Do we have a banking system with banks as they are supposed to be?

Sir, I refer to your “Non-bank lenders will bear brunt of credit crisis”, March 25

John Augustus Shedd (1859–1928) opined: “A ship in harbor is safe, but that is not what ships are for”

But bank regulators paid banks with lower capital requirements to stay safe, thereby overcrowding “safe” harbors. As a result, those who had real reasons to stay in safe harbors, like many non-bank lenders, and were less prepared to do so, like many non-bank lenders, had then to take to the risky oceans.

You opine “we are in a better place today because regulators forced greater protections on the banking system” What greater protection? A measly 3% leverage ratio supposed to cover for misperceptions of risks, like 2008’s AAA rated, and unexpected dangers, like coronavirus? You’ve got to be joking.

You quote Ben Bernanke “If you do not have a banking system, you do not have an economy.” Sir, do we really have a banking system with banks as the bank’s we used to know, or as banks are supposed to be?

I mean, with zero bank capital requirements against loans to the government and eight percent against loans to citizens you do not have a free market economy, you have financial communism.

With lower bank capital requirements for residential mortgages than for loans to the entrepreneurs or SMEs, those who can create the jobs needed in order to service utilities and mortgages, you will not have a functional economy, and houses have morphed from being affordable homes into being the main risky-investment of way too many families.

Sir, for the umpteenth time the Basel Committee’s risk weighted bank capital requirements: guarantees especially large bank crisis, caused by especially large exposures held against especially little capital to assets perceived as especially safe, but one of which suddenly one turns out as especially unsafe.

If John A. Shedd was alive today he might have opined: “A ship is safer on the oceans than staying in  a safe harbor, which might become dangerously overcrowded.”

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

The safest route for UK might be to take to the seas in a leaky boat, abandoning a safe haven that is becoming dangerously overpopulated.

Sir, Martin Wolf writes: “A significant generational divide has opened up. Those aged 22-39 experienced a 10 per cent fall in real earnings between 2007 and 2017. They were also particularly hard hit by the jump in average house prices from 3.6 times annual average earnings 20 years ago to 7.6 times today. Not surprisingly, the proportion of 25-34 year olds taking out a mortgage has fallen sharply, from 53 to 35 per cent.” “A bruising Brexit could shipwreck the British economy” November 17.

Sir, I would argue that has a lot to do with the fact that banks are allowed to leverage much more their equity when financing “safe” home purchases than when for instance financing job creation by means of loans to “risky” SMEs and entrepreneurs.

Because that means banks can earn much higher expected risk adjusted returns on their equity when financing home purchases than when instance financing job creation by means of loans to SMEs and entrepreneurs… and so they do finance much more home purchases than risky job creations.

But Martin Wolf does not think so. He thinks bankers should do what is right, no matter the incentives. I think that is a bit naïve of him.

The way I see it, one of these days all the young living in the basements will tell their parents. “We’ve been cheated. You move down and we move upstairs.”

And it will be hard to argue against that. My generation has surely not lived up to its part of that intergenerational holy social contract Edmund Burke wrote about. 

Wolf ends with “The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck”. No! I would instead hold that its bank regulators made it overstay in a supposedly safe harbor that is therefor rapidly and dangerously becoming overcrowded.

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

Sir, I have no idea if Martin Wolf has kids but, if he had, would his kids have grown stronger if he had rewarded them profusely for staying away from what they believe is risky? I don’t think so.

PS. If Brexit goes hand in hand with a Baselexit, Britain will at least to better than now.

@PerKurowski

Could not artificial intelligence, AI, sometimes prove more intelligent and socially concerned than humans?

Sir, John Thornhill writes: “Mireille Hildebrandt, professor of law and technology at the Free University of Brussels, says one of the dangers of AI is that we become overly reliant on “mindless minds” that we do not fully comprehend. She argues that the purpose and effect of these algorithms must therefore be testable and contestable in a courtroom. “If you cannot meaningfully explain your system’s decisions then you cannot make them,” she says.” “Only human intelligence can solve the AI challenge” April 18.

Indeed, but that should go for humans too! For instance bank regulators should be hauled in front of a courtroom, in order to answer some very basic questions about their risk weighted capital requirements for banks.

I ask this because I am absolutely sure that, if AI regulated our banks, then at least the following two questions would have been asked:

What is the purpose of banks? And something like John A Shedd’s “A ship in harbor is safe, but that is not what ships are for” would have been considered.

What causes big bank crises? And something like Voltaire’s “May God defend me from my friends, I can defend myself from my enemies” would have been considered.

As a consequence we would not be having our banks being regulated to avoid the risk taking the future of our grandchildren need, for no real bank stability purpose at all.

Here follows some of the questions that I would like to ask the current bank regulators in front of a court, since they do not even acknowledge hearing these.

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

@PerKurowski

Who sold IMF the fake idea that risk weighted capital requirements for banks do not distort the allocation of credit?

Sir, Shawn Donnan, referring to a IMF paper recently released by Christine Lagarde, “Gone with the Headwinds: Global Productivity”, writes that IMF economists warn: “The world’s economy is caught in a productivity trap thanks to an abrupt slowdown caused by the 2008 global financial crisis, which will yield more social turmoil if it is not addressed hold that” “IMF raises fear of slowing productivity” April 4.

Bank assets, based on how they are perceived ex ante, can be divided into safe and risky assets. The “safe”, by definition, currently include sovereigns and corporates with good credit ratings, and residential mortgages. The “risky” include what is unrated or what does not possess very good ratings… like loans to SMEs and entrepreneurs. It is also clear that she safe includes more of what is known; meaning what’s in the past or present, and the risky more of what is unknown, meaning what lies in the future.

Then suppose regulators had transparently told the banks: “We hate it so much when you take risks so that, from now on, if you finance something that is perceived as safe and stay away from what is perceived as risky, we will reward you by helping you to make you much higher risk adjusted returns on equity”.

In such a scenario, could it not be reasonably expected that IMF would be identifying regulatory risk aversion as something that could be slowing productivity? I mean, as John A Shedd said: “A ship in harbor is safe, but that is not what ships are for"

But, rewarding the banks for going for the safe, and staying away from the risky, is exactly what the current risk-weighted capital requirements for banks does.

And the IMF, even though here the report mentions: “Growing misallocation during the pre-global- financial-crisis financial boom [and] The global financial crisis might have worsened capital allocation further by impeding the growth of financially constrained firms relative to their less constrained counterparts.” says nothing about distorting bank regulations having something to do with this misallocation; an only produces second-degree explanations such as “banks may have “evergreened” loans to weak firms to delay loan-loss recognition and the need to raise capital”. How come?

April 3, in FT, Anjana Ahuja in reference to Robert Hare’s 1993 “Without Conscience: The Disturbing World of the Psychopaths Among Us,” wrote the following:

“Uncertainty is unsettling and certainty is alluring. Beware anyone who offers the latter with charisma, especially at this jittery juncture. Arm yourself against the charlatans…not only criminal psychopaths but the white-collar kind — who overstate their abilities, denigrate subordinates, have a tenuous grip on truth and seek greater power with shrinking oversight.”

Could it really be that one or more of these spellbinding salesmen of certainty illusions, technocratic besserwissers, managed to enthrall and blind the whole IMF? If so, Mme Lagarde owes herself and the IMF to find who they were… and to put a stop to it.

May I suggest she starts doing so by sending around to all those in the IMF that have had anything to do with bank regulations, some of those questions that, without any luck, I have tried to get answered, many times even in the IMF. Here’s the link: http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

But perhaps IMF already knows who those “charlatans” were, and just want to spare some members of their mutual admiration club some very deep embarrassments. If so then IMF is not fulfilling its responsibilities, as it should.

Too much is at stake! More than ever the world need to develop the capability of filtering out any fake experts, no matter how nice they are and no matter how important the networks they belong to.

PS. Twice I have had the opportunity to ask Mme Lagarde on this subject, and twice she kindly answered me, but nothing seems to have come out of it 

http://subprimeregulations.blogspot.com/2011/09/my-question-at-civil-society-townhall.html

http://subprimeregulations.blogspot.com/2013/10/my-question-for-umpteenth-time-to-world.html

PS. In December 2016, during the IMF’s Annual Research Conference, Olivier Blanchard also agreed with me there were needs to research how these capital requirements distort.

http://subprimeregulations.blogspot.com/2016/11/olivier-blanchard-agrees-there-is-need.html

@PerKurowski

To get our banks back to where we need them to be, we need a complete brand new set of regulators

Sir, since Patrick Jenkins misses out on the very important question of how our banks got here, it is hard for him to understand where they should go. “FT Big Read: Banking: Too dull to fail?” September 9.

We got here because regulators, without doing any type of research, concocted the loony theorem that bank crises were the result of excessive exposures to what was perceived as risky; and therefore imposed risk weighted capital requirements for banks; more perceived risk, more capital – less risk, less capital.

That immediately resulted in that banks, instead of maximizing their returns on equity by means of banking with reasoned audacity, or as Deirdre N. McCloskey would probably phrase it, by banking with courage and prudence, maximized their ROEs by minimizing equity.

And so the real problem is that banks can’t find the way out of their predicaments, unless we get ourselves a brand new set of regulators. Some who know about Voltaire’s “May God defend me from my friends [the AAA rated], I can defend myself from my enemies [the below BB- rated]”; and who know about John A Shedd’s “A ship in harbor is safe, but that is not what ships are for.”

And we need that to happen fast! If we want our kids and grandchildren to have jobs in the future; and if we want to have a real economy sufficiently healthy to help pay for our retirements, dumb regulatory risk aversion imposed on banks is about what we least can afford

Would the UK, and the Western World have become what it is with utilities like banks? Of course not!

PS. Jamie Dimon has still not yet convinced me he is a real banker and not just one of those bank equity minimizing bankers.

@PerKurowski ©

When will the Basel Committee define the purpose of our banks, and regulate accordingly?

Sir, Jim Brunsden writes of a “letter from the banking associations [that] calls on the Basel Committee on Banking Supervision to scrap plans for a floor limiting how far a bank can decrease its capital requirements by using internal risk models. “Lenders step up their fight against global capital reform.” September 2.

My immediate reaction could be to ask the bankers: When will you return to earning your returns on equity by doing banking and not by minimizing equity?

The current confusions about bank regulations all begin with that mindboggling fact that the regulator has not defined the purpose of banks. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

When will the regulator understand that banks must finance the “riskier” future and not just refinance the “safer” past?

When will the regulator understand that what’s rated AAA is more dangerous to banks than what’s rated below BB-?

When will the regulator understand Voltaire’s “May God defend me from my friends. I can defend myself from my enemies”

When will the regulator understand that risk weighted capital requirements distorts the allocation of credit?

When will the regulator understand the full monstrosity of its risk weighted capital requirements for banks?

PS. Sir, from your steadfast silence on these issues I can only deduct your “Without fear and without favour” is pure BS. You are clearly beholden to banks and their regulators, caring very little for the real economy on Main Street.

@PerKurowski ©

Mervyn King, for bank regulators to use the expected, as a direct proxy for the unexpected was, and is, radically dumb

Sir, John Plender, March 3, reviewed Mervyn King’s book “The End of Alchemy: Money, Banking and the Future of the Global Economy" And in doing so Plender writes that King argues that in a world of what economists now call “radical uncertainty”, it is not always possible to compute the expected utility of any action. There is simply no way of identifying the probabilities of all future events and no set of economist’s equations that describe people’s attempts to cope with that uncertainty.”

And according to Plender, King proposes a “central bankerly pawnbroking” facility to supply “liquidity, or emergency money, within a framework that eliminates the incentive for bank runs… That would displace what King regards as a flawed risk-weighted capital regime ill-suited to addressing radical uncertainty.”

And John Kay ends his discussion of King’s book with: “There is a world of difference between low-probability events drawn from the tail of a known statistical distribution and extreme events that happen but had not previously been imagined”, “The enduring certainty of radical uncertainty”, April 6.

Hold it there has all that really anything to do with the current risk weighted capital requirements for banks? Absolutely not!

What happened was that since the regulators did not know how to estimate the unexpected losses, those that bank capital is foremost to safeguard agains, they went out and used the expected credit risks. And since those risk were already cleared for by banks, with interest rates and the size of exposures, credit risks, when also used to set capital requirements, were given too much consideration.

And, for the umpteenth time: any risk, even if perfectly perceived leads to wrong actions if excessively considered.

And Plender also wrote about King arguing: “Banks satisfied investors’ desperate search for income by creating increasingly complex and risky financial products based chiefly on mortgage debt. Bank balance sheets grew explosively as property lending ballooned. At the same time, the capital of banks shrank as they took on more risk.

Again that is not really so! The increasingly complex and risky financial products chosen were entirely based on that these could be argued to be very safe, and therefore require banks to hold less capital. For instance mortgage debt would never ever have exploded as it did, if instead of receiving a 35 percent risk weight, it had the 100 percent risk weight assigned to “risky” SMEs and entrepreneurs.

And Plender also wrote about King arguing: “They were trapped by what game theorists call a prisoner’s dilemma. If they retreated from riskier lending and trading strategies while reducing their borrowings, a decline in short-term profits relative to their competitors would have caused staff to defect in pursuit of higher bonuses elsewhere and prompted calls for the chief executive’s head.”

Those “short tem profits” are not some absolute profits, but returns on equity, and so banks, searching for the highest profits, naturally favored those exposures that provided the highest expected risk adjusted returns on equity, in other words those that could be most leveraged.

Sir, I have no respect for a regulator like Mervyn King. He and all his colleagues decided to regulate banks without defining their purpose. Had they done so they would have known, that the most important social purpose of banks is to allocate credit efficiently to the real economy.

Now our banks do not finance the riskier future they just refinance the, for the short time being, safer past.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926 

I can understand journalists covering the reputation of old friends… but is that really their role and duty? “Without fear and without favor”… Hah!

@PerKurowski ©

Rod Stewart, it would be hard for you to find your way back home, it has been castrated.

Sir, Martin Wolf opines: “The battle over Brexit matters to the world” February 10. But does that matter the most to Britain?

Rod Stewart in “Way Back Home” remembers his childhood with: “And we always kept the laughter and the smile upon our face. In that good-old-fashion British way with pride and faultless grace”

And his song ends with Winston Churchill reciting in the background: “We shall fight on the beaches. We shall fight on the landing grounds. We shall fight in the fields, and in the streets. We shall fight in the hills, we shall never surrender”

But Rod, for your info, Churchill’s England has indeed surrendered to risk aversion, thanks to its bank regulators.

In Britain the banking sector represented so much. And just to think about the reasoned and astute daring of their merchant banks should make any Britt proud.

But you have a Britain that now allows foreign bank regulators in the Basel Committee, to allow its banks to hold less equity against what is perceived as safe than against what is perceive as risky; and therefore Britain now allows its bankers to make higher expected risk adjusted profits when lending to “the safe” than when lending to “the risky”; which of course is de-testosteronizing, or outright castrating Britain’s banks.

Therefore much more important for Britain than a Brexit, is a Baselexit, which means ignoring all those regulators who ignore that: “A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

The more you stabilize, the more you risk making the system brittle, so the more you really destabilize.

Sir, I refer to Paul Tucker’s “The world needs different ways of taming capital flows” October 10.

I have always, in the case of small bath-tubes placed next to the global oceans, been in favor of capital controls. And I have most specially liked what Chile used to do, namely forcing funds to park themselves for a time doing nothing, in order to show their serious intentions, before these were allowed to court beautiful Chilean daughters.

But, I have also been aware that every time you stop funds from going somewhere, those funds could remain somewhere even more dangerous.

Here Paul Tucker, a former deputy governor of the Bank of England, holds that “the objective [of capital controls] should be limited: guarding against threats to stability”

But, when regulators, with their credit risk weighted capital requirements for banks decided to create great incentives for banks not sailing risky waters, and instead stay in safe havens… they completely ignored that safe-havens can become dangerously overpopulated… in a very short time.

In other words, the more you stabilize, the more you make the system brittle, so the more you really destabilize.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926