Ms. Janet Yellen, like other recent bank regulators who have just faded away, will leave the Fed without answering THE QUESTION

Sir, you write: “The Federal Reserve can take some blame for failing to see risks building up in the years preceding the global financial crisis. But perhaps more than any other major policymaking institution in the world, the Fed has acquitted itself well in the decade since”, “The unfortunate exit of an exemplary Fed chair”, November 29.

As you might suspect, I profoundly disagree. The Federal Reserve has yet not understood (or has been willing to acknowledge it) the fact that the “risks building up in the years preceding the global financial crisis” were a direct consequence of the distortions introduced by bank regulations, primarily Basel II, 2004.

If you allow banks to leverage almost limitless when lending to sovereigns, (like European banks lending to Greece); when financing residential housing; and over 60 times to one just because a human fallible rating agency has issued an AAA rating, that crisis, just had to happen.

And since capital requirements for banks have remained higher for what is perceived as risky than for what is perceived, decreed or concocted as safe, that odious distortion wasted most of the stimulus quantitative easing and low interest could have provided.

Over the last decade, how many SMEs and entrepreneurs have not gained access to that life changing opportunity of a bank credit, only because of these odiously discriminating regulations? Who can believe that America would have been able to develop as it did, if these regulations had been in place since the time of the pilgrims?

And now Janet Yellen, like other regulators have done in the recent past, will leave the Fed without answering us why banks should hold the most of capital against what is perceived as risky, when it is when something perceived very safe turns out very risky, that one would really like banks to have the most of it.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

Sir, thanks for all the help you have given me over the last decade, forwarding that question without fear and without favour.

@PerKurowski

Long term growth, development, in India and elsewhere, requires getting rid of Basel's regulatory risk aversion.

Sir, Eswar Prasad writes: “the real question for policymakers in India is not about how they can boost growth temporarily but how to create the environment to elicit private investment. Without that, durable longterm expansion will remain a mirage”, “Long-term growth in India depends on serious reform” October 17.

It is now ten years since at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled: “Are the Basel bank regulations good for development?”

Its first paragraph states: “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.”

And from what I have seen, in terms of Basel’s banking regulations, India is proceeding as if just as papist as the Pope.

The risk weighted capital requirements; those that dangerously distort the allocation of bank credit in favour of what is perceived decreed or concocted as safe, and against what is perceived as risky, like SMEs and entrepreneurs, are still going strong there.

That is the danger of empowering technocrats that are more interested in showing off to colleagues what’s fashionable in Basel than wearing what they should wear back home.

PS. The document referred to was also reproduced in India, in October 2008, in The Icfai University Journal of Banking Law Vol. VI No.4

@PerKurowski

Greece cannot be rebuilt without the assistance of “The Risky” Greeks.

Sir you write “Only the Greeks can rebuild Greece”, November 9. I absolutely agree with that, as well with your conclusion that their politicians need “to sell to the Greek people the idea of a future lived within their means, and stop pretending to defend them against heartless foreigners.

But, if only Greeks can rebuild Greece that must also include to put a halt on those nonsensical banks regulations which through the risk-weighted capital requirements, discriminate so much the access to bank credit in favor of “The Infallible” of today, if there is such a thing, and thereby discriminates against “The Risky”, small businesses and entrepreneurs, those that represent so many of the possible infallible of tomorrow.

You seem to think that a recapitalization of Greek banks in terms of a Basel III would suffice to reignite the Greek economy. Forget it! For that to happen, as a minimum, the distortions produced by those regulations which impede the banks from performing with any sort of efficiency their role in allocating economic resources, need to be eliminated.

In other words “The Risky” Greek must be allowed to help rebuilding Greece. And by the way, if you do not want to become just like Greece, that goes for your homeland too.

If Draghi is the European Central Bank’s sharpest tool I pity Europe

Sir, Ralp Atkins holds that “Draghi’s resolve is European Central Bank’s sharpest tool” October 31. 

To me Mario Draghi is one of those utterly failed regulators who believed for instance that banks should be allowed to leverage their equity 62.5 to 1 when lending to those officially perceived as “The Infallible”, for instance Greece, but kept strictly to 12.5 to 1 leverage when lending The Risky, like European small businesses and entrepreneurs. And so, in this respect, if Draghi is the sharpest tool, I can only pity Europe, that tool can only keep on cutting it into pieces. 

As I have said so many times, if little me had anything to do about helping the eurozone or Europe out (or the US too) , the first thing I would do is to make certain that those most capable of saving the economy had access to bank credit in the best of terms. And that would mean that while bank equity remains so scarce, I would dramatically lower the capital requirements for banks when lending to “The Risky”, and slowly increasing these for all, until that odious and stupid regulatory discrimination in favor of “The Infallible” has been completely eliminated. 

To inject funds in any way shape or form before the distortions on how those funds will flow through the economy has been eliminated, all that is achieved is wasting away extremely scarce fiscal and monetary policy space.


PS. For those who do not know Mario Draghi was since April 2006, until 2011, the Chairman of the Financial Stability Forum, later the Financial Stability Board. And this is something I had to say about the FSF in 2008.

When regulatory madness is just that

Sir, Gillian Tett writes about “When political madness works” October 13, and in it refers to Lord Owen’s neurology paper “Hubris syndrome”, 2009. She also refers to Nassir Ghaemi’s “A first rate madness” which holds that some imbalances like depression, bipolar syndrome and hyperactive manias” could help leaders to better manage crisis. 

Hold it there! Before these imbalances become prerequisites of leadership let me state the following: 

Independently of what imbalances they suffered from, when bank regulators engaged in one of the greatest hubris exercises ever, that of believing themselves to be fully equipped to act as risk managers for the world, they utterly, and totally, failed… and their madness has not served them or us later either. 

Their regulatory discrimination in favor of The Infallible and against The Risky is killing our economies, and there is no way Gillian Tett is going to convince me they are doing us some Winston Churchill good.

And by the way... what about the hubris and or madness of some journalists? Is it good or bad?