

Sir, Sam Fleming writes: “Fischer worries about attacks by lawmakers on global regulatory bodies such as the Financial Stability Board, arguing that the rules it proposes are good for the world if everyone adopts them.” “Lunch with the FT Stanley Fischer ‘It’s dangerous and short-sighted’” August 19. Like Gershwin wrote it, “It ain’t necessarily so!”

In November 1999 in an Op-Ed in Venezuela 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 April 2003 as an Executive Director of the World Bank I argued that Board that "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."

And in January 2003, FT published a letter in which I stated: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

Sir, had regulators not introduced their risk weighted capital requirements for banks, made worse by the importance given to some few human fallible credit rating agencies, the 2007/08 crisis would not have happened; and the economy, net of automation and demographic factors, and considering the outlandish stimuli, would not be as stagnant as it is now.

PS. That Op-Ed I referred to above also included: “I recently heard that SEC was establishing higher capital requirements for stockbroker firms, arguing that “. . . the weak have to merge to remain. We have to get rid of the rotten apples so that we can renew the trust in the system.” As I read it, it establishes a very dangerous relationship between weak and rotten. In fact, the financially weakest stockbroker in the system could be providing the most honest services while the big ones, just because of their size, can also bring down the whole world. It has always surprised me how the financial regulatory authorities, while preaching the value of diversification, act in favor of concentration.”

Let me translate that into the current risk weightings. “It establishes a very dangerous relation between risk and the right to access credit. The “risky”, like SMEs, could be providing the most important additions to the real economy, while sovereigns and AAA rated, just because of their perceived “safety”, could bring the whole world down.”

@PerKurowski

ECB’s Mario Draghi’s star quality would evaporate had he to publicly answer some hard questions on bank regulations

Roger Blitz writes: “Mario Draghi, president of the European Central Bank, will be the star at the annual Jackson Hole symposium in Wyoming this year.” “Weak dollar remains centre stage” August 5.

Sir, if Mario Draghi, a former chair of the Financial Stability Board, and the current chair of the Group of Governors and Heads of Supervision (GHOS) of the Basel Committee, and therefore one of the most responsible for current bank regulations is the star of anything, that is only because he has never been made to fully answer some questions about current bank regulations in public, by his peers or by for instance FT’s journalist.

There are many many questions I could think of, but let me just indicate two:

First: Mr. Draghi. Do you not think that allowing banks to leverage more their equity with the net margins offered by those perceived safe than with those same margins when offered by those perceived risky; which means it is easier for banks to obtain higher returns on equity with “the safe” than with “the risky” does not distort the allocation of credit to the real economy?

If Draghi answers no, then there is nothing to do, as he would be evidencing he is clueless about finance on Main Street. If he answers yes then follow up with: Don’t you think this could be dangerous for the real economy and who authorized you and your colleagues to do so?

Second: Mr. Draghi, obviously current risk weighted capital requirements for banks, more perceived risk more capital, less risk less capital, indicates you the regulators believe that what is perceived as risky, is what is risky for the bank system. So, will you please tell us when there has ever been a bank crisis that has resulted from excessive exposures to what was perceived as risky when placed on the balance sheets of banks? As far as I gather from history all bank crisis, no exceptions, have been caused by unexpected events, criminal behavior or excessive exposures to what was perceived as safe when incorporated on banks’ balance sheet but that later, ex post, turned out to be very risky.

If Draghi answers yes, then he is deaf and has not heard the question. If he answers no, then ask him to explain why Basel II assigned a standard risk weight of 20% to what was AAA to AA rated and a 150% to what was rated below BB- and would therefore not be touched by bankers even with a ten feet pole.

Sir, Mario Draghi at ECB and others at the Fed with QEs and low interest rates, have just been kicking the 2008 crisis can down the road. The risk weighted capital requirements have caused that can to roll on the wrong roads. That is an act of terrorism against our economies.

@PerKurowski

Mme Lagarde. With regulations that distort the allocation of bank credit, any recovery is on shaky grounds.

Sir, I refer to Chris Giles’ “IMF chief warns of risks to recovery” July 6.

Of course, with regulations that distort the allocation of bank credit to the real economy, any recovery is on shaky grounds.

To help Mme Christine Lagarde of the International Monetary Fund understand the issue, better, I have drafted a short and polite letter she could send to her friends the regulators in the Basel Committee and the Financial Stability Board. Their answer, or their no answer, should reveal a lot. 

Dear regulator.

You set your risk-weighted capital requirements based on the ex ante perceived risks already considered by bankers when determining the size of the exposure and the risk premiums to charge. Could that not imply that perhaps the ex-ante perceived risks are excessively considered?

I often wonder if it would not be wiser of you and your colleagues to set these based on those risk not having been adequately perceived, or that bankers are not capable of manage the risks they perceive; or with an eye to somewhat unlikely but nevertheless potentially catastrophic events.

You and I know that one vital function we expect our banks to perform is to allocate credit efficiently to the real economy. Remembering that context, I wonder if the risk weighting you and your colleagues customarily make in your regulatory function is perniciously, if also unintentionally, distorting capital allocation -- by favoring the safer? past over the riskier? future?

Sincerely,

PS. If they do not answer Mme Lagarde could find a summary of some of the mistakes with risk weighting here.

@PerKurowski

Since the risks regulated for are not the right risks, meeting risk weighted bank capital requirements means little

Sir, Philip Stafford reports “Reforms put in place by the Group of 20 leading nations have successfully tackled the most pressing issues that contributed to the crisis, according to the annual report from the Financial Stability Board, an international group of policymakers and regulators.” “Financial reforms: Shadow banking tamed, argues global watchdog” July 4.

Nonsense! If all evidences are duly reviewed, what most caused the crisis was the risk weighted capital requirements for banks. These allowed banks to leverage immensely, and thereby earn very high expected risk adjusted returns on their equity, with what was perceived, decreed or concocted as safe, like financing houses, sovereigns like Greece or the AAA rated securities backed with mortgages to the subprime sector.

The regulators regulated as if they were bankers. As regulators they should look at the risk that the risks are not adequately perceived or managed, and at the possibility of unexpected events. 

And that stupid risk weighting has not been eliminated because of the introduction of a non-risk based leverage ratio; on the contrary as that LR pushes up the capital floor, it might squeeze even more those affected by the roof set by the risk-weighted portion.

And regulators have also introduced additional sources of distortions like the liquidity requirements, which also are based on simplifications about what is liquid and what not. 

Their test of the stresses a la mode, or the elaboration of wills that might affect the living, could also signify new sources of systemic risks.

No the regulators have done a lousy job, primarily because they all circled their wagons around the mistakes they committed.

And if they go on doing what their mutual admiration club’s groupthink tells them to do, let’s hope the shadow banking sector goes underground, so that regulators don’t get their dirty nannying fingers around it too.

PS. No wonder FSB's "safer", "simpler" and "fairer" financial system video, has the comments disabled.

PS. I need a co-author that writes well and knows something about banks and finance, to help me write a book based on more than 2.500 letters ignored by FT

World Bank, once again, the Basel bank regulations’ implicit risk aversion, attempts against any development.

Sir, Shawn Donnan writes: “In an interview, Paul Romer, World Bank chief economist, said the long-term effect of weak investment on developing economies was one of the main long-term challenges facing the global economy.” “World Bank warns on weak investment” June 5.

In October 2007, at the High-level Dialogue on Financing for Developing at the United Nations, in New York, I presented a document titled “Are the Basel bank regulations good for development?” It contained among many other the following paragraphs:

“It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

“The World Bank, as a development institution, should have played a much more counterbalancing role in this debate, but unfortunately it has been often silenced in the name of the need to "harmonize" with the IMF. Likewise, the Financial Stability Forum is also, by its sheer composition and mission, too closely related to the Basel bank regulations to provide for an independent perspective, much less represent the special needs of developing countries.”

“For the record, let us state that although we have made the above comments from the perspective of ‘finance for development,’ most of the criticism put forward is just as applicable to developed countries.”

“To conclude, we wish to insist that no society can survive by simply maximizing risk avoidance; future generations will pay dearly for this current run to safety.”

Unfortunately my arguments have gone nowhere. As is, the wagons circled by bank regulators to fend off any criticism, has been impenetrable to truths such as those implied in John A Shedd’s “A ship in harbor is safe, but that is not what ships are for”.

PS. 2002-2004, as an Executive Director of the World Bank I did what I could to silence those sirens singing that the risk weighted capital requirements would make our banks, and our economies, safer. I stood no chance. Basel’s siren’s song sounded much sweeter.

@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

FT establishment, accept that getting rid of a bank regulation that decrees inequality would also help the worst off

Sir, Chris Giles argues that Mark Carney did not live up to his own admonition last week about that the time has come for frank talk about the downsides of globalisation “Frank talk, not warm words, will help the worst off” December 15.

Indeed, Mark Carney, besides being the governor of the Bank of England, is the current chair of the Financial Stability Board, and so presumably well versed in bank regulations. Nonetheless Carney has refused to be frank about the fact that the current risk weighted capital requirements for banks, distorts horrendously the allocation of bank credit to the real economy, hurting growth and job creation; and all this for no purpose at all as major bank crises are never caused by excessive exposures to something ex ante perceived as risky. That regulation de facto decrees inequality.

But with respect to that FT also decided to ignore my soon 2.500 letters sent over the last decade on the subject of “subprime banking regulations”. One of these days, when all truth about the risk weighing really unravels; FT will need to be frank on its reasons for silencing a voice of criticism.

PS. Here are some simple questions that the “without fear” FT establishment has not dared to ask the bank regulation establishment. Or might it be that the “without favour” part of FT’s motto has its exceptions.

@PerKurowski

Mark Carney, as bank regulator, has no right to talk about an “unprecedented desire for safety”

Chris Giles writes: Mark Carney, governor of the Bank of England, talks about an “unprecedented desire for safety”. “Fed faces dilemma over how high rates should go” December 14.

Hah! Mark Carney is one of those regulators who set the capital requirements for banks based on ex ante perceived risks, and if that’s not an unprecedented run amok desire for safety, what is? Current bank regulators have not failed somewhat, they have failed in such a fundamental way that they should never ever be allowed to even get close to banks again.

Bankers perceive risk, and the more risk they see, the less they lend, and the higher the interest they charge… and yet regulators, if they also perceived more risk, also wanted banks to hold more capital… and so the ex ante perceived risks became excessively considered.

With the Basel Committee’s goggles, the safe seems safer, the risky riskier and the allocation of bank credit to the real economy goes bananas.

@PerKurowski