How naïve were we when regulators told us “We will risk weigh the capital requirements for banks to make these safer for you”?

Sir, Simon Kuper in reference to Brexit writes “It’s hard now to fathom how naive we were in 2016. I thought…you couldn’t just stick a false slogan on your campaign bus, could you? “Trust, lies and videotape” October 20.

Sure you could! Like when or bank regulators told the world that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, and the world, including Simon Kuper, and the Financial Times, believed that to be true.

Kuper holds the popular gold standard of truth being, “I saw it with my own eyes.” Well not in this case! 100% of the assets that caused the 2007-08 crisis were assets that because these were perceived as safe, allowed banks to hold especially little capital, and that has yet to even be formally noticed.

Kuper quotes Umberto Ecco: “The genuine problem . . . does not consist of proving something false but in proving that the authentic object is authentic.”

Yes, like the problem I have had surpassing that seemingly unsormountable barrier of “what is risky is risky”, in order to warn regulators that what is “safe”, is even more dangerous… at least to our bank systems.

@PerKurowski

Artificial intelligence could help humanity to overcome some of its very human frailties.

Zia Chishti, the chairman and chief executive of Afiniti holds that AI is especially good at “the identification of patterns in complex data.” “Do not believe the hype about artificial intelligence” October 18.

I agree but sometimes we also need help identifying what we humans for some reasons are unable or find hard to see in very simple data. 

That’s why I have often tweeted out asking for IBM’s Watson’s (or Goggle's DeepMind) help, in making bank regulators understand that their risk weighted capital requirements for banks have gotten it all wrong. Had they really looked at simple data on bank crises, they would have immediately seen these were never caused by assets perceived ex ante as risky, but always by assets that when booked by banks were perceived as especially safe.

Perhaps the safe-is-risky and the risky-is-safe might just be a too hard concept for humans to swallow and act on. If that’s the case, in AI’s assistance we trust.

PS. Another useful factor is that AI has the advantage of being able to admit mistakes easier, as it has (I pray) a smaller ego than humans

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

The regulators should also care about their own internal governance standards.

Sir, Gary Dixon referring to Caroline Binham’s report “Record caseload for UK financial regulator” (August 13) writes, “FCA is now paying increased attention to the internal governance standards of regulated firms... all regulated firms should be taking steps now to improve their board standards as a matter of priority.” ,“Governance standards have become FCA’s focus” August 14

The regulators should also urgently take steps to improve their own government standards. I mean how could they have signed up to those risk weighted capital requirements for banks based on the nonsense that what’s perceived risky is more dangerous to bank systems than what’s perceived as safe? 

And those in EU, how could they have assigned a 0% risk weight to Greece and thereby doom it to suffer the tragedy of way excessive public debt?

@PerKurowski

Rana Foroohar. Please ask yourself a question and, if you cannot answer it, do ponder why.

Sir, I refer to Rana Foroohar’s “Three questions for the Fed’s Powell” February 26.

Ms. Foroohar (and you too Sir) should ask herself: why do regulators want banks to hold more capital against what, by being perceived as risky, has been made quite innocous, than against what, because it is perceived as safe, is so much more dangerous?

And if could not come up with a truly convincing answer, then that should give her a clue on that something very strange is going on in the field of bank regulations.

And if she had gotten to that point, then it should not be too hard for her to begin to understand how those different capital requirements, which allows for some assets to be leveraged much more than others, might distort the allocation of credit to the real economy… and thereby affect its “real non-financialised growth”

And at that point she would surely add, that same question she could not answer, to those three she proposes to ask Powell.

Foroohar also references companies “buying up the higher-yielding bonds of riskier companies at a favourable spread and holding those assets offshore [and that now after] President Donald Trump’s new tax rules… They will simply be able to move their money wherever they want, whenever they want, in cash.”

“Cash”? In order to become cash, all those assets the companies have bought and held offshore must be sold. Would that not have any consequences?

@PerKurowski

On Main Street what’s perceived ultra risky, is de facto much less dangerous than what’s perceived ultra safe.

Sir, Simon Kuper writes: “The Republican plan to strip health insurance from 22m Americans (including 18m adults), it would kill about 32,700 adults annually (using the mid-range estimate). That’s gruesome. But boring old obesity kills far more.”, “How to solve the obesity epidemic” July 29.

That presents a perfect opportunity to explain again, for the umpteenth time, what regulators did wrong with their risk weighted capital requirements for banks.

They would have assigned a higher risk weight to the Republican plan, because even though it might kill less it is perceived (or decreed) as riskier, than what they would assign to what though more dangerous for society, obesity, is perceived as safer.

In Basel II, the ultra dangerous ultra safe AAA rated got a 20% risk weight, while the totally innocuous ultra risky below BB- rated got a 150% risk weight. 

PS. Cars and motorcycles.

@PerKurowski

What’s perceived safe could be much more dangerous than what’s perceived risky. Why is that so hard to understand?

Sir, Gillian Tett, responding to “Why on earth would anyone buy a bond that yields a negative interest rate?” includes in the answer: “desperation” (they cannot think of anywhere else to park their funds) or “regulation” (they have to buy bonds to comply with financial supervision rules or investment mandates)” “The alchemists who turn negative yields into profit” September 16.

And then Ms. Tett explains interestingly how “some investors have found ways to make those negative yields pay” with “the rather esoteric corner of finance of dollar-yen cross currency swaps”.

But, if “government intervention to reinvigorate stagnant economies has left markets so peculiarly distorted” is the search for profit opportunities derived from distortions more important than eliminating the distortions?

I ask, because in all these years Ms. Tett has been unwilling to touch, even with a ten-foot pole, one of the most fundamental sources of distortion, namely the risk weighted capital requirements for banks.

That piece of regulation, by focusing on the ex-ante perceived risk of bank assets, and not on the ex-post risk for the banking system conditioned to how banks manage those ex-ante perceived risks, is loony and dangerous. As an example it allowed regulators to come up with a risk weight of only 20% for AAA to AA rated assets, while placing one of 150% on the so much less dangerous assets like the below BB- rated.

Sir, am I wrong to think an anthropologist should be able understand this?

@PerKurowski ©

BoE, of course prudential bank regulations is not everything, especially when totally imprudent

Sir, Chris Giles writes “The Old Lady is right that prudential policy is not everything” June 19. Absolutely! And this is especially so when the prudential policy applied, is the wrong one.

Prudential bank regulations rule 1.

Whatever you do, beware of the dangers of distorting the allocation of bank credit in the real economy; precisely like what is being done now with the risk-weighted capital requirements for banks.

Prudential bank regulations rule 2.

Never forget that in the financial world what is perceived as “risky” is a thousand times less dangerous than whatever is perceived as “absolutely safe”; something which regulators have completely ignored with their current risk-weights in the risk-weighted capital requirements for banks.

If one gets ones prudential regulations right there is less need for monetary policies. If one does not get ones prudential regulations right, no monetary policy can make up for it… in fact it could make things much worse... adding to the distrust of the financial system the distrust in the currency.