Compared to more than three decades ago, what is the current leverage ratio of our banks?

Sir, Martin Wolf, in FT on July 12, 2012, in “Seven ways to clean up our banking ‘cesspit’” opined: “Banks need far more equity: In setting these equity requirements, it is essential to recognize that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters. It needs to be far lower.”Soon a decade since, are bank capital requirements much higher and really sufficient?

No! Though bank capital requirements are mostly needed as a buffer against the certainty of misperceived credit risks & unexpected events, in this uncertain world, these are by far, still mostly based on the certainty of the perceived credit risks.

Consequently, when times are rosy, regulators allow banks: to lend dangerously much to what’s perceived as very safe; to hold much less capital; to do more stock buybacks and to pay more dividends & bonuses. Therefore, banks will stand there naked, when most needed. 

The leverage ratio is also important because it includes as assets, loans to governments at face value, and thereby makes it harder for excessive public bank borrowers to hide behind Basel I’s risk weights of 0% government, 100% citizens. No matter how safe the government might be, those weights de facto imply bureaucrats know better what to do with credit they’re not personally responsible for than e.g., small businesses and entrepreneurs.

November 19, 2004, in a letter you published 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?” That this factor, in the face of huge government indebtedness, is not even discussed, as I see it can only be explained by too much inbred statism.

Before the Basel Committee Accord became operative in 1988, Basel I, banks were generally required to hold about 10 percent of capital against all assets, meaning a leverage ratio of 10.

Where do banks find themselves now? I know well it’s hard, and extremely time consuming, to make tails and heads out of current bank statements, but I’m absolutely sure most financial media, if they only dared and wanted, have the capacity to extract that information.

Should not such basic/vital data be readily available and perhaps even appear on front pages? It’s not! Why? Has media been silenced by capital minimizing/leverage maximizing dangerously creative financial engineers?

Sir, I’m not picking especially on financial journalists, the silence of the Academia, especially the tenured one, is so much worse.

@PerKurowski

Corporations and their tax payments distract the full attention the citizens deserve from their governments

Sir, I refer to John Plender’s “A strange aversion to corporate tax” January 4. I have an aversion to corporate taxes that is not duly reflected there.

In my homeland Venezuela the government gets directly 97 percent of all exports and, when oil prices are high, we citizens become almost a nuisance to those in charge of administrating such revenues… only when oil prices are low do they begin to remember us.

As a result I have held that the ideal tax system is that in which the government gets all of its income directly from identified citizens… not anonymous sales taxes, and that makes me to have an aversion to corporate taxes too. The corporations, with their often very high profits equally, quite often, constitute a distraction that hinders the governments to give full attention to us citizens.

100 percent citizens based tax system, true tax heavens, would also be the best way to diminish the needs for tax havens.

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

@PerKurowski ©

Venezuela: stop press?

Today I was censored in Venezuela

Financial Times

A prominent and important FT journalist interviewed invisibly on my empty chair?

Sir, I recently sat down a prominent and important bank regulator invisible on an empty chair and made him some questions. And I am sort toying with the idea of now inviting a prominent and important FT journalist, to do the same. I tell you why. 

Over the last decade I have been writing literally hundreds of letters (over 700) to the Financial Times referring to the fact that the current capital requirements for banks, based on perceived risks, constitute a formidable and dangerous source of distortion of the markets, to such an extent that it can even be blamed for the current crisis. 

Why distortion? Setting the risk-weights which determine the capital requirements for the banks, in a quite arbitrary way, means that the regulator is, in a very non-transparent way, intruding in how the market evaluates risks. That they for that purpose use the same risk perceptions which are cleared for by not blinds bankers makes it so much worse, as that only guarantees that the banks will overdose on the perceptions of risk. 

Why dangerous? Because by giving the banks additional incentives to search out the “not-risky”, that will cause a dangerous overpopulation of the safe-havens. And also because by giving the banks additional incentives to stay away from what is officially perceived as “risky”, the banks will not perform adequately their role of allocating capital in the markets. 

But you the Editor, and the journalists in FT, have for all practical purposes been totally silent about this. I have been told by one of you that I am just too monothematic, which if you look at all my letters is really not true, but, even if so, that would be something much less serious than your monothematic silence. 

When I hear one of you described as an “uncompromisingly pro-market columnist”, but he is still incapable of understanding and much less defending the market against this really unauthorized regulatory intrusion, I do not know whether to cry, or whether to believe that he is just too dumb to get it, or whether he has his own agenda.

Yes, occasionally, someone in FT refers to some of my arguments, but then, always in a very partial way. 

Imagine what could have happened to bank regulations, Basel III and other, if FT had helped to give me voice, earlier, in time. Can you imagine how much buildup of dangerous exposures to what was perceived as absolutely safe could have been avoided? Can you imagine how much better use we could have given to that scarce fiscal and monetary policy space that is being consumed so fast? 

Why was I and my arguments censored this much by a paper that so bravely announces in its motto "Without fear and without favor"? 

Crises occur when what was thought to be low risk turns out to be very high risk

In July 2012 in “Seven ways to clean up our banking ‘cesspit’” Martin Wolf wrote: “In setting these equity requirements, it is essential to recognise that so-called ‘risk-weighted’assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters. It needs to be far lower.”

I strongly object to Basel I, II and III.

Sir, I have written you hundreds of letters that reference my strong objections to the regulatory paradigms used by the Basel Committee and I know my arguments are not baseless… and you know that too. Can you at least once, for the record, publish these objections… or is there something that you want to silence? You are the Financial Times and so I should be able presume this topic should be of interest to you:

I strongly object what is basically the only pillar of bank regulations created by the Basel Committee in Basel I, II and III, namely having the capital requirements for banks to be based on perceived risk of default.

First: All systemic bank failures in history have occurred only as a result of excessive lending to what is perceived as not-risky, and never because of excessive lending to what is perceived as risky, which makes these capital requirements counterfactual.

Second: The market and the banks already discriminate against higher perceived risk by means of the risk-premiums imbedded in the interest rates, and so these capital requirements are just an extra layer of risk-aversion that hinders the banks to help the world to take the risks it needs in order to move forward.

Third: Since needing less capital when doing business with the “less risky” makes the profitability of bank business with the “less risky” to shoot up to the skies, this causes the banks to forget or discriminate against the “risky”, such as the small businesses and entrepreneurs on whom we depend so much for the future generation of jobs.

Ps. And the above does not even mention the problems of having empowered the credit rating agencies with a risk-information oligopoly.

On eating green

Sir Fiona Harvey informs on August 13 that now there is “A chance for shoppers to start counting carbons” beside the carbs, and that a packet of Walkers potato crisps contains 75g of carbon dioxide a mango and passion fruit smoothie 294g.

Great, this is more information for an information starving world. But how do we best digest it? For a start and even when I run a blog on the environment, http://www.ourpiedaterre.blogspot.com/, I have not a faintest clue of what 75g of carbon dioxide means. ¿Could you give it to me in equivalent to litres of petrol? Eating those chips means driving how many miles? I could perhaps connect more easily to that sort of information; I mean having been told that to get rid of those potato chips I have to walk so many miles.

Don’t get me wrong, I am all for maximum disclosure, but if it is to be helpful and not produce more g of carbon dioxide in the gathering and printing of this information than what it saves in the consumption of those same g then we need to increase its transparency. Next time what I would like to see is how many g of carbon dioxide Walkers potato crisp contains by g of carb, calories and fat, saturated and non saturated of course. With this information I might then be able to be so much more effectively green in my dietary and culinary endeavours. By the way, could this be a way for children to make up for not eating their greens?

Even in a nightmare you might find good things to do…while awakening

Sir I just read David Gardner’s hair-raising “Lost in Iraq: the illusion of an American strategy” August 10, and, if he is right, then what he is telling us is that Iraq does not any longer exist and that even if there was never a reason for the USA to enter Iraq now there seems to be plenty of reason for why the world cannot leave Iraq. In a globalized world where does it say that the remains of a failed nation should go to the neighbours?

Also reading about the nightmare I once again felt that the best thing the USA could do, while trying to get out, is to impose, by brute force if needed, a transparent revenue sharing system that spreads out the oil income directly to each of the Iraqi citizens. Around the concept of a monthly check, of probably more that 100 dollars per citizen, you could find the real incentive needed for some good nation building. The current oil revenue sharing being discussed has nothing to do with the people but seem more like agreements between all the power grabbers about how to share the oil loot.

Does procreation include the possibility of adoption?

Sir Clive Crook with “Let the rich go forth and multiply” has really fired up my interest in reading Gregory Clark’s upcoming “A farewell to Alms: A brief Economic History of the World”, August 10. Besides of course forcing me to look up the meaning of “alms” it also left me with the question of whether this generous procreation of the rich so that it spills over into the less fortunate development method does also extend to Angelina Jolie’s adoptions of poor children.

Liberty and security also requires consensus

Sir, although Willem Buiter might be fundamentally correct when he says “For the sake of liberty and security: legalise all drugs” August 8, he should also remember that for the sake of that same liberty and security he needs to frame his idea in such a way that it is acceptable for the majority. 

In this respect and making reference to Moisés Naim’s interesting book “Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy”, (2005) and that reminded us of how much of the illegal world was interconnected, perhaps a more consensus reaching approach could be to identify the whole world market of illicit and legalize it at a rate of 5 per cent a year starting with the more digestible. 

Otherwise they way the world is going its illicit part is soon going to be wealthier and stronger than the licit… and that is more dangerous than hundred al-Qaeda put together. Also while discussing these issues let us never forget that strict social sanctioning is normally a far more efficient route to go than the strictest of the law enforcements.

And be careful with the regulator risk

Sir in your editorial “The dangers of bailing out banks” August 6, you timely remind that “if bailouts are the norm, an entire banking system may take on inefficiently high levels of risk” and illustrating clearly the case for this warning by stating that in the case of IKB Deutsche Industriebank “there was always an implicit promise of support from KfW – credit rating agencies such as Fitch counted on it”

At this moment of time after so many years without any major bank crisis around the world and when the Bank Regulators have spend a couple of years in a self congratulatory mode may I also warn against the possibility, no matter how remote, that some very expensive bailouts could be undertaken also in order to save the regulator’s reputation. I mean if you appointed a couple of Credit Rating Agencies and then went to sleep on the job, you could foreseeable have a vested interest in hiding some facts.

We need to eliminate the financial fortune-telling franchise.

Sir I have nothing against the credit rating agencies, in fact I would like to have hundreds of them instead of the current only three. What I do not like though is when investors are forced to act in accordance with what they opine since when someone is told that someone else does the thinking for them, they lose the motivation to think for themselves and they have been empowered with the perfect excuse to hide their own shortcomings.

When you tell a pension fund it is not allowed to invest in anything below a specified level of ratings you are sending two messages. The first, that pension funds should only invest in safe ventures sounds about right but goes against current financial theories that say that a perfect blend of uncorrelated potions could just as well be the safest bet in town. The second message, the truly dangerous one, is that you are implying that there are objectively safe investments in the world and that the credit rating agencies have the tools to spot them.

We have already gone much too far down the road to a systemic risk explosion and we can already smell the subprime gases that have been accumulated. Anyone who lives in an earthquake prone region knows to be grateful for the small tremors that release the build-up of tensions and keeps the big one away. In these days we pray that the current financial uncertainties are only a minor tremor but if we really want to avoid building up the tensions that will lead to a true catastrophe, one of the first things we must do is to dismantle the fortune-telling franchise awarded by regulators to the credit rating agencies.

Have 100% guaranteed incomprehensive financial model…will travel!

This is a great and handy tool for hedge funds when valuating portfolios and that will produce maximum commissions; and for the large US banks that have recently been authorized by their regulators to apply Basel II rules and now need to catch up with European competitors in lowering their capital requirements.

Low maintenance costs with access to an exclusive well churned and pliable data set licensed by the proprietor and that reaches back to 1840 and is equally impossible to scrutinize.

About Banana Republics and the moments of reckoning

Sir in March 1999 I published and article where I held that the effects of the global warming might be more severe than we thought as it seemed to even have shifted the parallel of the tropical Banana Republics northward, since how could we otherwise explain the current enormous fiscal and commercial deficits in the United States.

Now, eight years later, when Kenneth Rogoff in “Americans will eventually learn that deficits do matter”, July 18, mentions that “continuing inflows are probably holding down interest rates by at least 1.5 per cent and possibly more” I cannot help but to think of those investors that quite recently thought they were doing splendidly, when valued by a model, but that now have to face some crude realities when marked to a market that sometimes does not even seem to exist.

You should not give debt relief to “odious” debt.

Sir Alan Beattie in “Vultures unlikely allies in anti-graft cause” July 18 quotes Stephen Rand of the Jubilee Debt Campaign saying “Debt relief should never be used as a weapon of economic coercion by creditors” as implying that debt relief should be awarded even when governments are still corrupt.

What is this? As a citizen of a country with a government that I consider quite corrupt, I do not like anyone giving it loans, debt relief or anything whatsoever. Frankly, before corruption is ended most of any debt relief given would just end up allowing these countries and governments addicted to debt, to hit the bars again.

If the concept of odious debt is applicable in the sense that some debts should not have to be repaid if contracted in an illegitimate way, castigating the creditor, then the same concept should clearly also apply to the granting of any debt relief, punishing the debtor.

Go where the beef is

Sir, I really do not understand how, in “Latin Lessons”, July 10, you can even think about achieving a better US engagement in Latin America by entering the field of establishing comparison between the simple propagandas of “the $20m being spent on a four-month-long humanitarian health care mission, involving a visit by the Comfort hospital ship to 12 countries, to the scale of the health care plans launched by Mr chávez and his Cuban ally, President Fidel Castro”. That is like assessing the cultural efforts of Brittan in terms of how long the British Museum lends out their Tutankhamen collection to the world.

Of course the real dealings with Latin America have to occur in the real areas you mention such as energy, trade and of course migration, and there, if the US was to find a more constructive approach to Latin America, it needs primarily to start looking for a more constructive and consistent approach among themselves, in Washington at least.

The Inter-American Development Bank recently reported that the working migrants of Latin America remitted to their home countries $62.3bn in 2004 and if these represented 15% of what the workers earned, we are then talking about a yearly figure of around $415bn, of which the US contributes almost all, and clearly this beats anything that what Castro and chávez can come up using the money obtained by selling Venezuelan oil.

The world has no representation either

Sir, Wolfgang Münchau in “This gentlemen’s agreement fails Europe too”, July 9, makes a very clear case for why Europe by splitting up the European representation in international institutions such as the International Monetary Fund (he argues that it is to preserve many plum jobs) ends up in fact with having no real representation at all. I understand and agree with his point of view especially since it goes hand in hand with my opinion that since all the votes, and all the Executive Directors, and the Presidents, and so many of its staff are assigned on pure local considerations, it is the “international world”, the global order, or mother-earth itself, whatever you want to call it, that ends up being the most under represented party in these global institutions.

If we are going to be able to manage the global challenges it is urgent we look for means to break away from our parochial local chains. What about splitting at least 50% of the shares among varied constituencies such as migrant workers, multinationals, media, educators, environmentalists, NGO’s, accountants, farmers, manufacturers, service providers, and so on?

The only constituency that has currently a representation in IMF, a 100% one, is the constituency of central bankers and this need to be changed. Europe, if you must insist on naming the next managing director in the IMF then at least do the world the favour of appointing some finance knowledgeable person that has never worked for any central bank. That would provide us with much more needed diversity than just appointing another central banker based on the local consideration that he is from Asia, Africa or Latin America.

And this is no joke. Incest is about the most dangerous limiting factor when it comes to impede clear thinking and effective actions.

Gazprom in a public-private partnership?

Sir, in your “Putin’s piste”, July 7, you sort of allude that there might be a public-private partnership between Russia and Gazprom. Nonsense. That is just a public-public partnership that uses private sector flexibility to avoid the constraints that reason imposes on public spending. If Gazprom is anywhere like the Venezuelan PDVSA that I know, then whatever it does beyond their basic oil and gas exploration, production and refining business, is just a way to non-transparently lose or distribute some of their oil and gas profits previuosly made.

Private or informal?

Sir when looking to analyze “Private equity’s risks and rewards” July 7, it might be useful to always differentiate between what could happen when someone goes into private practice from what could be the results from hiding out, going informal. The freedom to be private must always be defended, just as the forces that drive the growth of the informal sector must always be opposed.

Do we really know how currencies behave when nude?

Sir, the concerted and concerned called for “We must act when currencies become misaligned” July 6, by four US senators, seems timely and reasonable even though it is hard to detect much real urgency as the unemployment levels in the US are low. In the dark ages, less than forty years ago, these currency imbalances would take care of themselves once the gold had moved over from the strong currency country to the weaker vault, and which made a reshuffle of the exchange rates required in order for the game to go on. Not any longer, now the currencies have no specific backing, they are all naked, which makes the issue much more confusing.

One of the attractions of asking someone else to revalue their currency is that somehow, because of some magic that would make the Hogwarts curricula proud, you seem to avoid having to communicate that you are devaluing yours, or that in essence you are declaring a big domestic salary decrease when measured in international purchase power terms.

The senators rightly say that there is no one single answer to America’s international economic and of course they are right, even though I fail to fully understand how “responsible healthcare” is an instrument of this particular toolbox. Sir, the world has never really been in this territory of major currency misalignments while in a nudist camp, so let us pray that everyone tinkers very carefully with them, while we learn, and at least while it all seems to be working not too bad.