How long will it take for bank regulators to ask AI regulators for a little favour?

Sir, Michael Skapinker writes: “Why did no one speak up “inside Sil­icon Val­ley Bank before it col­lapsed? People thought speak­ing up would leave them vulnerable to vic­tim­isa­tion.” “Listen and you might learn something” FT July 17.

Thought, or knew? 

What should a risk manager know about the risk of informing the board that according to revised models that included the interest rate risk (duration), SVB’ risk weighted capital/equity requirements would increase substantially? 

Would a bank supervisor like to go on record informing his superiors, the regulators, that because of IRR, the 0% risk weighting of long-term US Treasury bonds made no sense?

Sir, instead of exposing humans to victimisation, it seems precisely the moment that we could make great use of artificial intelligence. 

E.g., I asked ChatGPT – OpenAI: “Should regulators and supervisors be aware of risks with US Treasury long-term bonds? 

It answered: “Yes, they should be aware of the duration risk and interest rate risk associated with long-term Treasury bonds held by banks”

But of course, AI could be vulnerable to victimisation too.

I asked Open AI:” Can those who become an Artificial Intelligence regulator, make you or any other AI participants agree with all they want you to agree with?” 

It answered: “Regulators aim to address ethical considerations, potential risks, and ensure responsible AI practices… AI systems don't possess independent consciousness or the ability to willingly agree or disagree with regulations. Their behavior is determined by their programming and the data they have been trained on.”

Sir, you know much to well, that for more than two decades I’ve been vociferating, as much as I can, my criticism against the risk weighted bank capital requirements. Clearly when someone does want to hear, he does not hear. For instance, as Upton Sinclair Jr. explained it: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Therefore, when I heard about OpenAI, I asked it a series of questions. From the answers you must agree I found an ally. I just wonder how long it will take for bank regulators to shut it up. “We can’t have someone questioning the risk weights of 0% government – 100% citizens. Can we?”

How long will it take to FT to really listen to some of its faithful subscribers?

PS. US Treasury long-term bonds still carry a 0% risk weight.

https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-should-bank.html

https://perkurowski.blogspot.com/2023/07/ai-chatgpt-open-ai-artificial.html

https://subprimeregulations.blogspot.com/2023/06/my-questions-to-chatgpt-openai-about.html

@PerKurowski

The access to bank credit manipulation costs us infinitely more than Libor and all other manipulations put together

Sir, Michael Skapinker, referencing a traders working conditions, gives a well reasoned and heartfelt explanation of why he feels sorry for at least one of those recently found responsible for manipulating the Libor rate. I sure hope it will be read before any sentencing, “The Libor trial and how to deal with a bullying, dishonest boss” July 7.

But let me add to that the following:

I am absolutely convinced that the risk weighted capital requirements for banks, introduced by the Basel Committee in 1988 signifies an outright manipulation of the access to bank credit. By favoring what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential housing, these sectors have received way too much bank credit on way too easy terms. And, as a consequence, those perceived as risky, like SMEs and entrepreneurs, those upon much of the future economic growth and job creation depends, have received way too little credit, in way too harsh relative terms.

If we add the costs of having dangerously overpopulated safe havens like AAA rated securities and Greece, and around the world hindered millions of small loans to be given to those who most needed it, the costs of this distortion for the society are mind-blowing. These exceed thousand fold whatever damages might have been produced by all other recent manipulations put together.

And what has happened to the bank credit access manipulators? Absolutely nothing, in many ways they have even been promoted.

And what has happened to whistle blowers like me. Not much, except for having to suffer seeing my arguments ignored, while being sure this will affect negatively the future of my own constituency, my children and grandchildren; as well as the future of those of the baby-boomer generation about to retire.

The costs of a Libor manipulation, winners and losers, these net out.

The costs of distorting the access to bank credit do, medium and long term, only produce losers, and so they are boundless.

And even though all that access or bank credit manipulation implies absolutely no criminal act, I believe it was done unwittingly and with only good intentions, and only pure innocent stupidity prevailed, it sure help to put all other manipulations in a different perspective. 

@PerKurowski ©

The by far best “collect as you go” pension plan, is built around loving kids and a healthy economy.

Sir, I refer to Michael Skapinker’s “Five possible scenarios for a ‘work till you drop’ world” March 10.

In my book “Voice and Noise” of 2006, on the issue of “Social Security in Real Terms” I wrote:

“In order for your savings and social security investments to be worth something when you need them, the real economy must be in a reasonable condition at the time of your selling your investments. When I hear the many discussions about the financial preparation needed to accommodate for the upcoming demographic changes, I find it truly amazing how little is being said about the economy in real terms.

Considering that there will be many fewer young ones to drive people around and shovel snow, much of today’s beautiful real estate might drop in value when the elderly start selling their houses to live close to a metro, hospital, and more reasonable weather conditions. So, before putting the money away in a private accumulation trust I think we need to rethink the whole retirement strategy.

Also we should never forget that historically, through all economic cycles, there is nothing so valuable in terms of personal social security as having many well-educated loving children to take care of you, and that you can’t, in real terms, beat that with any social security reform.”

I have the very loving very great kids, but I am still very concerned. Regulators concocted credit-risk weighted capital requirements for banks, and that is seriously distorting the allocation of credit to the real economy. If that mistake is not soon corrected, our economies are doomed to stall and fall.

How many kids of working age are not already living in the basements of their ‘work till you drop’ parents?

Sir, as I see it, we have no choice but to fire, immediately, the current bunch of dumb bank regulators.

@PerKurowski ©

It was the regulatory culture and not the banking culture that went wrong. The regulators need a real bashing.

Michael Skapinker writes about “the recent decision by the UK Financial Conduct Authority to drop its probe into the culture of banking is wrong, and why members of the Treasury parliamentary committee are right to call for hearings into why it did so.” “Bankers need a (metaphorical) bashing — as do the rest of us” January 7. He also opines that: “Lax regulation led to the 2008 banking crisis.”

Sir, what if FCA’s probe into the culture of banking would have come up with the following:

“The culture of bankers has not changed; as usual they do their best to provide their shareholders with the highest risk adjusted returns on equity possible.

This time though, the regulators, the Basel Committee, allowed banks to leverage their equity differently with assets, depending on the ex ante perceived risk of these. For instance with Basel II, they authorized a leverage of over 60 to 1 for any AAA to AA private asset but only 12 to 1 in the case of a loan to an unrated corporation.

That meant of course that the risk adjusted returns on equity for safe assets shot up in the sky. An expected 0.5 percent risk adjusted margin to something safe could produce a 30 percent on equity, while a loan to a risky SME or entrepreneur, with the same expected risk adjusted margin, would only yield about a 7 percent ROE.

And so banks, naturally, as should have been expected, went overboard in exposures to for instance AAA rated securities and loans to Greece. And assets perceived ex ante as safe but that ex post turn out to be risky, is precisely the stuff bank crisis are made off. In this particular case the crisis ended up so much worse by the fact that banks were holding very little capital when the ex post realities set in.

Another unfortunate consequence has of course been that banks have either completely abandoned the lending to the risky, or are charging them extra premiums in order to compensate for the regulatory distortions.

We have to make a note that the distortion that caused the crisis remains in effect with Basel III.

In order for regulators to introduce the necessary correction, we want to remind them of the following:

Bank capital is to cover for unexpected losses and so, to have these based on expected credit risk, a risk already cleared for by banks by means of interest rates and size of exposure makes absolutely no sense.

The safer and asset is perceived the greater its potential to deliver unexpected losses.

The regulators should not worry about the credit risk of bank assets but about how banks manage those risks, and a good place to start is by not introducing distortions that makes it more difficult for them.

In conclusion “lax regulations” had nothing to do with causing this crisis. It was all about seriously bad regulations. Of course we feel sad about it, but our bank regulation colleagues must be held accountable for what they did, otherwise the moral hazard becomes just too big to handle.

Yours truly”

Sir, could it not be that FCA has abandoned its probe into the culture of banks because its conclusions would reflect very badly on the culture of regulators?

Skapinker with respect to the malpractice that is allowed to go undetected, like because of the silence of the media before the 2008 crisis writes: “One part of society needs to step in when another does not. It is through their actions that the system is kept honest, more or less, or at least honest enough for it to keep functioning”

Absolutely, but why has FT not helped me to do so? How can you be so sure I am wrong… or is it something else?

@PerKurowski ©

What if your company was so honest you could lose your job or you had to accept a lousy salary?

Sir, Michael Skapinker writes about someone who bought a company, discovered it was engaging in corrupt practices, disclosed it to the government, was told to correct it, and the company lost one half of its business. “What to do if you discover your company is corrupt” October 15.

What would you do if you discover your company, is so scrupulously correct with absolutely everything, even with the silliest regulations, that it begins to lose business and could disappear

Unfortunately, we do not live in a perfect world, in which all are scrupulously correct.

And sometimes I have even got the feeling that the corruption fighters themselves, are engaged in some very devious kind of corruption.

Am I not against corruption? Of course I am! But I am also absolutely sure that the best way of fighting corruption is to reduce the temptations. In other words not to require weak humans to be able to resist too big temptations.

I come from Venezuela. There the government receives 97 percent of all export earnings… and these, oil revenues, do not even come as a result of a productive effort of its citizens… it was given to us by God.

To impede corruption in Venezuela, the minimum minimorum needed, would be to share out all net oil revenues to all citizens. But that is not happening, because there is always someone in waiting for the opportunity to manage and exercise the power provided by those oil revenues... and there is always somebody there, like EITI, telling you that if only they supervise and the governments adhere to their principals, everything is going to be fine and dandy.

Let us not ignore that so many speaking out against corruption, do so out of a position of security, one that quite often was assured them and their countries by not so utterly clean means. So less preaching, and more practical action.

@PerKurowski ©

Those creating regulations that can be cheated provide the cheaters competitive advantages.

Sir, Michael Skapinker writes: “Devising a system to detect when a car is being tested surely required planning, expertise and a specific decision. It must have required forethought. It is not something you can drift into through incrementally deteriorating behavior”, “Volkswagen, its software and the psychology of cheating” October 1.

Indeed and we must blast Volkswagen for doing that. But, is it not also the responsibility of regulators to make absolutely certain that cheating cannot happen? Otherwise they will be providing the cheaters with a competitive advantage to win over those who do not cheat. At the end of the day, though Volkswagen needs to be punished, severely, let us not forget that it all happened thanks to lazy regulators who thought it was enough to regulate and no would cheat or game it.

Exactly the same happened when bank regulators allowed banks to hold very little capital against what was perceived as absolutely safe, and the securities backed with lousy mortgages to the subprime sector were dressed to the nines, wearing false AAA ratings.

@PerKurowski

Limit tax deductibility on what is paid to a CEO, to 10 times the average salary. That sends a discreet social message.

Sir, I refer to Michael Skapinker’s “It is time for a brave CEO to ask for lower simpler pay” May 21.

Skapinker is of course right in his wishes… also because I believe it is very useful for a company to attract CEOs that do not give the factor of financial remuneration an importance weighting of, let us say, more than 50 percent.

But why not also help “the brave CEOs” to make up their mind. For instance what about limiting the tax-deductibility for the company of all salaries and bonuses paid to the CEO to 10 times the amount of the average (or median) salary paid in the company? That should be a good place to start sending out a discreet social message to corporations and their shareholders alike.

As compensation above that limit would be made with after tax profits that would stimulate everyone to make really sure the CEO has really earned it.

@PerKurowski

PS. http://teawithft.blogspot.com/2013/03/why-must-uk-say-no-to-eu-on-bonuses-cap.html

Corporations are not part of the community... and should not be allowed to dilute citizens´ tax representation

Sir, Michael Skapinker holds that “Business has lost its place in the community” August 14, and frankly I wonder if business ever had a place in the community. I mean, when a corporation does good things for the community, that is not really out of a sense for the community but because it is building up its image… a sort of clever advertising expense.

No, communities should be about people, and in this respect the tax on corporations should be 0%, because corporations should never have the possibility to dilute the tax representation of the citizens. In other words it is for the owners of the corporations to have a sense of community.

And with respect to Skapinker´s comments on bankers and their manipulations I agree…slap them hard on their fingers. But, Skapinker should not ignore that the manipulation of how bank credit is allocated in the real economy, performed by regulators with their risk-weighted capital requirements for banks, has been and is much more harmful for the society than any of the other bank manipulations currently spoken of… and in this respect Mark Carney´s behavior, as the current chairman of the Financial Stability Board, is “highly reprehensible” too.

http://perkurowski.blogspot.com/2012/03/my-tax-paradise.html

Whistleblowers of the world unite!

“Managers need to listen before disaster strikes” writes Michael Skapinker March 17. Everyone agrees none argue against it and still it is almost impossible to achieve most often because what management and others would qualify as disaster varies dramatically. Sometimes the only real disaster is the pure possibility of a disaster being acknowledged.

But what can we do? Let me have a go at it. Since a corporate climate that is unreceptive to whistle blowers could hide a time bomb credit rating agencies should never be able to give more that a B- to any company that does not achieve some minimum results in a yearly secret internal ballot held on various governance issues.

That could help some managers to start listening.

If it is not a job for the market it is still less a job for the government!

Michael Skapinker in “Every fool knows it is a job for the government” November 18 seems quite willing to let the pendulum on financial regulations to go back completely based on a “Fool me once, shame on you; fool me twice, shame on me”.

Skapinker would do well remembering that no matter how much talk of de-regulation there is we got here primarily because the financial regulators in Basel concocted what the thought was a magical potion capable to eliminate the risks in banking for ever, the minimum capital requirements for banks based on vaguely defined risks of default, and then empowered the credit agencies to serve as the Masters of the Risk in the world. Without that, we would be where we are.

And please, do not argue that the same thing happened with the dotcom bust. There investors were pursuing profits in an always risky stock market while this crisis happened because investors followed what was supposed to be AAA least risky securities, and which by the way pokes fun at the whole concept of allocating risks with those better able to manage it.

And so, before we start swinging, let us make sure where the pendulum really is. Perhaps it is because I have never minded government regulations, when clearly needed, that I find it much easier not sending the government where it is not needed. Long live the radical middle!

The truth as always lies somewhere in the middle!

Sir Michael Skapinker in "The market no longer has all the answers" April 25 writes that though the hands-off regulatory policies have clearly been discredited even in the eyes of hardnosed free-market fans no one knows what to do now and that "Trawling leftwing and far-left wing websites is instructive, because they clearly have not got a clue either".

May I invite Mr Skapinker to trawl the radical middle too? From the middle we protest the sheer thought of the financial sector having had a hands-off regulatory policy since in our view never before has the financial sector been so much nannied as with the empowerment of the credit agencies as the officially outsourced regulatory risk surveyors. Had these agencies not worked undercover as private agencies I am sure all hell would have broken out long ago.

But from the middle we also protest any deepening of the regulations that starts without taking a huge step back and realizing that to regulate the banks, with the sole objective of avoiding a bank crisis, as it has been done for almost two decades now, is totally meaningless.

We need banks to do much more for society than simply avoid risks and survive and therefore we need to clearly define what their whole purpose is. How on earth could you regulate without doing that?

I need to fluoridate

Sir, Michael Skapinker in his “Bottled water and the madness of crowds”, September 25, seems to be searching for the perfect reason why ask the waiter for tap water instead of expensive bottled water. May I suggest “I need to fluoridate”. Unbewits to most of us the use of bottled water has disconnected us from the fluor added to the water in the water taps and so therefore we can already see a whole generation of sophisticated water drinkers ending up with bad teeth. In the US they now almost call it an epidemic.