I trust banks and markets much more when regulators keep their hands off.

Sir, I refer to John Authers’ “In nothing we trust” Spectrum, October 6.

Let me give you brief one page version of my story:

1998, in an Op-Ed (in Venezuela I wrote) “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared…History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

1999 in another Op-Ed “What scares me the most, is what 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”

January 2003, in a letter published by FT I wrote: “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”

April 2003, as an Executive Director of the World Bank, in a formal statement, I repeated that warning: "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"

June 2004, the Basel Committee on Banking Supervision issued Basel II. By means of their standardized risk weights, they allowed banks to leverage a mind-blowing 62.5 times their capital if only an asset carried an AAA to AA rating issued by a human fallible credit rating agencies.

October 2004, in one of my last formal written statements as an ED at the Board of the World Bank I held: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

After reading an incomprehensible explanation provided in June 2005 by the Basel Committee I have, in hundreds of conferences tried to get the regulators to answer the very straightforward question of: “Why do you want banks to hold much more capital against what, by being perceived as risky, becomes less risky to our bank systems, than against what perceived as safe poses so many more dangers?” I have yet to receive answer.

So we have regulators who still, after a crisis caused exclusively by assets perceived as safe and that therefore banks could be held against less capital, allow especially large bank exposures, to what’s perceived as especially safe, against especially little capital. 

Sir, that dooms our bank system to especially severe crises. Why on earth should I or you trust them?

Sir, in hundreds, if not thousands of letters to you over the last decade, I have also tried to enlist FT in helping me ask that question (one that seemingly shall not be made) and to insist on receiving a comprehensible answer. I’ve had no luck with that either, so, respectfully, why should I trust your motto “Without fear and without favour”?

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for banks.

PS. And this letter does not refer to the horrendous introduction of full fledged statism that happened when with Basel I in 1988 the regulators assigned a risk weight of 0% to the sovereign and one of 100% to the unrated citizen.

@PerKurowski

FT, the Basel Committee has already done more harm to the global liberal order than what one or two Trump could do.

Sir, you write: “The most powerful nation on Earth has elected a real-estate mogul with no experience in government, a self-styled strongman, contemptuous of allies, civil discourse and democratic convention. Barring a protean change of personality, Mr Trump’s victory represents, at face value, a threat to the western democratic model.” “Trump’s victory challenges the global liberal order” December 10.

Let us pray we’re all wrong about our quite natural concerns; for a starter the election result was quite a surprise for most of us, probably even to Mr. Trump.

Nonetheless, as I have been arguing for years, the Basel Accord, and its ensuing bank regulations has already endangered “the global liberal order”, probably much more than what one or a couple of Trumps could do.

First, for the purpose of setting the capital requirements for banks, it determined the risk weight for the sovereign to be 0% while that of We the People was set at 100%. That de facto means that regulators believe government bureaucrats can use bank credit more efficiently than for instance SMEs and entrepreneurs. What on earth has that to do with a global liberal order? Those who still argue the 1989 fall of the Berlin Wall heralded the collapse of communism, must have no idea about 1988 Basel Accord.

And setting the capital requirements for banks based on ex ante perceived risks, risks that were already cleared for by bankers by means of the size of exposures and interest rates, introduced monstrous distortions in the allocation of bank credit to the real economy. What on earth has such distortions to do with a global liberal order? 

And the doubling down on ex ante perceived risk, meant that the more risky-bays where SMEs and entrepreneurs reside, were to be explored much less; while dangerously overpopulating “safe” havens such as sovereigns, AAA rated and housing finance.

What on earth has silly risk aversion induced by regulators to do with a global liberal order that should thrive on risk-taking ?

Also, by much favoring The Safe’s access to bank credit. it negated The Risky many of those credit opportunities that could have helped them to realize their dreams, and helped us with new jobs. What has such odious regulatory discrimination to do with a global liberal order?

Sir, on all this You and the whole Financial Times have seemingly decided to keep mum. It seems a bit suspicious. Though you proudly state “without favour” in your motto, could it be FT is in reality harboring a very pro-statist and interventionist heart?

PS. Sir, please don’t insult our intelligence by telling us this was all done in order to make our banks safer. You know very well that no major or even minor bank crisis has been caused by excessive exposures to what has been ex ante perceived as risky.

@PerKurowski

But why do some, like Gillian Tett, insist on trusting some totally failed experts?

Sir, Gillian Tett writes on “Why we no longer trust the experts” July 2.

But one could also ask: “Why do some keep trusting totally failed expert?” or “Why are not experts questioned more?”

Those responsible for Basel I and II regulations, they allowed banks to leverage equity especially much with those assets perceived ex ante as safe, precisely those assets to which bank could create excessive exposures; and which could result very dangerous if ex post, as indeed happened, these assets turned out to be very risky, like the AAA rated securities and sovereigns like Greece.

And by imposing higher capital requirements on what was perceived as risky, like SMEs and entrepreneurs, they made it even harder than usual for these extremely important economic agents to access bank credit.

And yet, basically the same experts, using basically the same although much more complicated script, are allowed to keep on regulating with Basel III.

That would never happen in Hollywood or Bollywood after a major box-office flop.

Here is an aide memoire on the egregious mistakes of current bank regulations.

So why is it so hard for FT that so proudly announces a motto of “Without fear and without favour”, to shame the failed regulators, as they should be shamed. There is nothing o dangerous as experts not duly sanctioned. Frankly, from the looks of it, we should not trust many expert journalists either.

PS. I believe it is much more important to make sure our banks are regulated by adequate persons than picking a good restaurant… but perhaps some would disagree.

@PerKurowski ©

At least Lucy Kellaway defends with honor the “Without fear and without favor” motto of the Financial Times

Sir, Lucy Kellaway does great living up to “Without fear and without favor” when she socially sanctions all the full of themselves experts, and those who socially suck up to these. Well done! “Boneheaded aphorisms from Davo’s windy summit.” February 1.

It is a real pity there are not many more like her at FT. The world could benefit a lot if the journalists at FT dared to, for instance, question more current bank regulators on what they are up to… like for instance with their zero risk weight to sovereigns and the 100 percent risk weight for that private sector that makes the sovereign strong.

@PerKurowski ©

Something dysfunctional is hindering FT from living up to its motto of “Without fear and without favour”

Sir, Martin Wolf holds that “The relentless decline in the proportion of prime-aged US adults in the labour market indicates a significant dysfunction. It deserves attention and analysis. But it also merits action.” “America’s labour market is not working” November 4.

There is a whole lot of things that do not work as we want them to work, and there are certainly many major dysfunctions causing that, and clearly not only in America.

For instance one truly major dysfunction is that our banks, those who should allocate credit as efficiently as possible to the real economy, have been awarded huge incentives, not to manage perceived credit risks, but to avoid credit risks.

That is so because even though banks consider credit risk when deciding on the size of exposures and interest rates, the regulators decided those same perceived credit risks should also determine the capital banks needed to hold. The end result of that regulatory nonsense is of course too much bank credit to what is perceived as safe, and too little to what is perceived as risky… and, among the risky, we find the SMEs and entrepreneurs, precisely those who have the best chances of delivering new jobs.

That dysfunction which started in 1988 with a major destructive tsunami known as the Basel Accord, in which the regulators amazingly set the risk weights of sovereigns to zero percent, and that of the private sector at 100 percent, has been in crescendo ever since.

The regulators have just not been able to understand that even a perfectly perceived credit risk, leads to imperfect results, if excessively considered.

But that dysfunction might be topped by an even worse dysfunction, namely that of the academia and other influential actors, like journalists, simply not daring to accept the possibility that regulators could have made such a fatal blunder, and therefore keeping silent about it.

Sir, since during the last decade I have written Martin Wolf over 250 letters about that problem, which I accept is slightly dysfunctional in its own way. But, the only time Wolf publicly acknowledged these was when in 2012 he wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters.”

And yet, even describing the argument that showed that the regulators, with their more risk more capital – less risk less capital, could be 180 degrees off mark, he left it at that.

Sir, I am sorry to say but there seems to be something very dysfunctional at FT that hinders it from living up to its motto of “Without fear and without favour”

@PerKurowski ©