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

A real review of UK’s financial system requires breaching the etiquette rules of a mutual admiration club

Sir, I refer to Huw van Steenis’ “An opportunity for the Bank of England to rethink its priorities” June 21.

Is he really recommending among other for banks to “use machine learning”, so that they can better cope with even more voluminous regulations…like that on climate change that has become so fashionable nowadays?

Well no Sir. “A review of the UK’s financial system to strengthen the BoE’s agenda, toolkit and capabilities” should, foremost, include a review of the credit risk weighted bank capital requirements. 

That could start by asking Mark Carney, why do you believe that what is perceived as risky is more dangerous to our bank system than what is perceived as safe.

You could follow it up with: Does the use of this not guarantee especially large bank crisis, caused by especially large exposures to what was perceived (or decreed, like the Eurozone sovereign's 0% risk weight) as especially safe, and ended up being especially risky, against especially little capital?

You could follow it up with: Favoring so much bank lending to the safer present over that of the riskier future not risk weaken our real economy? 

But of course, asking those questions and similar that shall not be asked is not comme il fautin the central-bankers’ and regulators’ mutual admiration club.

Sir, one single capital requirement 10-15% on all bank assets would serve us much better than the BoE’s entire current rulebook, distorting less the allocation of credit and bringing back into banking all that “risky” activity that has been expelled by regulators to be handled by other intermediaries. 

But how would then ten thousands of regulators justify their salaries? 

PS. My letter to the Financial Stability Board

@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

If AI was allowed to have a crack at the weights used by current risk weighted capital requirements for banks, the regulators would surely have a lot of explaining to do.

Sir, John Thornhill writes that he saw an artificial intelligence program crack in 12 minutes and 50 seconds the mindbendingly complex Enigma code used by the Germans during the second world war” “Competent computers still cannot comprehend” January 9.

I wish AI would also be asked to suggest some weights for the risk weighted capital requirements for banks.

For instance in Basel II the standardized risk weight assigned to something rated AAA, and therefore perceived as very safe, something to which banks could build up dangerous exposures, is 20%; while the risk weight for something rated below BB-, and therefore perceived to be very risky, and therefore banker won’t touch it with a ten feet pole, is 150%.

I would love to see for instance Mario Draghi’s, Mark Carney’s, and Stefan Ingves’ faces, if artificial intelligence, smilingly, came up with weights indicating a quite inverse relation between perceived risks and real dangers to a banking system.

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

@PerKurowski

How long will regulators believe that unrated entrepreneurs pose more danger to banks than investment graded companies?

Sir, Brooke Masters writes that “a group of banks collectively lent €1.6bn to a South African billionaire. At the time, these “margin loans” looked like really safe bets because the lending was secured by 628m Steinhoff shares worth €3.2bn and the company had an investment-grade rating” and now they “were sitting on paper losses of €1.2bn” “Beware of top execs who depend on share-backed loans”, December 16.

Sir, this just another evidence of that what is really dangerous for banks is not what is perceived risky but what could erroneously be perceived as safe. And therefore that the current risk weighted capital requirements for banks makes absolutely no sense?

Sir, why is it so hard for you to ask regulators: “Is it not when banks perceive something as safe that we would like for these to hold the most capital?”

Are you afraid they will give you a convincing answer and leave you standing there as a fool? Don’t you think that if they had had an answer they would have shut me up decades ago?

Simon Kuper in today’s FT writes about how America an Britain have fallen into the hands of incompetent amateurish well-off baby boomer politicians, born between 1946 and 1964, “Brexit, Trump and a generation of incompetents”.

Sir why could that not also be applicable to baby boomer regulators, like for instance Mario Draghi, Stefan Ingves or Mark Carney?

PS. We should note though that it was a pre-baby-boomer generation’s Paul Volcker and Robin Leigh-Pemberton who were responsible for the origins of this monumental regulatory faux pas.

@PerKurowski

If you allow banks to earn higher risk adjusted returns on equity on mortgage lending than when lending to entrepreneurs, bad things will sure ensue

Sir, Jonathan Eley writes: “in the UK…younger people especially are being priced out of the market while their parents and grandparents benefit from decades of above-inflation rises in home values. The ruling Conservatives, traditionally the party of home ownership, now finds itself shunned by millennial voters frustrated by spiralling housing costs” “Why Budget fix will not repair market” November 21.

And among the long list of factors that has distorted the market in favor of houses Eley includes: “Mortgage securitisation facilitated further growth, as did the Basel II reforms cutting the risk weights applied to real estate. This made mortgage lending less capital-intensive for banks.”

This Sir is one of the very few recognitions, by FT journalists, of the fact that risk weighting the capital requirements for banks distorts the allocation of bank credit.

Indeed, Basel I in 1988 assigned a risk weight of 50% to loans fully secured by mortgage on residential property that is rented or is (or is intended to be) occupied by the borrower, and Basel II reduced that to 35%. Both Basel I and II assigned a risk weight of 100% to loans to unrated SMEs or entrepreneurs.

But the real bottom line significance of “mortgage lending [being] less capital-intensive for banks”, is that banks when being allowed to leverage more with mortgages than with loans to SMEs and entrepreneurs, earn higher expected risk adjusted returns on equity with mortgages than with loans to SMEs and entrepreneurs, and will therefore finance houses much much more than SMEs and entrepreneurs, than what they would have done in the absence of this distortion.

As I have written to you in many occasion before, this “causes banks to finance the basements where the kids can live with their parents, but not the necessary job creation required for the kids to be able to become themselves parents in the future.”

And the day the young will look up from their IPhones, and understand what has happened, they could/should become very angry with those regulators that so brazenly violated that holy intergenerational social bond Edmund Burke wrote about.

I can almost hear many millennials some years down the road telling (yelling) their parents “You go down to the basement, it’s now our turn to live upstairs!”

Eley also quotes Greg Davies, a behavioural economist with: “People like houses as an investment because they are tangible. They feel they understand them far more than funds or shares or bonds.”

But the real measurement of the worth of any investment happens the moment you want to convert it into current purchase capacity. In this respect people should think about to whom they could sell their house in the future, at its current real prices.

PS. In June 2017 you published a letter by Chris Watling that refers exactly to this, “Blame Basel capital rules for the UK’s house price bonanza”.

What most surprises me is that regulators don’t even acknowledge they distort, much less discuss it… and that the Financial Times refuses to call the regulators out on this… especially since all that distortion is for no stability purpose at all, much the contrary.

It is clear that no matter its motto of “Without fear and without favor”, FT does not have what it takes to for instance ask Mark Carney of BoE and FSB, to explain the reasoning behind Basel II’s meager risk weight of only 20% to the so dangerous AAA rated and its whopping 150% to the so innocous below BB- rated.

@PerKurowski

Martin Wolf insists on turning a blind eye to the Financial Instability AAA-Bomb armed by the Basel Committee

Sir, Martin Wolf writes: “it has to be possible for the financial system to cope with changes in asset prices without blowing up the world economy… An essential part of achieving this is deleveraging and in other ways strengthening intermediaries, notably banks.” “Central banks alone cannot stabilise finance” October 25.

What did the Basel Committee for Banking Supervision do, for instance with Basel II?

They assigned risk weights of 0% for AAA rated sovereigns, 20% for AAA rated private sector, 35% for residential mortgages and 100% for the unrated private sector.

That, with a basic capital requirement of 8%, translated into banks being able to leverage their capital (equity): limitless with AAA rated sovereigns, 62.5 times with AAA rated private sector, 35.7 times with residential mortgages and 12.5 times with the unrated private sector.

Major bank crisis never ever result from excessive lending to what is perceived as risky. These, with the exception for when some major unforeseen events occur, always result from excessive exposures (credit bubbles) to what is ex ante perceived as safe, but that ex post turns out to be very risky, often precisely because too much credit has been given to it.

So considering that this regulation implies telling banks to go to where for the system it is the most dangerous, while holding the least capital, it must truly be classified as a bomb against financial stability. In 2009, in sad jest, I set up a blog titled The AAA-Bomb.

And oh if the only thing that bomb produced was financial instability. But no, it also produces economic weakness, by negating the “risky” the access to credit they need in order to keep the economy going forward. We finance much more the building of safe basements in which our jobless children can live, than those “risky” who could have a better chance to provide them with the jobs they need to move to their own upstairs.

And don’t tell us that if a bank can leverage much more with the “safe”, and thereby obtain much higher expected returns on equity with the “safe” than with the “risky”, it will keep on bothering with lending to SMEs or entrepreneurs. Of course it won’t. The risk weighted capital requirements for banks have turned our savvy know-your-client loan officers into dumb equity minimizers.

With respect to “deleveraging and in other ways strengthening intermediaries, notably banks” Wolf now opines “That has indeed happened, but not, in my view, nearly enough.”

Well of course not! How could that be, when even Martin Wolf himself has played a great role in silencing the existence of that bomb… that about which I have written to him more than 400 letters and to FT in general more than 2.500.

Finally Martin Wolf writes about “the failure of governments to address the many frailties that still lead to financial excess. The central banks did their job. Unfortunately, almost nobody else has done theirs”

What? Look at the major role central bankers like Paul Volcker, Mario Draghi, Jaime Caruana, Mark Carney, Stefan Ingves and many other have had or have in the area of banking regulations. They, by ignoring the distortions in the allocation of bank credit to the real economy these regulations caused, have wasted most of the stimulus they have been injecting with their quantitative easing and low interest rates.

Sir, since getting rid of the risk weighted capital requirements for banks is not even mentioned here by Wolf, and you yourself can be considered a partner in the silencing of me, I guess this letter will also be added to the silenced ones… but of which I of course keep a record… here on the web.

PS. Come to think of it, should not central bankers even recuse themselves when it comes to bank regulations?

PS. Truly, FT's lack of curiosity amazes me

PS. Sir, click if you want an aide mémoire on the mistakes

@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

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

Any regulator stress-testing banks that ignores what should be on the balance sheets and is not, should be fired!

Sir, Emma Dunkley and Martin Arnold report on the recent stress testing of British banks performed by Bank of England, “Stress test flop fuels criticism of turnaround efforts at RBS” December 1.

Just want to remind again that bank regulators who only look at what is on the banks’ balance sheets while ignoring entirely what should be there if the banking needs of the real economy were served, should be fired.

And of course the BoE has most probably not done that. That I say because Mark Carney is one of those regulators who see nothing wrong with capital requirements for banks that uses a risk weight of zero percent for the sovereign and 100% for SMEs and entrepreneurs.

Sir, should the stress testing of our banks also say something about their relative usefulness?

In 1997 I ended an Op-Ed with: “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

Sir, I have no detailed knowledge about British banks, but what if RBS was the bank serving Britain’s real 

PS. We need some outstanding Main-Street/Real Economy knowledgeable, to stress test bank regulators

@PerKurowski

What is puzzling is that regulators, like Mark Carney, cannot see they might also be a source of huge systemic risk

Sir, Ed Crook, with respect to Mark Carney, the governor of BoE and the chair of FSB arguing last year that regulators need to address climate change promptly, quotes Daniel Yergin with: “It was puzzling that a central bank would choose to identify investment in this sector as a major systemic risk to the global financial system, when there are so many other more obvious and immediate risks” “Energy expert dismisses warnings of carbon bubble” October 20.

On occasions I myself have proposed slightly less capital requirements for banks based on environmental sustainability and job creation ratings, so that banks earn a little higher risk adjusted returns on lending when they are doing what many of us consider as social good. But I have always done that with much trepidation; as it clearly requires a lot of hubris to think you could intervene so without causing any unexpected negative consequences.

But the Basel Committee and FSB regulators suffer no such inhibitions. They have gladly gone ahead with imposing credit risk weighted capital requirements, all without the slightest consideration to how that could (and is) dangerously distort (for no purpose) the allocation of credit to the real economy.

In my homeland (Venezuela) we often refer to those who have been awarded power (or have given themselves powers) in order to engage in dangerous activities, as being monkeys with razorblades. That description applies perfectly well to regulators who are not eve aware of that their actions might in itself constitute the largest systemic risk for the financial system (and for the economy)

@PerKurowski ©

Mark Carney: Who should offset the credit distributional consequences of the risk/future adverse bank regulations?

Sir, Martin Wolf mentions that BoE’s Mark Carney, noted monetary policy has distributional consequences but “it is for broader government to offset them if they so choose”. “The unwise war against low interest rates” October 19.

The risk weighted capital requirements for banks has distributional consequences too, in this case with respect of bank credit.

For instance, a risk weight of 35% when financing residential housing, and a risk weight of 100% for loans to SMEs, helps the young to have more availability of basements in which to live with their parents, than perspectives of a new generation of jobs.

And the blatantly statist 0% risk weighting of the sovereign, skews the distribution of credit away from the private sector and towards government bureaucrats.

So the question is: Should we now try to add a new layer of non-transparent complications so as to try to offset those credit distributional consequences, or should we simply get rid of risk-weighted capital requirements altogether?

I clearly favor the latter option but, doing so, I have to continuously confront those who like Martin Wolf know, quite correctly, that a below BB- borrower is risky (150% risk weight) but, unfortunately, do not have the necessary wisdom to fathom that what’s AAA rated, and therefore only 20% risk weighted, is, or will be made by this, much more dangerous to bank systems.

Wolf also states: “Lower interest rates need not worsen pension deficits; that depends on what happens to the value of assets held by pension funds. Normally, lower interest rates should raise the latter. What would lower both real interest rates and asset prices is greater pessimism about economic prospects. Central banks do not cause such pessimism but try to offset it.”

That is so very wrong! The only moment when the value of assets held by pension funds is really important, is when these have to be sold in the market in order to access purchasing power for the pensioners. And with these risk weighted bank regulations that impede banks from financing the risky future, and have these only refinancing the safer past and present, you can bet that the future economy will not be strong enough to pay well for those assets.

Of course Wolf might think it is the bankers’ duty to overcome such regulations, but that would be to ignore completely the overriding objective of bankers which is to maximize the risk adjusted returns on equity (and their bonuses).

PS. On the issue of low interest rates, let me as a financial consultant with extensive main-street experience, remind you that few things stimulate projects to advance faster from plans into income generating realities, than high interest rates. Low interest rates feed a lot of project execution laziness into the active real economy.

@PerKurowski ©

How do politicians stand such failed technocrats as those in the Basel Committee and Financial Stability Board?

Sir, you quote BoE’s Mark Carney saying: “The objectives are what are set by the politicians. The policies are done by technocrats,” “Carney’s gentle reminder about BoE independence” October 17.

So let us assume that having banks perform the allocation of bank credit to the real economy as efficiently as possible, while at the same time ascertaining the stability of the banking sector, would be a reasonable objective set by the politicians. In fact I challenge you to find a politician who would dare to disagree with that objective.

But now let’s see what policies the technocrats, like Mark Carney, the current chairman of the G20s Financial Stability Board, and his colleagues on the Basel Committee have come up with.

They have imposed risk weighted capital requirements for banks that, allowing banks to leverage their equity and the implicit support these receive from society differently, based on ex ante perceived risks already cleared for, utterly distort the allocation of bank credit to the real economy.

And they designed that regulation based on the premise that what is ex ante perceived as risky is risky for the bank system, thereby completely ignoring all empirical evidences that clearly show that what’s really dangerous to the bank systems, is unexpected events and excessive exposures to what was ex ante perceived as safe but that ex post turned out to be very risky.

So the real question Sir would be: How do politician stand for such lousy technocrats?

@PerKurowski ©

If one incorrectly accuses bank regulators of being totally inept, in public, one would think they would answer

Sir, Eric Lonergan writes: “Mark Carney is right: the traditional use of interest rates has run its course. For central banks to continue playing a role in preventing recession and raising growth, they will need to rethink the entire premise of monetary policy and aim their firepower directly at consumer spending and corporate investment”, “Interest rates are a spent economic force” August 13.

What central banks, and regulators, must really rethink is the whole bank regulatory framework’s pillar; the risk weighted capital requirements for banks. The problem is they are doing their utmost to avoid that Pandora box to be opened, because they know that would disclose their incredible technocratic-besserwisser disabilities.

Sir, you know what I think of these regulations, and you might think I am obsessed with the issue, which I am… but have you never asked yourself why my arguments are not even discussed? I have publicly accused Mark Carney, Mario Draghi, Stefan Ingves and many other of being absolutely inept bank regulators… and, if I was wrong, one could reasonably assume they would love to strongly correct me… in public.

PS. Sir, as you might be fed up receiving my many letters, you could also ask the regulators to answer my questions, and then you might get rid of me for good. Do you dare!

@PerKurowski ©

#BoE #FSB Mark Carney why do you bank regulators discriminate so much against us SMEs and entrepreneurs?

Sir, Mitul Patel with reference to that “The Bank of England’s Monetary Policy Committee will formally meet on Thursday for the first time since the EU referendum result” expresses many valid concerns. “Question marks remain as BoE grapples with monetary policy poser” July 12

But the following question is in my mind of much larger importance:

Mr. Mark Carney, you as the chair of the Financial Stability Board must be well versed on the subject of bank regulations, and so could you please explain to us SMEs and entrepreneurs the following?

We, who are usually perceived as risky, usually perceive much less bank credit and pay much higher risk premiums than those perceived as safe. And so, why do banks, when compared to the capital they need to hold against those perceived as safe, need to hold much more capital against loans to us.

Since banks can then leverage their equity, and the support they receive from taxpayers much more with assets perceived as safe, than with loans to us, we now have a much harder time to provide the banks with competitive risk adjusted ROEs. And so we get even less bank credit or have to pay even higher interest rates.

And to top it up we cannot understand where you all got the idea that banks could build up the excessive and dangerous exposures that could threaten the bank system, with small and high interest rate loans to borrowers like us.

So Sir, can you explain it all for us? Why should our access to bank credit be curtailed? Are we not useful to the real economy?

Thanks,

Will Mark Carney dare to take that question, or will he as I once heard Robert McNamara recommend: “If they make you a question you don’t like just answer the question you wanted to hear”?

@PerKurowski ©

Are risk weights of King John 0%, AAArisktocracy 20% and Englishmen 100% in the spirit of England’s Magna Carta?

Sir, with respect to Mark Carney having opined on the risks of Brexit you hold that “It is imperative to stop the attacks on the BOE because the central bank governor must command public confidence to do his job. “This is no time to attack the credibility of the BoE. The leaders of the Brexit campaign owe Mark Carney an apology” July 30.

I cared little about Carney giving opinions on climate change, and I care little about his opinions on Brexit but, Mark Carney is the chair of the Financial Stability Board, and so I do care about him regulating banks, when he does not understanding banking risks.

He does not understand the most basic truth, namely that those dangerously excessive bank exposures that could set of a major bank crisis, are never ever built with assets ex ante perceived as risky but always with assets ex ante perceived as safe. “May God defend me from my friends [what’s safe]: I can defend myself from my enemies [what’s risky]” Voltaire

And Carney has not understood either that allowing for different capital requirements, allows for different leverage of equity or societal support, which produces distorted risk adjusted returns on equity, and which distorts the allocation of bank credit to the real economy. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd

With the Basel Accord of 1988 bank regulators assigned a 0% risk weight for loans to the sovereign and 100% to the private sector. Some years later, 2004, with Basel II, they reduced the risk-weight for loans to those in the private sector rated AAA to AA to 20%, and left the unrated with their 100%.

Sir, do you think it is in the spirit of your Magna Carta to include risk-weights like King John 0%, AAArisktocracy 20% and Englishmen 100%? I do not. And so in essence, the bank regulators, your BoE and your Mark Carney, are messing with the foundations of your country, and you, FT, you keep mum on it.

But I won’t. I will protest those regulations, in all ways possible, not because of England, but because it is too important for the future of my children and grandchildren, my constituency.

@PerKurowski ©

The real UK economy, SMEs and entrepreneurs, need also to be invited to a “fireside chat” with Mark Carney and BoE

Sir, Martin Arnold and Caroline Binham report on the invitation of Bank of England extended to “The heads of the five big UK banks — HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered — along with a few others including Nationwide and TSB”, in order to have a “Fireside chat” May 29.

The real UK economy should also be invited, so that it is given a chance to ask: “Mark Carney, BoE, when compared to that of SMEs and entrepreneurs, when will bureaucrats stop having preferential access to bank credit?”

Let me explain: The current risk weight of the “safe” sovereign is zero percent, and that of “risky” not-rated citizens 100 percent.

That means banks need to hold much less or no capital at all, when lending to the sovereign, than when lending citizens; which means banks can leverage their equity and the support they receive from society (taxpayers) much more when lending to the sovereign than when lending to citizens; which means banks can earn higher risk adjusted returns on equity when lending to sovereigns than when lending to citizens; and which means banks favor more and more lending to the sovereign over lending to the citizen. And so the SMEs and the entrepreneurs who basically represent the “not-rated citizens” must face harsher relative conditions accessing bank credit, than those that would prevail in the case all bank assets faced the same capital requirements. 

There could be some discussion on whether lending to sovereigns represent less risk than lending to SMEs and entrepreneurs. I do not believe so. Banks do not create dangerous not diversified excessive exposures to SMEs and entrepreneurs; and, at the end of the day, the sovereign derives all its strength from its citizens.

But I doubt the real economy will be invited to the fireside chat… the regulators do not want to hear: “Sir, especially after Basel II introduced risk-weights that also favor the safer of the private sector, the AAArisktocracy; do you know how many million of loans to SMEs and entrepreneurs around the world have not been awarded, only because of your risk weighted capital requirements for banks? Have you any idea of how many jobs for our young ones have not been created as a direct consequence of this?

@PerKurowski ©

It behooves us to stress-test our main bank regulators; the Basel Committee and the Financial Stability Board

Sir, Caroline Binham, Stephen Foley and Madison Marriage report “Systemwide and individual stress-testing of asset managers, as well as examining whether greater disclosure should be made by mutual funds, were among 14 recommendations made by the Basel-based Financial Stability Board to authorities across the G20 nations yesterday” “Stress test asset managers, says FSB” June 23.

Much more important for us is to stress-test bank regulators, to be sure they really know what they’re doing.

Since about two decades I have been asking regulators many questions that have not been answered. And so for a start I would like to ask Mark Carney, the current chair of the FSB; Mario Draghi, the former chair of FSB and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision; and Stefan Ingves the current chair of the Basel Committee, the following:

For the purpose of setting the capital requirements for banks, in Basel II you assigned a risk weight of 150 percent to what is rated highly speculative and worse, below BB- but only 20 percent to what is rated AAA to AA.

Gentlemen why did you do that? Major bank crises have never ever resulted from excessive exposures to what is perceived as really risky, but always from what ex ante was perceived as safe but that ex post turned out not to be.

If these regulators are not capable of giving us a credible answer, then I submit they are not capable enough to stress test any bank, asset manager or mutual fund.

And, if they dare answer the first question, then make them explain all this!

@PerKurowski ©

Since you cannot put up a Leave Britain to referendum, you must force your Parliament to act more forcefully in EU

Sir, Chris Giles, fighting Brexit argues: “some [EU] economic officials have been granted constrained powers to take decisions for the public good… Competition authorities help arrange the playing field on which companies compete. Parliament’s ultimate sovereignty comes in the ability to remove these powers”, “Economists’ rare unity highlights the perils of Brexit” June 16.

But the problem is that many EU issues are considered so remotely, and in such convoluted ways, that parliaments are often not even aware of what is happening.

As an example, and though it is not directly a EU authority, let me refer to the Basel Committee for Banking Supervision.

The BCBS imposed de facto credit risk weighted capital requirements for banks which meant banks could hold assets perceived or deemed as safe against less capital that assets perceived as risky. And introduced a distortion of the playing field where borrowers compete for bank credit. 

What would the chances of the following proposal having been approved by any European parliament?

“By means of regulations, and in order to make our bank system safer, we propose to help banks earn much higher risk adjusted returns on equity when lending to what is safe, like to sovereigns, the AAArisktocracy and the financing of houses; and so that they are given good incentives to stay away from lending to what is risky, like to SMEs, entrepreneurs and citizens in general”

I bet no MP would have even dared to present such proposal for consideration.

And just think of proposing what the Basel Accord of 1988 decided: “The risk weight of the sovereign (the government) is zero percent and that of citizens 100 percent”

But since BoE, where Mark Carney is the current Chair of the Financial Stability Committee, and all other locals involved seem to agree with the above mentioned distortions, you are facing much more than a stay or leave EU issue.

Since you cannot solve it by putting a Leave Britain up to a referendum, you better get your Parliament to work on issues like this, hurriedly, come what may.

I would suggest you start by asking Mark Carney why he feels it is adequate that those assets rated below BB-, speculative or worse, and to which banks would never ever voluntarily create excessive exposures to, should have a risk weight of 150%, while the AAA to AA rated assets, those to which excessive exposures is precisely the stuff that mayor bank crises are made of, these have only a risk weight of 20%.

PS. “Rare unity” between economists does not have to mean they are right. EU is full of problems and I have not seen economists considering much the possible unexpected consequences of a strong rejection of Brexit.

PS. For full disclosure I also belong to those who have had enough with at least quite many of the experts.

@PerKurowski ©