Sweden sadly forgot risk-taking was the oxygen of its development.

Sir, Martin Sandbu, when discussing Scandinavian countries, the Nordic mixed model begins with: “Ten years ago, the global crisis laid bare the failures of financial capitalism.” “Nordic lessons for today’s socialists” August 29

That most still believe the crisis “laid bare the failures of financial capitalism”, is just the result of what seems to be one of the greatest cover up stories in mankind, promoted by those who want the regulatory mistake of the risk weighted capital requirements for banks to remain forever as something that shall not be named.

And it has absolutely to do with the subject discussed here because, one of the reason little Sweden, the Nordic country I best know, became such huge success, was the willingness of many Swedes to take extraordinary risks. In the Swedish Church psalm book we find a psalm that begs, “God make us daring”.

I find it outright shameful that a Swede, Stefan Ingves, could chair the Basel Committee and not enlighten his colleagues on risk-taking being the oxygen of development.

Of course, to top it up, that the risk weights are foolishly based on the risk of assets per se, and not on the risks of how bankers perceive and manage the assets, namely the conditional probabilities, makes it all so much worse. We will not have explosions fueled by risk-taking but much worse explosions fueled by excessive risk-aversion 

Today Swedish banks, as most of the world, are on route to build up extremely dangerous exposures to what is perceived as safe, like to sovereigns, residential mortgages or any other concocted security that manages to get hold of an AAA rating. 

Sir, today Swedes risk end up in their “safe” houses from which they have extracted all equity, and without the jobs needed to service their mortgages or to pay the utilities. Sad!

@PerKurowski

Sweden got to be an economic powerhouse with its banks financing “risky” entrepreneurs, not by these financing “safer” houses.

Sir, Patrick Jenkins reports: “Nordea has a core equity capital ratio of close to 20 per cent, double that of some European rivals. It can expect lesser capital demands from the ECB” “Nordic noir: the outlook darkens for Sweden’s banks” May 1.

Let us suppose that Nordea has only Basel II’s 35% risk weighted residential mortgages on its books. Then, a 20 percent capital ratio, would translate as having Nordea 7% in equity against all its assets meaning it is leveraged 14.2 times to 1.

So when we then read that in Sweden “house prices have declined 10 per cent since last summer, although in prime Stockholm the slump has been closer to 20 per cent” of course that should be enough to besides giving “Jitters about the sustainability of property prices” causing jitters about its banking sector.

I have a close relation to Sweden in that not only was my mother Swedish but I also spend my most formative years, high school and university there. So it saddens me to see what is happening. Sweden that got to be so strong by its banks financing “risky” entrepreneurs is now getting weaker by its banks mostly financing “safer” assets, like mortgages.

“Sweden’s Financial Supervisory Authority, late last year, proposed Sweden’s Financial rules [that] would mean those taking out new home loans of more than 4.5 times their salary would have to pay off an extra 1 per cent of their mortgage annually.” Are we to be impressed with that?

Stefan Ingves the Governor of Sveriges Riksbank has since 2011 been the Chairman of the Basel Committee for Banking Supervision. Why has he not proposed to stop distorting the banks allocation of credit, by requiring these to hold the same capital when extracting value and placing a reverse mortgage on the “safer” present economy, than when financing the riskier future, that the young Swedes need and deserve is financed?

In Swedish churches there was (is) a psalm (#288) that prays for: “God make us daring”. It would seem Mr Ingves never heard less sang it. 

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

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

Why is it so hard to understand that risks should not only be correctly perceived but also correctly considered?

Sir, Patrick Jenkins, discussing the Basel Committee’s push “to finalise another leg of post-crisis global financial reform” writes that “financial and economic stability is more important than a blinkered crackdown.”, “Basel Committee boss needs to reconsider hard line on reform” October 18.

What? “financial AND economic stability”? That’s a new one. Until now it has only been financial stability, which is why regulators (and journalists) have not cared to analyze how much current bank regulations distort the allocation of credit to the real economy. For instance Stefan Ingves, the chair of the Swedish Riksbank and of the Basel Committee, seems not to understand at all that the so much lower risk weight assigned to financing houses (35% in Basel II), when compared to the risk weight when financing SMEs (100%), has something to do with prices of houses going up and up, and the credits to SMEs going down and down.

Jenkins, on the possibility of part of the capital requirements to be based on the conduct of the banks, like misdeeds, argues: “The logic is flawed”, since “basing future capital demands on past fines duplicates the impact of a penalty”.

Indeed, but why Sir is it so hard for Jenkins, for the Basel Committee, for you and for all other in FT to understand that, basing capital requirements on ex ante perceived credit risks already cleared for by banks with interest rates and size of exposures, also “duplicates the impact” of perceived credit risks?

Is it really so hard to understand that any risk, even if perfectly perceived, causes faulty actions, if that risk is excessively considered?

@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 ©

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 ©

Based on the flimsy notion that below BB- rated is more dangerous to the bank system than AAA, regulators distorted

Sir, Gillian Tett tells us that a central bank official once told her pointing to a Euro note “That’s what’s wrong with Europe… It’s just windows and bridges!”. And she is clear about that “you cannot fight nationalism solely with economic figures — you need faces too” “How to change the face of Europe” May 7.

That, as I had often written to you, goes to the heart of the problem of EU, namely that very few would like to call Europe home, precisely because home is much more about compatriots than infrastructure.

And Gillian Tett writes “These days Mario Draghi, head of the European Central Bank, is providing another unifying force (of sorts). But these are not faces that command popular respect across the continent — or not compared with the heroes of individual nations”

Of course, adorning a Euro note in the future is an honor that should be reserved for nation or union builders, not for destroyers. With time Draghi, Ingves, Caruana, some of the European names among the bank regulators, together with their over the pond colleagues, are going to be held to account for having concocted a destructive invention with what we know as the Basel Committee’s risk weighted capital requirements for banks.

The principle behind these regulations is that a below BB- rated asset, highly-speculative to imminent default rated, which in Basel II was given a 150% risk weight, is much more dangerous to the banking system than an AAA rated prime asset, and which was therefore given only a 20% risk weight.

It was like nannies believing the children to be more in danger when approached by ugly and foul smelling persons, than when approached by nice looking gentlemen who offer them candy.

And based on that sole flimsy principle the regulators shamelessly, not concerned with it at all, went on and completely distorted the allocation of bank credit to the real economy.

Does Gillian Tett also believe in the validity of such principle? And, if not, why does she keep mum on it?

PS. Just as a curiosity, in the weeks before the Euro, I did not write of names, but of bridges… the burning of these.

@PerKurowski ©

The risks with the risk weighted capital requirements for banks distortions' are much larger than those of a Brexit.

Sir, Bank of England’s mandate is to “promote the good of the people of the United Kingdom by maintaining monetary and financial stability” and therefore Chris Giles holds that “The Bank of England needs to speak up on Brexit” April 21.

But there you have BoE steadfastly supporting the Basel Committee’s risk weighted capital requirements for banks, which so dangerously distorts the allocation of bank credit to the real economy.

The merchant bankers that helped England prosper would currently not be able to do so, because all they would be doing, like the rest of banks, is investing in public debt and residential mortgages or lending to some AAArisktocracy.

Now you do not have banks that finance the riskier future, they only refinance the for the short time being safer past.

Frankly, when compared to that regulatory reality, the risks with Brexit, though these could be large, sound minor to me.

Few months ago Stefan Ingves, the current chair of the Basel Committee, innocently used the story of an infamous Swedish warship, the Vasa, in order to illustrate the work of the Basel Committee. Ingves is totally unaware of how applicable that story still is. 

@PerKurowski ©

Whether there are thousands of small banks, or just a few TBTF, if regulations are bad and distort, it’s all the same shit.

Sir, I refer to John Dizard’s “Banks are destined to accept break-ups in exchange for lighter regulation” February 27.

It should not be a question of heavy vs lighter regulations. Many of us would like to see banks accepting break-ups as a result of better regulations. Because frankly, it is silly to break-up banks, if they are anyhow going to be joined together in a lousy regulatory matrimony.

2001, in an Op-Ed, I warned: “Today, when the world seems to be asking much for bank mergers or consolidations, I wonder if we on the contrary should be imposing on banks special reserves depending on their size. The bigger the bank is, the worse the fall, and the greater our need to avoid being hurt.” 

But, just as important, in the same Op-Ed, I also warned about the risk of regulations, in the following terms:

“The regulatory risk: Before there were many countries and many ways of how to regulate banks. Today, with Basel proudly issuing rules that should apply worldwide, the effects of any mistake could be truly explosive.

“Excessive similarity: Encouraging banks to adopt common rules and standards, is to ignore the differences between economies, so some countries end up with inadequate banking systems not tailored to their needs. Certainly, regulations whose main objective appears to be only to preserve bank capital, conflict directly with other banking functions, such as promoting economic growth, and democratize access to capital.”

And Sir, as you well know, I opine that when the regulators decided to introduce credit risk weighted capital requirements for banks, which distorted the allocation of bank credit to the real economy, then they blew it for all of us. And our economies are still suffering, because these regulators just don’t want to admit they blew it, and for what reasons.

For instance when John Dizard mentions “securitisation fakery”, he should not forget that the main driver of such fakery was the fact that there was going to be very different capital requirements depending on how that securitization got rated… and that distortionary incentive is still well alive and kicking more than ever.

So at the end of the day, if all AAA rated securities backed with lousy mortgages to the subprime sector were held by one or by a thousand banks, it’s all he same shit. 

Stefan Ingves the current chair of the Basel Committee, but also the chair of the Swedish Riksbank, recently had this to say of Swedish banks: “Banks have changed the way they calculate risk weights, the risk-weighted capital adequacy therefore look good. But in the end they do not have much more capital than before the financial crisis.”

Sir, can we really take our current regulators to the bank?

PS. For all practical purposes it would seem I have been as much censored by the Government of the Financial Times than as I have been by the Government of Venezuela. J

@PerKurowski ©

FT, once again you ignore, God knows why, one of the prime causes for “The precarious state of the global economy”

Sir, I refer to your editorial “The precarious state of the global economy” February 26.

For the record I notify you that you have once again ignored in your analysis the following, God knows for what reason: 

Current credit risk weighted capital requirements for banks, especially in times of scarce bank capital; by allowing banks to earn higher expected risk adjusted returns on equity on what is perceived or deemed to be safe asssets than on risky assets; is hindering banks from lending sufficiently and in sufficiently reasonable conditions to those ex ante perceived as risky, like the SMEs and entrepreneurs. And that must obviously have a big negative impact on the economy.

And seemingly all for nothing, Stefan Ingves, the current chair of the Basel Committee, when as the chair of Sveriges Riksbank, in November 2015, in Svenska Dagbladet commented on Swedish banks had this to say: “Banks have changed the way they calculate risk weights, the risk-weighted capital adequacy therefore look good. But in the end they do not have much more capital than before the financial crisis.”

FT, might your stubborn silence about my arguments have painted you into a corner?

@PerKurowski ©

The central banks monetary policies are hampered more by distorting bank regulations than by bad communications.

Sir, I refer to your “Central banks struggle to make things clear”, January 30. In it you hold that the monetary policy is hampered by bad communications. No Sir, their monetary is hampered much more by bad bank regulations.

Central bankers are also commercial bank regulators. Just look at this list:

Mario Draghi of ECB and Mark Carney of BoE are the former and current chairs of the Financial Stability Board.

Jaime Caruana of BIS and Stefan Ingves of Sveriges Riksbank are the former and current chairs of the Basel Committee for Banking Supervision.

In such a role they have all for years supported credit risk weighted capital requirements for banks which indicate that ‘highly speculative’ below BB- rated assets are far more dangerous to the bank system than ‘prime’ AAA rated assets.

In Basel II the risk weight for ‘highly speculative’ below BB- rated assets is 150 percent while the risk weights for ‘prime’ AAA rated assets is a meager 20 percent.

And therefore according to Basel II banks need to hold 12 percent in capital (basically equity) against ‘highly speculative’ below BB- rated assets, while only 1.6 percent against ‘prime’ AAA rated assets. 7.5 times less!

Honestly, when have banks created excessive dangerous financial exposures to what ex ante is perceived as ‘highly speculative’? Have these all not been created around assets ex ante perceived as ‘prime’ but that ex post turned out risky?

But the stability of the banks is not the most important problem with those capital requirements. The real problem in that they completely distort the allocation of bank credit to the real economy and thereby nullify all central banker’s monetary policies.

Nothing but central bankers' self-inflicted damage!... for which we all suffer.

@PerKurowski ©

Can journalists wash their hands about the (dis)empowering of citizens and of keeping failed elite in power?

Sir, Gillian Tett referring to “how the global elite converged on Davos this week” writes: “The most interesting issue revolves around something the WEF calls the “(dis)empowered citizen”. This arises because the internet makes voters feel more powerful than ever… The bitter irony is that although the internet gives people the impression they have a voice, in most countries power remains firmly with the elite.”, “The big illusion of empowerment for the masses”, January 22.

Tett holds “This creates disappointment and frustration: ordinary people have the illusion they are vocal. But although they use their mobile phones to exercise power over some issues, they cannot easily use them to change important issues such as politics.”

But, do journalists have no role to play in that? Are they not suppose to in many ways represent ordinary people in front of the elites?

For instance I do not call the Financial Times on the mobile phone (except perhaps when I will travel and suspend my subscription for a week or so) but I have sent thousand of letters to FT, including to Ms. Tett on issues like the following:

Four very important central bankers in Europe; ECB’s Mario Draghi and BoE’s Mark Carney, former and current chairs of the Financial Stability Board; BIS’ Jaime Caruana and Sveriges Riksbank Stefan Ingves, former and current chair of the Basel Committee for Banking Supervision, with their approval of risk-weighted capital requirements for banks, believe that ‘highly speculative’ below BB- rated assets are far more dangerous to the bank system than ‘prime’ AAA rated assets.

Since ex ante perceived ‘highly speculative’ below BB- rated assets have never ever set of a major bank crisis, as these have always resulted from excessive exposure to something ex ante deemed as safe but that ex post turned out very risky; that should raise some very serious questions about the risk management capabilities of those four highly empowered technocrats.

But, would Ms. Gillian Tett raise such question when meeting them? I don’t think so but, if she has, and has not reported back on the answers, to me or to you Sir, then she is just much more complicit in the cover up of the elite’s blunders than I thought possible.

@PerKurowski ©

Europe’ banks are in hand of regulators and central bankers who prefer dreaming about the safer past than a riskier future.

Sir Mark Mazower writes: “I was going to write — “critics and supporters of the European dream”. But there is no dream any longer and that is in some ways the biggest problem of all.” “Fresh ideas and lessons from the past are key to Europe’s survival” January 22.

A dream could be about a better future or about conserving a better past. Europe’s bank regulators, with their credit risk weighted capital requirements, which allow banks to earn much higher risk adjusted returns on equity when refinancing the safer past, than when financing the riskier future, clearly evidence what they dream about… poor Europe’s youth.

Let me refer to four extremely important European central bankers: ECB’s Mario Draghi and BoE’s Mark Carney, former and current chairs of the Financial Stability Board; BIS’ Jaime Caruana and Sveriges Riksbank Stefan Ingves, former and current chairs of the Basel Committee for Banking Supervision

All these gentlemen fully support credit risk weighted capital requirements for banks, which de facto means they believe that ex ante perceived ‘highly speculative’ below BB- rated assets, are far more dangerous to the bank system than ‘prime’ AAA rated assets. Europe, if that’s not scary, what is?

@PerKurowski ©

Out with Stefan Ingves, Mario Draghi, Mark Carney and other, and in with Daniel Kish, Conrad Allen and Lenore Skenazy

Sir, Emma Jacobs has penned one of the most important articles I have read over the last decades. I refer to “Teachers who make risk child’s play: Three people who coach children in how they can anticipate and manage hazards offer their insights on how to be bold” January 8.

In it she describes how Daniel Kish, president and founder of World Access for the Blind and chief perceptual-navigation instructor, he himself blind, teaches blind children how to manage risks they cannot see.

Compare that to silly bank regulators who, by means of their credit risk weighted capital requirement for banks, want to help bankers to manage the risks they already see.

And she refers to Conrad Allen, chief instructor of True-ways Survival, who objects to that kids “don’t go into the woods to play any more… largely because their parents are risk avoiders rather than risk mitigators”

And compare that to silly bank regulators who, by means of their credit risk weighted capital requirement for banks, give banks ice cream and chocolate cake, larger risk adjusted returns on equity, as long as they stay away from those dangerous forests where spinach an broccoli, SMEs and entrepreneurs, grow.

And she refers to Lenore Skenazy, a free-range parenting advocate who “has spoken at schools to encourage children to push back against their parents’ well-meaning coddling and take risks”

And compare that to the silly bank regulators who, by means of their credit risk weighted capital requirement for banks, insist with Basel III in that bankers should stick to refinancing the safer past and stay away from financing the riskier future.

As for me, I would, without a doubt, immediately throw out the current regulators in the Basel Committee for Banking Supervision, and gladly hand it over to Daniel Kish, Conrad Allen and Lenore Skenazy, so as to save the Western Civilization, that which became what it is thanks to risk-taking and not to risk aversion.

God make us daring!

@PerKurowski ©

Sweden, ask Stefan Ingves a simple question before granting him more powers.

Sir, I refer to Richard Milne’s “Sweden central bank chief [Stefan Ingves] gains forex intervention powers” December 5.

And “Andreas Wallstrom, an economist at lender Nordea, called Mr Ingves’s new powers “truly sad” because currency interventions often failed to bring about the intended result.”

Mr. Ingves, as the current Chair of the Basel Committee, is one of the experts on interventions that fail to bring about the intended results.

Take just the case of regulations that force banks to hold more equity against what is perceived as risky than against what is perceived as safe, and which dangerously distorts the allocation of bank credit.

The result, dangerous bank exposures to AAA rated securities and Greece and equally dangerous lack of exposures to “risky” SMEs and entrepreneurs.

So just ask Mr Ingves the following:

Sir, would you be so kind so as to provide us with one example of a major bank crisis that resulted from excessive bank exposures to assets that were perceived as risky when placed on the balance sheet of banks.

If he cannot answer, should that not be a sufficient indication he might have no idea about what he is doing?

Regulators assigned a 20 percent risk weight to AAA rated private sector bank assets and a 150 pecent risk weight for similar assets rated below BB-. I can think of many instances were bankers were lulled into a false sense of security by good credit ratings, but I cannot for my life imagine bankers building up excessive exposures to something rated below BB-. Sir, can you?

Yes! Central banks must be made accountable

Sir, Alex J Pollock, of American Enterprise Institute in Washington, asks that “Central banks must be made accountable”, November 13.

Absolutely! I totally agree: “there is zero evidence that these central bankers have superior knowledge, obvious that they have no superior insight into the future, and dubious that they command superior virtue.”

Anyone thinking that by distorting the allocation of bank credit in favor of those perceived as ex ante as safe, and which discriminates against the fair access to bank credit of those perceived as risky, will make the bank system safer, has not the slightest idea about what he is doing.

Not only are bank crises always the result of excessive exposures to what is perceived as safe but turn out to be risky; but also the strength of the real economy is a direct function of banks lending intelligently to those perceived as risky, like to its SMEs and entrepreneurs.

Let me just name some of these failed regulators that should be held accountable: Jaime Caruana, Mario Draghi, Stefan Ingves, Alan Greenspan, Ben Bernanke and Mark Carney.

@PerKurowski ©

#1 Macro-prudential rule is never take for granted those in charge, like bank regulators, know what they are doing

Sir, Richard Milne quotes Stefan Ingves with “sailing a small boat on the ocean: it’s good if you know how to sail.”, “Riksbank head warns on tools to tackle crises”, September 14.

But let us not forget that Stefan Ingves is the current chairman of the Basel Committee, and as such, we could presume he agrees entirely with the current risk-weighted capital requirements for banks. In essence that regulation implies the following:

The better things are going for some assets, and so the safer these look (like house mortgages), the less capital are banks required to hold against these, and so the more incentives do banks have to lend, and thereby make these assets look even better yet… that is until the overcrowding of those safe havens become so dangerous that the whole banking system fails.

The worse things are going for some assets, and so the riskier they look (like loans to SMEs), the more capital must banks hold against these, and so the more incentives will banks have to reduce lending, and thereby make these assets look even worse yet… that is until riskier but perhaps more productive bays are left so unexplored that the whole economy fails.

Sir, the first and most important macro-prudential rule is that of never taking for granted that those in charge of sailing the boats know how to sail. And as I have argued for years, current bank regulators, which include Mr. Ingves, have no idea about what happens out there on the real oceans… their experience might be restricted to having played with toy boats in bathtubs.

The second most important macro-prudential rule with respect to banks, and boats, is that instead of by all means trying to stop these from going under, assist these to fail expeditiously, whenever they seems to be insufficiently seaworthy.

If it were up to me, and knowing these are to cover against unexpected losses I would set the capital requirements for banks based of cyber attack or being struck by asteroids, so as not have to spell out these as based on risks of bankers not knowing how to manage perceived risks, and worse, on risks of regulators trying to manage risks.

PS. “Gud gör oss djärva” “God make us daring” is a Swedish psalm. It would do us much good if bank regulators tried to understand its message....perhaps Riskbank would be a more appropriate name than Riksbank for a nation that has prospered thanks to risk-taking and much reasoned audacity.

PS. Axel Oxenstierna, 1648: “An nescis, mi fili, quantilla prudentia mundus regatur?”, “Do you not know, my son, with how little wisdom the world is governed?”, “¿No sabes, hijo mio, con que poca sabiduría el mundo esta gobernado?”, “Vet du inte, min son, med hur litet förstånd världen styrs?” 

@PerKurowski

“The time it takes to react to a 'misdemeanor', will be in inverse proportion to its seriousness" Parkinson dixit

Sir, Matthew Vincent writes of the much speedier reactions to small time misbehaviors, like catching a ride on the corporate jet, compared to much more egregious behavior, like the manipulation of the Libor “Lessons from the Swedes on accountability" August 15.

It reminds us of Parkinson’s law that states: “The time spent on any item of the agenda will be in inverse proportion to the sum [of money] involved."

Look for instance at how fast the case against the Libor manipulators proceeded when compared to the immensely larger and more serious case with bank regulations. By means of risk weighted capital requirements, the regulators manipulated the allocation of bank credit on a global scale… and the experts have not yet given signs they have even detected their misbehavior… not even in Sweden, whose Stefan Ingves currently chairs the Basel Committee for Banking Supervision.

PS. 

http://subprimeregulations.blogspot.com/2014/02/mr-stefan-ingves-i-do-seriously.html

http://subprimeregulations.blogspot.com/2015/02/en-fraga-till-herr-stefan-ingves-som.html

@PerKurowski