Martin Wolf, ask the Greeks: Who is more dangerous, Trump with his trade tariffs, or​ ​bank regulators with their risk-weights?

Sir, Martin Wolf lashes out against the President of the United States’ “administration’s trade actions and announced [trade] intentions defining him as an “ignoramus” “Trump creates chaos with a global trade war” July 11.

I just know central bankers and bank regulators should know more about their specialized line of activity, than what a real estate developer should know about trade policy. And so, when it comes down to the title of world-class ignoramus, in my mind that one should clearly go to those who came up with the senseless idea of the risk weighted capital requirements for banks.

Dare to explain to a Greek that European technocrats assigned a 0% risk weight to their government, and that this was what led bankers into lending to it way over its capacity to use the loans. And then ask the Greek who is more dangerous, Donald Trump with his trade war, or bank regulators with their war, with subsidies and tariffs, on the allocation of bank credit?

Yes, Trump poses a threat to significant part of world trade, but the besserwisser in the Basel Committee have dangerously distorted most of the allocation of bank credit in the world.

PS. Here is a letter I wrote and that Washington Post published today and which has exactly to to with this theme

@PerKurowski

Moody, what would happen to US credit ratings if suddenly it was not any longer the world’s mightiest military power?

Sir, Rochelle Toplensky and Eric Platt write that according to Moody, the four primary factors it considers when assessing a country’s creditworthiness are “very high degree of economic, institutional and government financial strength and its very low susceptibility to event risk”, “Moody’s warns next US president over debt” September 8.

In the case of the US they perhaps miss a very important factor. As I once argued in a letter that the Washington Post published, “Much more important than a triple-A for the United States is the fact that this country is, by far, the foremost military power in the world. Lose that supremacy and all hell breaks loose. Keep it and a BBB rating could do.”

And so perhaps you should ask Moody: How would it impact your credit rating of the US if the US was no longer, by far, the mightiest military power? And would the credit rating of any closing up mighty then automatically improve?

@PerKurowski ©

Why does not FT, “without fear”, debate the distortions the credit risk weighted capital requirements for banks cause?

Sir, Martin Wolf writes that if that if “hysteresis” — the impact of past experience on subsequent performances” is the cause for the economy failing to recover its “Possible causes [could] include: the effect of prolonged joblessness on employability; slowdowns in investment; declines in the capacity of the financial sector to support innovation; and a pervasive loss of animal spirits” “In the long shadow of the Great Recession” November 11.

For more than a decade I have tried to explain for Mr. Wolf that, if you allow banks to hold less capital against assets that ex ante are perceived as safe than against assets perceived as risky, you allow banks to make higher expected risk adjusted returns on equity on safe assets than on risky, and that of course will decline the willingness of the financial sector to support innovation and erodes the animal spirit. When banks make the good returns on equity, on for instance financing houses, why on earth should they go an finance what requires them to hold more capital and is therefore harder to achieve good ROEs for?

But Martin Wolf, and FT, has never wanted to accept that as a serious source of distortion in the allocation of bank credit. I have never understood why. I dare him, or FT, or any bank regulator for that matter, to a public debate of that issue… come on, show us some of the “without fear”

Thomas Hoenig the Vice Chairman of FDIC has recently said: “Using simple leverage measures instead of risk-based capital measures eliminates relying on the best guesses of financial regulators to guide decisions.” I pray he is able to convince his colleagues of that. The world has had more than enough of that reverse mortgage regulators imposed and that makes banks finance more the safer past than the riskier future.

When I think of those millions of young people who will never get a chance of jobs that help them fulfill dreams, thanks to these hubristic and outright incapable regulators, I get so sad and mad.

PS. Here is a letter that Washington Post published today.

@PerKurowski ©

EDTF beware; disclosure requirements for banks can also be used as camouflaging material.

Sir, Oliver Ralph writes: “Maybe one day banks may be trustworthy enough not to have publish annual reports that are hundreds of pages long”, “Excessive disclosure by banks eludes comprehension” June 1.

Indeed but it is clear that publishing annual reports that are hundreds of pages long does not make banks more trustworthy either. One-way to concealed bad behavior, is to bury it under hundreds of pages of mumbo jumbo.

Ralph refers also to the Enhanced Disclosure Task Force’s (EDTF) “recommendation 7, which asks the banks to describe risks in their business models.” Would that cause banks to prepare their own homemade list of weights they assign to the risks in their business? That could shed some light on what risks the banks are not considering in their business model… but frankly, mostly it seems like generating profitable employment opportunities for bad and good fiction authors.

And I set all these efforts against the background of the regulators and the banks having colluded in producing that masterpiece of financial disinformation, which is the leverage that in the numerator does not use assets but risk-weighted assets instead.

Few days ago, a leading American newspaper, citing another leading American newspaper in its editorial expressed “banks are significant safer than they were prior to the 2008 financial panic, with an average of $13 in capital for every $100 in assets for member banks of the Federal Deposit Insurance Corp”. That is false! It should have stated for every $100 in risk-weighted assets; and it should have reported the real undistorted leverage too.

Since the risk weighing not only distorts information but also the allocation of bank credit to the real economy, something that is even more dangerous, the EDTF should start by clearing this out with the Basel Committee, before allowing banks more mumbo-jumbo material under which to hide.