We might need to parade current bank regulators down our avenues wearing cones of shame.

Sir, Patrick Jenkins writes: “Bill Coen, secretary-general of the Basel Committee on Banking Supervision… said auditors should be given responsibility for checking banks’ calculations [so as to have] another line of defence to ensure assets are [given] the proper risk weighting”, “Metro Bank sparks call for external checks on loan risks” February 4.

I totally disagree, auditors look at ex post realities, on what banks have already incorporated into their balance sheets, What most matters are the ex ante perceptions of risk. 

Jenkins opines here “The error at Metro was to put some loans into standard risk-weighting buckets, determined by the UK regulator”. Sir, I ask, is that not evidence enough that we should get rid of current bank regulators?

If somebody is to blame, that is precisely the Basel Committee who with its risk weighted capital requirements for banks decided that what bankers perceived ex ante perceived as safe, was so much safer to our bank system than what they perceived as risky.

Basel Committee’s Bill Coen should be asked to explain the rationale of a standardized 20% risk weight for what, rated AAA, is dangerous to our bank systems, and 150% for what, rated below BB-, becomes so innocous. 

Jenkins opines: “The error at Metro was to put some loans into standard risk-weighting buckets, determined by the UK regulator”. Sir, I ask, is that not evidence enough that it behooves us to hold our bank regulators very accountable, perhaps even by parading them down our avenues wearing cones of shame? Perhaps hand in hand with those unable or unwilling to question them.

@PerKurowski

I would not shed tears for the Basel Committee for Banking Supervision’s demise. Neither would millions of SMEs.

Sir, Caroline Binham and Jim Brunsden, with help of Laura Noonan, report that the Basel Committee for Banking Supervision is introducing reforms that include a contentious “output floor” that would limit banks’ ability to use their own internal models to assess risk. “In many cases this will effectively raise the amount of capital that banks have to hold” “Basel group warns of call for lenders to ramp up capital” October 8.

What do they mean with “in many cases”? How can anyone believe all banks authorized to use internal models do not use these to minimize the capital they need to hold …so that they can maximize their returns on equity?

Sadly, what is really contentious with all this, is how on earth we ended up with such infantile regulators.

Anyhow the authors report these reforms are creating some discord between the US and Europe; to such an extent it “tests the viability and purpose of the Basel group, founded 41 years ago to harmonise banking rules around the world.”

Sir, if that would signify the end of the Basel Committee, you know I will not shed a tear. Neither would the millions of SMEs and entrepreneurs who over the years have been denied fair access to bank credit, if they finally came to realize that was a direct consequence of Basel’s regulatory discrimination. 

Knowledgeable bank regulators know below BB- rated assets are risky. Wise ones know what’s AAA rated is dangerous. The world is overdosing on information and knowledge and it sorely needs more wisdom.

PS: Here is an aide memoire on the regulatory monstrosity of the risk weighted capital requirements for banks.

@PerKurowski ©

The Basel Committee’s risk weighted capital requirements for banks decreed the ‘new mediocre’, and boosted inequality

Sir you write: “Christine Lagarde, the IMF managing director, has warned that the recovery remains too slow and fragile — and that the world risks being trapped in a “new mediocre” of persistent low growth, with damaging effects on the social and political fabric of many countries.” “The high cost of settling for the ‘new mediocre’” April 6.

If asked: “Is risk-taking essential to the economy?” most experts and all wise men would say “Absolutely!”

And yet regulators de facto ordered banks to stay away from whatever that is ex ante perceived as risky. Because that is what happens when you allow banks to earn higher expected risk-adjusted earnings on what is “safe” than on what is “risky”. Because that is what happens when you allow banks to leverage equity more with what is “safe” than with what is risky.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926 

This week William Coen, the Secretary General of the Basel Committee, said in a speech: “We have spent several years developing a framework to make sure that banks' capital and liquidity buffers are strong enough to keep the system safe and sound.” And that describes precisely the problem; they have only cared about the condition of the banks, and not one iota about the fundamental social purpose of banks, which is that of allocating credit efficiently to the real economy.

As is banks will dangerously overpopulate safe havens and leave many promising but “risky” bays unexplored. As is banks no longer finance the riskier future, they just refinance the, for the very short time being, safer past.

And of course, negating the “risky”, like SMEs and entrepreneurs, fair access to the opportunity of bank credit can only boost inequality.

Sir, I cannot understand your, IMF’s, World Bank’s, economists’ and so many others’ silence on this issue. As I see it you should all be ashamed.

One day soon, your sadly unemployed children and grandchildren, will hold you accountable for it.

And don’t tell me I did not warn you. I have sent you way over 2,000 letters on the dangers of arbitrarily imposing distorting risk aversion on our banks, during more than a decade. 

@PerKurowski ©

William Coen. Do you really think that government bureaucrats use bank credit more productively that SMEs and entrepreneurs?

Sir, I refer to Laura Noonan, Caroline Binham and Barney Jopson reporting that “Basel group faces up to compliance challenge” May 26.

We read David Green stating that still to be answered “is whether the new regulations actually does what it was intended to do and whether the side effects are acceptable, whether they are intended or not”. And that is something that does not sound quite unimportant eh?

But then William Coen, head of the Basel Committee’s secretariat, tells us “We hear quite often about unintended consequences of our reform when, in fact, the effects of our reforms are actually fully intended; some just don’t like them”.

But here then is a question to Mr. Coen.

The Basel Committee uses credit-risk weighted capital requirements for banks were the weight of governments is 0% while the weight of SMEs and entrepreneurs is 100%... and that is something quite discussable, especially in these days when governments announce they need to use financial repression in order to impose informal haircuts on their obligations.

But worse, much worse, looked at from the opposite side, it tells us that the Basel Committee for Banking Supervision feels that the risk of bank credit not being used productively is 0% for government bureaucrats, and 100% for SMEs and entrepreneurs.

Is that really what you believe and have intended to say Mr Coen? Are you a communist?

@PerKurowski

There’s much more bank regulatory stupidity than what we should tolerate

Sir, Laura Noonan writes “The avalanche of post-crisis banking regulation is coming to an end and most of the uncertainties weighing on the financial industry will be dealt with in the next year, Basel Committee secretary-general William Coen has said”, “End in sight for post-crisis bank reform” March 30,

And she quotes Coen with: “There is light at the end of the tunnel, the big pieces are there and it’s really now about getting to the finish line”

Sorry, as I see it, they have not really started, there’s much more bank regulatory stupidity than what we should tolerate. For example:

Regulators should have no concern with individual banks failing, but with the banking system itself failing. In fact they should know that the failure of individual banks is needed in order to help to strengthening the bank system at large.

Regulators should foremost be concerned with how banks perceive credit risks, and with how they manage these. But they do also concern themselves with the perceived credit risks in order to set the equity requirements. Doubling down on the same basic perceptions can help no one.

Regulators should know the banks play an essential role in allocating credit to the real economy, and that they need to be extremely careful in not distorting that process. And yet they allow banks to leverage their equity, and the implicit support these receive from taxpayers, differently depending on perceived credit risks, something that of course distorts.

Most of us ordinary citizens are extremely risk-adverse. And that is why we as taxpayers agree to give support to banks so that they, on our behalf, take some of the risks we know the economy needs to go forward. So why on earth do regulators believe we taxpayers support the banks for these to be only safe mattresses in which to stash away our savings?

By the way, besides stupidity, there is immorality. To discriminate against the fair access to bank credit of the “risky” those who by being perceived as risky are already discriminated against by bankers, kills opportunities and promotes inequality.

Perhaps the Basel Committee is so blinded by its own mistake so that there’s no other way than to start from scratch… beginning with holding bank regulators accountable for their stupidity and immorality.

@PerKurowski