What the world needs is to introduce true diversity in its financial architecture.

Sir, I refer to “The world needs a new fin­an­cial archi­tec­ture” by Michael Krake, the exec­ut­ive dir­ector for Ger­many at the World Bank.

What if, keeping the UN, World Bank and IMF, we instead reform these institutions? As is, these are managed and governed by bureaucracy autocracies. 

November 2004, at the end of my short two-year term as an executive director in the World Bank, FT published a letter in which I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

I had often expressed this at the World Bank Board but, those colleagues who understood what I referred to, and nodded in agreement, could do nothing. How could they, they were nominated by governments and most expected, and needed, to return to the government. What did not exist was real diversity. Not diversity based on gender or race, but diversity based on interests, life experiences and needs. 

Then I often suggested substituting some on the current executive directors with e.g., a plumber or a nurse; or at least to give a place at the board to that migrant community that, by means of its remittances, provided development countries with much more financial assistance than the multilateral financial entities could ever dream to do.

Now 2024, if I had the blessing to again be at that board of directors, I would drive my fellow directors to despair by, over and over again mentioning: “Give me ten seconds, I want to see what my friend ChatGPT opines on this.”

Would, “Without Fear and Without Favour” FT, be willing to publish a letter on what ChatGPT thinks?

http://voiceandnoise.blogspot.com/2006/05/world-bank-needs-to-go-truly-global.html

http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

@PerKurowski 

Any new IMF managing director should at least know, as a minimum minimorum, that two current important financial policies are more than dumb.

Sir, I refer to John Taylor’s “Choice of new IMF head must not be dictated by the old EU order” August 12.

I have no problems whatsoever with all what Taylor argues and neither with IMF changing its bylaws to allow someone over 65 years to take up the post of managing director.

But I do have two very firm ideas about what the next managing director should know.

First, that the risk weighted capital requirements for banks, based on that what’s perceived as risky, like loans to entrepreneurs and SMEs, is more dangerous to the bank system than what’s perceived as safe, like residential mortgages, is more than dumb. These only guarantee a weakening of the real economy and especially large bank crises, caused by especially large exposures to something perceived, decreed or concocted as especially safe, which turns into being especially risky, while held against especially little capital.

Second, that to assign a 0% risk weight, as that which has been assigned by EU authorities to all eurozone sovereigns, and this even though these take on debt that de facto is not denominated in their own domestic printable currency, something which could bring down the Euro and the EU with it, is also more than dumb. 

Sir, I wonder if anyone of the G20 Eminent Persons Group, international worthies and the names Taylor mention understand and know this. And if they do, why are they silent on it?

@PerKurowski

What keeps IMF and World Bank so silent on bank regulations that go against their respective mission?

Sir, you argue, “If the IMF and the World Bank were to disappear, the absence of their combination of expertise, credibility and cash would soon be painfully obvious.” “Bretton Woods twins need to keep adapting” July 18.

Absolutely but they would also be sorely missed as the right places for having serious discussions on many serious issues that can affect our economies. 

But in that respect both have also been somewhat amiss of their responsibilities. The Basel Committee’s credit risk weighted bank capital requirements, which so dangerously distort the allocation of bank credit, have not been sufficiently discussed.

The World Bank, as the world’s premier development bank, knows that risk taking is the oxygen of any development. With this in mind it should loudly oppose regulations that so much favors the safer present’s access to bank credit over that of the riskier future. Doing so dooms our economies to a more obese less muscular growth. 

And IMF should know that all that piece of regulation really guarantees, is especially large bank crises, caused by especially large exposures to something perceived or decreed as especially safe, and that turn out to be especially risky, while being held against especially little bank capital. 

Why the twins’ silence? Perhaps too much group think, perhaps too close relations with regulators, something that could make this topic uncomfortable to discuss. 

PS. My comments to the Financial Stability Board

If you kick a crisis can forward, without correcting for what caused the crisis (2008), then when you run out of kicks, the can will roll back on you, only so much worse.

Sir, you write “The view of the global economy can best be described as murky but unencouraging”, “More gloom gathers over the world economy” April 13.

Since I have never thought of murkiness as a great promoter of encouragement, I must say that “but” was a bit disconcerting to me, that is, unless I should read it as a source of blissful ignorance.

That said, you refer to what monetary and fiscal policymakers must do, but you leave out the bank regulators, those who most definitely helped cause the 2008 crisis.

Though with Basel III they have introduced a leverage ratio the fact remains that, on the margins, there where it most counts, the risk weighted capital requirements for banks are still distorting, perhaps more then ever, the allocation of bank credit to the real economy.

How can I explain it? Sir, if you fill a financial irrigation system with huge amounts of liquidity (QEs) and ultra low interest rates, and some of its most important canals are blocked with high risk weighted bank capital requirements, there can be no doubt that bad things will happen. 

In 2006 you published a letter I wrote that exposed “The long-term benefits of a hard landing”. Sir, you tell me, where would we be today if our decision makers had taken that route? 

@PerKurowski

IMF, where’s the regulators’ discipline when needed to stop the procyclical risk weighted capital requirements for banks?

Sir, Chris Giles writes that IMF’s Christine Lagarde warning about “70 per cent of the global economy to experience a slowdown in growth… acknowledged that budgetary discipline in good times was difficult for finance ministers to achieve, but necessary to create “fiscal space to act in bad times”. “IMF Lagarde highlights risks to global economy” April 3.

Times are good, lesser the perceived risks; less the capital must banks hold; even though it is a good time to raise bank capital.

Times are bad, higher the perceived risks; higher the capital must banks hold; even though it is a bad time to raise bank capital.

But are regulators doing something to diminish this regulatory pro-cyclicality? No, or absolutely not enough. Why? Because doing so would require to admit that their risk weighted bank capital requirements are based on the nonsense that what is perceived as risky, when place on banks’ balance sheets, is more dangerous to the bank system than what is perceived as safe.

Sir, that slow down Ms. Lagarde speaks of is much the result of the obese growth that results from excessive exposures to what is perceived as safe. Muscular, sustainable growth requires, by definition, a lot of risk taking.

God make us daring!

@PerKurowski

Stress tests for banks, performed by mighty regulators, signify dangerous systemic risks, as well as useless predictors

Sir, Caroline Binham reports on how “Andrea Enria, the outgoing head of the European Banking Authority, who is set to become the Eurozone’s top banking regulator, has questioned the value of its stress tests of lenders’ balance sheets, arguing that elements of them are no longer ‘tenable’ and need a redesign” “European regulator questions value of stress tests” November 16.

I could not agree more for two reasons:

First: Stress tests introduce a systemic risk. The fact that banker know their banks will be the object of stress tests causes them to distract their attention from what they might think to be more dangerous, in order to concentrate more on what they think regulators might think more dangerous.

Second: The stress tests are useless since they avoid stress testing many real stresses. In 2003 the United States General Accounting Office (GAO), in its study of the IMF’s capacity to predict crisis concluded, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Much of that has to be a consequence of that if IMF forecasts a crisis; it could quite possibly be blamed for detonating that crisis. Similarly, regulators will avoid to stress test the risks they might be blamed for having produced. For instance when will they stress test the banks on the possibility that their risk weight of 0% to sovereign would have to be increased, and the market reactions to that news. Never! They have painted themselves into a corner.

Sir, when it comes to banks, and their regulations, worry much more about what might be perceived as safe than about what is perceived as risky. In that respect, if I were to perform stress tests on banks, I would look to stress test the risks that seemingly would least need to be stress tested.

@PerKurowski

If not in US dollar notes under Warren Buffet’s mattress, what is Berkshire Hathaway’s “$104bn cash pile invested in?

Sir, you conclude that “Regulators and governments would do well to study whether the huge increase in repurchases has damaged business growth and capital formation” “Record share buybacks should be raising alarms” November 8.

Of course they should but let us be very clear, since that has been going on for quite some time so, if they have not done it yet, then shame on them.

For instance in July 2014 Camilla Hall, in “Bankers warn over rising US business lending” wrote, “Charles Peabody, a bank analyst at Portales Partners in New York, has warned that while it is hard to extrapolate what is driving commercial and industrial lending, if it is to fund acquisitions or share buybacks it may not indicate a strengthening economy. “It is loan growth, just not sustainable,” he said.” 

And therein Hall also wrote, “A banking lending executive at a large regional lender said ‘Traditionally banks have been very cautious of that’.”Of course, you and I know Sir that banker should not be throwing the first stone, since bankers too have morphed, thanks to the risk weighted capital requirements, from being savvy loan officers into being financial engineers dedicated to minimizing the capital their bank is required to hold.

Also, in 2017, when discussing IMF’s Global Financial Stability Report, John Plender wrote: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.”

But what really caught my attention today was your reference to Berkshire Hathaway’s “$104bn cash pile [it holds] keeping its powder mostly dry for future deals — if, say, the market correction continues.”

How do you keep that powder dry? Since most probably it is not in dollar notes under Warren Buffet’s mattress, what is it invested in? We know that in accounting terms “Cash” includes a lot of investments, but in the real life, “Cash” does not always turn out to be real cash. In Venezuela you could now fill a whole mattress with high denomination bolivar notes, and still not be able to buy yourself a coffee with it. 

In a world in which regulators have assigned a 0% risk weight to for instance the already $22tn and fast growing US debt, which, if nothing changes, would doom that safe-haven to become very dangerous, is not Cash just another speculative investment?

@PerKurowski

Our banking systems have been made especially fragile, because of especially bad bank regulations.

Sir, Martin Wolf writes “The world’s economy and financial systems are fragile … the most important source of fragility is political… In country after country, populists and nationalists are in, or close to, power. Salient characteristics of such politicians are myopia and entrenched ignorance. Inevitably, they spread uncertainty.” “Politics puts the skids under bull market” October 17.

In April 2003, as an Executive Director of the World Bank I delivered a statement that contained the following: "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."

One of those “Best Practices” has been the risk weighted capital requirement for banks. These give banks incentives to create especially large exposures to what is perceived or decreed as especially safe, against especially little capital; making our banks, and the sector lending thereby favored, like sovereigns and houses, extremely fragile.

Populism? Sir, few things as brazenly populists as “We will make our bank systems with our risk weighted capital requirements because we sure know about risks. 

PS. Wolf, during the last annual meetings of IMF and the World Bank in Bali when interviewing Christine Lagarde, mentioned: “As a journalist I am paid to be skeptical”

But Wolf refuses to ask bank regulators about what they were thinking when they assigned a meager 20% risk weight to assets that because rated AAA represents great dangers to bank systems, compared to a whopping 150% for the so innocous below BB- rated. Sir, could it be you are not paying Wolf enough?

PS. In a similar vein during the interview Mme Lagarde said, “In IMF’s view capital flow management measures should: not be first order of priority, only be used in exceptional circumstances, not be a substitute for macroeconomic and macroprudential policies.”

So why does IMF keep mum about the risk weighted bank capital requirements? In a letter FT published in November 2004 I wrote: “our bank supervisors in Basel are unwittingly controlling the capital flows in the world.” Could it be that IMF still does not understand that that regulation distorts, controlling credit flows in favor of the “safe” present and against the “risky” future

PS. Ref the same interview: Trade protectionism? What neo-Bretton Woods Conference will be needed to help us get rid of bank regulations made to protect banks but that only endangers bank systems?

PS. Ref the same interview: Balance sheet vulnerabilities. Are not the consequences of central banks huge liquidity injections, with QEs, especially for emerging countries, precisely the same as those of the 1974 to 1981 recycling of oil revenues surpluses?

PS. Ref the same interview: Is the eurozone crisis over? “No!” says Mme Lagarde. After 20 years way too little has been done about solving the challenges of the euro and that, if not solved could bring EU down… and still Wolf categorizes his homeland Britain as “my idiotic country” because of Brexit.

PS. Ref the same interview: With respect to Greece, not a word was said about the EU authorities 0% risk weighting of Greece, which doomed it to its excessive public indebtedness.

@PerKurowski

IMF, what are tariffs on billions of trade, when compared to tariffs and subsidies on trillions of bank credit?

Sir, Chris Giles, James Politi and Stefania Palma write about concerns during recent IMF meetings in Bali, “With the world’s two largest economies slapping tariffs on $360bn of goods so far this year, and possibly more to come” “Geopolitical tension casts pall over annual IMF meeting” October 15.

Last year I read somewhere that the just world’s 10 largest banks combined had over $25 trillion in assets. So when I think on how much the allocation of those assets might be dangerously distorted by the risk weighted capital requirements, I find it hard to understand that “the world’s two largest economies slapping tariffs on $360bn of goods so far this year”, was of so much concern during the recent IMF meetings

Sir, get it, the risk weighting of banks’ capital requirements, for bank protection purposes, translates de facto into tariffs and subsidies that will steer the allocation of bank credit.

The damage, by promoting banks way too much to be into banks “safe” AAA rated securities, residential mortgages and loans to sovereigns, while de-incentivizing loans to “risky” entrepreneurs and SMEs, is immensely worse than what the current trade-wars, sort of Lilliputian vs. Blefuscu in comparison, could produce.

Sir, again, for the umpteenth time, what the risk weighted capital requirements for banks guarantee is: 

Especially large exposures to what’s perceived as especially safe, against especially little capital, which dooms or bank system to especially severe crises. 

Especially low exposures to what is perceived as risky, like loans to entrepreneurs and SMEs, which dooms our economies to weakness and to not being able to reach their potential.

@PerKurowski

To minimize the next unavoidable financial crisis, get rid of the dangerous risk weighted capital requirements for banks.

Sir, Martin Wolf backs IMF’s Global Financial Stability Report of October 2018 by requiring that “above all we must keep [bank] capital requirements up”, “How to avoid the next financial crisis”, October 9.

No one, except of course those bankers whose bonuses depend a lot on not having to compensate much capital, would argue against banks having to hold more capital. But, after a bank crisis that resulted exclusively from excessive bank exposures to assets especially perceived as safe, and that therefore regulators allowed banks to hold against especially little capital, it should be clear that even more important than more capital, it is to get rid of the risk weighted capital requirements for banks, those which so distort the allocation of bank credit.

Wolf writes: “The pre-crisis world was one of globalisation, belief in markets and confident democracies” Really? If so that’s because way too few knew what was happening.

“Confident democracies” In 1988, with the Basel Accord, one year before the Berlin Wall fell, bank regulators, without due consultations, smuggled in risk weights of 0% for the sovereign and 100% for the citizens. Sir, no matter how you see it, that is statism imposed by unelected autocrats that has nothing to do with democracy.

“Belief in markets” When regulators, with Basel II of 2004, assigned a risk weight of 150% to what was rated below BB- and only 20% to what was rated AAA to AA, they very clearly, stated, bankers don’t see shit, so we must help them out.

Sir, some might take comfort that current figures, even not as good as if the crisis had not happened, are still acceptable. They will soon wake up to the fact that these relative decent post crisis results, come from kicking the crisis can forward, and from the debt-financed anticipation of demand. That can, will soon start rolling back on our children and grandchildren. Great kicking authorities!

PS. Again! Had regulators understood that risk-weighted capital requirements for banks only guarantee especially large exposures, against especially little capital, to what’s perceived or decreed as especially safe, an especially big crisis like that of 2008 would not have happened

@PerKurowski

When will someone invited dare to pose the question that shall not be made at a Davos or Jackson Hole gathering?

Sir, Gillian Tett writes: “The International Monetary Fund calculates that between 1970 and 2011, the world has suffered 147 banking crises... But whatever their statistical size, the pre-crisis period is marked by hubris, greed, opacity — and a tunnel vision among financiers that makes it impossible for them to assess risks.”, “When the world held its breath” September 1.

Sir, and why should regulators, who impose risk weighted capital requirements for banks, and stress test these be less affected by that “tunnel vision”? 

If regulators knew about conditional probabilities, if they absolutely wanted and dared to distort the allocation of bank credit, they would have set their risk weights based, not on the perceived risks of assets, but on how bankers’ perceive and manage risks.

Tett quotes Alan Greenspan with “I originally assumed that people would act in a wholly rational way, that turned out to be wrong.” Shame on him, had he just done his homework, he would have known that what was perceived as risky never ever causes financial crises, that is always the role of what was thought as very safe.

Tett also quotes Paul Tucker, the former deputy governor of the Bank of England with, “There is a dynamic which pushes banking and the penumbra of banking to excess, over and over again”. That “dynamic” force was the regulators pushing bankers into excesses, for instance by allowing them to leverage 62.5 times if only an AAA to AA rating issued by human fallible credit rating agencies was present.

Tett recounts: “One day in the early summer of 2007, I received an email out of the blue from an erudite Japanese central banker called Hiroshi Nakaso”, who warned her “that a financial crisis was about to explode because of problems in the American mortgage and credit market.” 

Tett was astonished, though she did, by then, not disagree with the analysis. May 19th 2007 I wrote the following letter to FT, which was not published.

“Sir, after reading Gillian Tett’s “A headache is in store when the credit party fizzles out” May 19, it is clear we should all go down on our knees and pray for that she is right, in that it is only a headache that is in store for us. 

As for myself I have serious doubts that the consequence of this blissful-ignorance-bubble resulting from our hide-and-not-seek the risks with derivatives, is unfortunately going to be much more painful than that. When that day comes though, before putting the sole blame on the poor bankers earning their luxurious daily keep; I suggest we look much closer at the responsibility of our financial regulators.”

Sir, sadly, that suggestion has been way too much ignored until now. 

“Why do you require banks to hold more capital against what by being perceived as risky is made less dangerous to our bank systems, than against what by being perceived as safe, poses so many more dangers?” That is the questions that seemingly shall not be asked by anyone who markets his name in the debate and does not want to risk being left out from Davos or Jackson Hole gatherings.

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

@PerKurowski

What if Germans knew German authorities approved of giving Greece a 0% risk weight?

Sir, Mehreen Khan writes, “hawkish governments, led by Germany… are reluctant to award Greece more generous terms that mean their taxpayers are not paid back in full” “IMF signals need for more Greek debt relief” August 1.

The historical fact is that European central bankers, for the purpose of the risk weighted capital requirements for banks, assigned Greece a 0% risk weight. That meant banks needed to hold no capital (equity) when lending to Greece. That meant that among other German banks, caused Greece to take on that excessive debt that lead it to its current tragic predicament.

Some will argue that Greece also played statistical shenanigans with its economic data. That is true, but if German banks had to hold as much capital on loans to Greece than what they needed to hold against loans to German entrepreneurs or German small businesses, you could bet your last Deutsche Mark, sorry your last Euro, on that German banks, no matter how good economic data on Greece looked, would not have lent it a fraction of what they did. 

And now IMF’s calculations find Greece’s debt costs will “begin an uninterrupted rise” after 2038, to about 20 per cent of the country’s gross domestic product every year.” Sir, is it really fair to single out some groups of European citizens to pay for the mistakes of everyone’s European authorities? Should that not be a totally shared responsibility?

Germans should be aware that at this very moment German banks, are required to hold much less capital when lending to its government or to some other governments, than when lending to German citizens… and that dooms Germany, sooner or later, to end up being another over-indebted Greece. And that applies to banks and nations much everywhere.

May I make a suggestion to Germans, and all Europeans, and all Americans, and all other? If so, that would be to get rid, immediately, of bank regulators that are either so statist so as to assign the sovereigns a 0% risk weight, or so loony so as to believe that what is perceived as risky is more dangerous to their bank system than what is perceived as safe.

PS. And don’t tell us they did not know they were favoring sovereign debt so much

PS. Some in Germany are aware of the problem

@PerKurowski

I am not sure what, but, to hold the Eurozone together, requires something politically very difficult to be done.

Sir, you write: “IMF…economists reckon the real exchange rate was between 10 and 20 per cent weaker than appropriate in Germany, which continues to run huge trade surpluses, but overvalued by between 3 and 10 per cent for Spain. This is not a problem that a central bank can fix” “Central bankers and currency conflicts” July 28.

That is a central problem with the Euro, from day one, from when the bridges were burnt, and way too little has been done to solve it, in fact most efforts seem to have been to ignore it. 

And Sir, don’t tell us that central bankers have the right to be so unaware of this problem, so as for instance having assigned Greece a 0% risk weight, which caused Greece run even larger deficits, and Germany even larger surpluses, all mostly financed by German and French banks.

And, truthfully, have central bankers, with their hubris filled “whatever it takes” messaging communicated sufficiently their limitations to the politicians? I don’t think so.

What can be done to solve it? I have no firm idea but, what about a Euro effect compensation tax, by which surplus countries would be charging higher sales taxes than deficit countries, and all those revenues were shared out to all European equally by means of a Universal Basic Income? Would that be politically impossible? Perhaps, but if not something politically very difficult is done about this problem, it will become politically impossible to hold the Euro are together. 

The governments, the European Parliament, the Council of the European Union and the European Commission, cannot persist counting on European central bankers, like a Mario Draghi, to solve it. 

@PerKurowski

Flags need also to be raised, when influential multilateral financial institutions help to blow up bubbles

Agustín Carstens, the general manager of the Bank for International Settlements writes: “A decade of unusually low interest rates and large-scale central bank asset purchases may have left many market participants unprepared, and contributed to a legacy of overblown balance sheets” “It is precisely when pressure starts to build that flags need to be raised” June 26.

Indeed, but to that we should add the presence of extraordinary low capital requirements for banks when lending to what’s perceived as safe, like to house buyers and sovereigns. These have helped to explode the exposure to this type of loans, as well as distort the signals sent to the markets, something that of course has also helped to inject a lot of liquidity. 

Carstens also opines: “At the BIS, we have come to appreciate how unrewarding it can be to flag risks when markets are running hot. Yet that is precisely when risks tend to be highest.” 

Indeed, that is the same difficulty all influential institutions like the IMF face since, whenever they flag a risk, they could be accused for helping to set off a crisis. But now they all have themselves to blame for making the flagging problem so much worse. By assigning risk-many sovereigns a risk weight of 0% they painted themselves into a corner. When you know that risk weight is absolutely wrong, how do you go about to change it without scaring the shit out of the markets?

@PerKurowski

Instead of Andreas Georgiou, Greek courts should prosecute those who assigned Greece a 0% risk weight

Sir, Ulrich Baumgartner, Eduard Brau, Warren Coats and otherformer senior staff of the IMF launch a spirited defense of Mr Andreas Georgiou. They write that Georgiou, a respected authority in statistics, has been pursued relentlessly during seven years with lawsuit after lawsuit, for “bringing harm to Greece and dereliction of duty by refusing to falsify the figures.” “Greece should not hound man who refused to falsify the figures” June 7.

What “Georgiou and his Greek staff, helped by international experts” did was to produce corrections, “which showed a much bleaker picture than the earlier data, were vetted by Eurostat and accepted by the European Central Bank, the EU and the IMF as the basis for major financing.”

Amazing! If anything the courts should prosecute all those European central bankers and regulators who, for the purpose of their risk weighted capital requirements for banks, and knowing it did not merit it, assigned a 0% risk weight to Greece. Had it not been for that the governments of Greece would not have been able to build up that gargantuan level of public debt that was the primary cause of its crisis.

Since IMF, with its silence on it, has de facto endorsed that 0% risk weight, perhaps those here defending Mr Andreas Georgiou should start with a mea culpa. The world would very much appreciate that. It is way overdue.

To underestimate the strength of a nation causes its debt to cost more but, to overestimate it, causes excessive debts, which in my mind, as a citizen, is more dangerous.

Just imagine what would happen to a credit-rating agency if it was proven that it had knowingly assigned an undeserved an AAA rating?

What if a credit rating agency had knowingly assigned an undeserved AAA rating? European central bankers assigned an even worse 0% risk weight to Greece, which doomed Greece to excessive public debt… and they have yet not been held accountable for it in the slightest.

PS. And in the case of Greece EU violated a fundamental principle of a Union... solidarity.

PS. Even though none of these sovereigns can print euros on its own will, EU authorities assigned to all Eurozone sovereigns’ debts, a 0% risk weight.

@PerKurowski

“Co-operate more” is often argued by multilateral technocrats only for them to interfere more

Sir, Martin Wolf writes: “Countries that contain substantial populations in relative domestic decline are consumed by the politics of rage. Yet, if progress is to be sustained and the dangers are to be managed, peaceful co-operation is necessary” and he ends with “Am I optimistic that the world will rise to the challenge? The answer is: No”, “The world’s progress brings new challenges” May 30.

I am not optimistic either. In 1998 in an Op-Ed: “History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”, and in 1999: 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”. 

And with the risk weighted capital requirements that distorts the allocation of bank credit to the real economy, the peacefully cooperating regulators in the Basel Committee realized my worst fears.

And that horrendous mistake, which included assigning risk weights of 0% to sovereigns, like Greece and Italy, and which brought us the 2007/08 crisis, and that is to blame for much of the stagnation in productivity, is not yet even discussed. There’s a total lack of transparency and accountability among those that Yanis Varoufakis rightly holds belong to a network of insiders.

Why? As Varoufakis explains in his “Adults in the room” journalists, I would argue like Martin Wolf, are also “appended, however unconsciously, to a network of insiders… [and] This is how networks of power control the flow of information.”

Wolf also refers to Kishore Mahbubani, the author of “Has the West Lost It?” arguing: “The lesson the west — above all, the US — must learn is… to interfere far less and co-operate far more [with] multilateral rules and agreements. It cannot run the world. It needs to stop its arrogant and usually foolish interventionism.” 

But again: The worst “arrogant and foolish interventionism”, that which really has the West really losing it, as it put banker’s risk aversion on steroids, is what was concocted by the Basel Committee for Banking Supervision. And its interference is like a cancer tumor that keeps on growing thousand of pages a year.

A call to “co-operate more” is always justified but, when cooperating, let us not ignore that is precisely what multilateral technocrats often ask for, only in order for them to do more besserwisser interference.

The best multilateral agreement we now could have with respect of our banks, is to set one capital requirement against all assets, a one pager regulation, and then carefully manage the process of getting the banks from here to there, while minimizing the hurting.

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

PS. The best way to fight pollution, climate change [and inequality], is by means of a carbon tax with all its revenues shared out to citizens. But, since that does not allow for interesting profit opportunities that could be captured, and that could be ruled, the intervention profiteers much prefer the Paris accord on climate change.

@PerKurowski

The severity of Greece’s financial crisis was caused, directly, by totally inept bank regulators

Sir, Jim Brunsden, Mehreen Khan and Kerin Hope report “Greece is approaching a momentous moment: the end of eight years of international bailouts that forced the country into unprecedented belt-tightening in exchange for a cash lifeline from eurozone governments and the IMF” “Eurozone and IMF are still to agree a package as deadline approaches” April 27.

What I find impossible to understand is how European bank regulators, and European central bankers, have been able to hide from the Greeks the fact that they directly caused that crisis to be so much worse than it would have been, had they not meddled.

For the purpose of the capital requirements for banks, they assigned Greece’s public debt a 0% risk weight, and this as if Basel II’s credit rating dependent minuscule risk weight of 20% was not bad enough.

Would Greece have found itself in such troubles had banks needed to hold the same capital when lending to the Greek government than when lending to Greek citizens? Absolutely not!

Those retirees protesting against pension reforms, and all those young Greeks who have had to left their country in order to stand a better chance in life, should now all jointly be protesting in Basel against the Basel Committee of Banking Supervision, the Financial Stability Board and all bank regulators.

https://teawithft.blogspot.com/2015/06/europe-you-want-truth-it-was-not-euro.html

@PerKurowski

Just wait until the music stops playing the low interest rate tango building up corporate balance sheet leverage

Sir, John Plender, when discussing IMF’s latest Global Financial Stability Report writes: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.” “Beware the curse of buybacks that destroy shareholder value” October 31

Clearly this is another music that keeps bankers dancing, even when they know they shouldn’t, not for their own or for the economy’s sake.

In July 2014, commenting on an article by Camilla Hall on this subject I wrote: “Ask any old retired banker what was his first question to a prospective borrower and you would most probably hear him say: “What do you intend to do with the money if I lend it to you?” The banker would not have liked to hear “To pay a dividend or buy back some shares”.

Not any longer. Now his first priority is to think about how he can construe the operation in such a way as to minimize the capital needed, so that he could max out leverage too… and pay dividends and buy-back shares too.

But why should we assume only bankers are to behave responsibly? It takes two to tango. The regulators, with their risk weighted capital requirements clearly indicate they do not care one iota about the purpose of banks, and the central bankers, they just keep on kicking the crisis can down the road with QEs and low interest rates.

https://teawithft.blogspot.com/2017/05/low-interest-rates-cause-buy-backs.html

@PerKurowski

To save us from “calm waters” and recover economic dynamism, get rid of risk weighted capital requirements for banks

Sir, Tim Harford writes: “economic dynamism is at risk… John Haltiwanger has charted a fall since the early 1980s in the rate of start-ups, business exits, job creation and job destruction…Calm waters eventually stagnate. It is time to agitate the real economy…But how? …support for small-business finance, would all add much needed fizz to the economic system.” “Eerie quiet marks Black Monday’s anniversary” October 22.

That “how?” must include getting rid of the absolutely insane risk weighted capital requirements for banks

Sir, as a member of the Civil Society, during the Annual Meetings of World Bank and IMF, and for the umpteenth time during such occasions, I asked the following question:

“As the world’s premier development bank the World Bank must know that risk-taking is the oxygen of any development. So why is it still not speaking out against the risk-weighted capital requirements for banks that put a brake on risk-taking, like on the lending to SMEs small and medium sized enterprises…even though never ever has a major bank crisis erupted because of excessive exposures to something ex ante perceived as risky.”

After Jim Yong Kim gave a very valid answer, but not one that directly addressed my concerns, IMF’s Christine Lagarde jumped in with:

“I am actually tempted to address also this question, is that okay?

Because I think it is an important point and one that has very complex ramifications. It has complex ramifications in the banking regulations business, in the banking supervision business, and in the accounting business.

And then it is at the very junction of between sorts of self-established model by the banks versus models established by the supervisors. 

I think we both would agree that methods that would actually encourage the lending by banks and by insurance companies and by pension fund to SMEs, you know with the risk associated with it, should actually be very much in order.

At the moment the risk weighing methods and the models that are being used are discouraging from actually investing and taking risk to benefit the small and medium sized enterprises 

And that’s not necessarily the best avenue to support the economy and to support entrepreneurs who want to have access to financing.”

Sir, as you can see the IMF is finally opening up its eyes to the distortions in the allocation of bank credit that are produced by current bank regulations… those which FT has been so steadfastly silent on… even though I have over the years sent you about a thousand letters on this specific issue.

FT, when will you be fearless and without favour enough to take up this issue?

Here is a transcript of my question and the answers received during AM2017.

And here is an old homemade YouTube in which I try to give an explanation as simple as possible of what is so wrong with the risk weighting.

God make us daring!

PS. By the way are you not at all curious how regulators, in their standardized risk weights of Basel II, came up with only a 20% for those so dangerous AAA rated, and a whopping 150% for the so innocuous below BB- rated, those that bankers do not touch even with a ten feet pole?

@PerKurowski

Much more than the Paris Climate (photo-op) Agreement, our pied-à-terre needs revenue neutral carbon taxes

Sir, Martin Wolf writes: “In no area are global spillovers more significant and co-operation more vital than climate… The main obstacles to such action are three. First, specific economic interests, notably in the fossil fuel industry… Second, free-marketeers, who despise both governments and environmentalists, reject the science, because of its (to them) detestable policy implications. Third, few wish to…threaten their standard of living, for the sake of the future or people in poorer countries” “Climate change puts poorest nations at risk”

Not so fast! There are those of us who believe that the threat of climate change is so real that there is no need to convince us with the “people in poorer countries” argument. The best interests of our grandchildren suffice. And there are those of us that despise the idea that so much of the important sacrifices required could be dilapidated enriching governments and environmentalists. To mostly attribute “specific economic interests” to the fossil fuel industry is to be too biased.

Of course the poorer countries should be helped, but the brunch of the climate change war effort, needs to be carried out as much as possible by sending out strong market signals, letting the markets operate freely assigning resources; and aligning the incentives as best as possible.

For that I strongly believe that a huge carbon a tax, shared out entirely to the citizens, is what first should be happening. Let us for instance suppose that petrol (gas) was sold all over the world at Norway’s current price of about US$2.10 per liter (Venezuela would have to increase its prices US$2.09 per liter) and that 100% of what that tax produces, goes directly back to the citizens.

Then we would fight climate change and inequality at the same time; which would be great since as Martin Wolf rightly holds: “The linked challenges of climate and development will shape humanity’s future.”

Sir, nothing in the Paris Climate (photo-op) Agreement seems to me remotely as powerful and effective as revenue neutral carbon taxes.

Similar to what I proposed for Mexico City

http://ourpiedaterre.blogspot.com

@PerKurowski