The silenced conversation on the risk weighted capital requirements for banks.

Sir, Thomas Hale writes, “From the eighties onwards, a focus on capital constraints on bank balance sheets encouraged banks to sell mortgages and other loans through securitisation. The regulatory framework meant that profitability had become at least in part a function of state-directed regulatory rules around capital — a fact that persists today. For this reason, lending against a house might be preferable to lending to a business, even if the former represents, for whatever reason, a greater risk.”, “The broken conversation about financial regulation”, Alphaville, September 19.

Hale’s “even if the former represents, for whatever reason, a greater risk” does not explain the whole problem because, being perceived as safe, and therefore subject to some regulatory subsidies, is precisely what can most make this house-lending dangerous to our bank systems.

The safety of the banking sector is also a secondary issue because, for the long term good of the economy, lending to “risky” entrepreneurs seems to be preferably than the “safe” financing of house purchases.

Hale writes: “Discussion of post-crisis regulations really only take place in extremely rarefied and specialist settings… there are a few people talking about regulating the banks, but the conversation is mostly inaccessible.”

Inaccessible? Read some of the over 2.800 letters that I have written to FT over the years, which includes even some to Thomas Hale, related precisely to the problem with the risk weighted capital requirements for banks; those that distort the allocation of bank credit; those that are based on the flawed theory that what’s perceived as risky is more dangerous to bank systems that what’s perceived as safe.

These letters, even when I could show some credentials as having formally spoken out against these regulations while being an Executive Director at the World Bank, in times of Basel II preparations, were for all practical purposes ignored. Someone in FT told me that I was obsessed with that problem. Of course I am, and as a grandfather I should be. But much more obsessed has the Financial Times been in ignoring it. 

Sir, a lot of internal soul searching on the why of FT’s silence on the risk weighted capital requirements for banks, should be a much-needed exercise for a paper that as its motto has “Without fear and without favour”.

I was also told to write a book. Why should I, the only book I have written “Voice and Noise”, and that contains some clear pointers to this problem, I believe that not including those I purchased to give away, sold only 51 exemplars.

But perhaps there might be a future book based on all the letters to the Financial Time that are included in this my TeaWithFT blog.

@PerKurowski

During this year’s central bankers’ Jackson Hole meetings, will there finally be a seminar on conditional probabilities?

Sir, you write “The global economy and financial markets remain relatively benign, but the political environment in which central banks once operated has changed, perhaps for ever” “The tricky politics of being a central banker” August 24.

Indeed, but all is not that tricky for central bankers and their financial sector regulation colleagues. Just think of how they have all been able to progress, for soon thirty years, Basel I 1988, without any knowledge about conditional probabilities. 

Imagine, even after a 2007-08 crisis, caused 100% by assets that had extremely low capital requirements, only because these assets were perceived as extremely safe, and they have not yet been called out on that.

If I were to be invited, I would again ask them: Why do you believe that what’s perceived risky is more dangerous to our bank system than what’s perceived safe, have you never heard of conditional probabilities? But of course I am not invited.

Sir, again I will invest some hope that a “Without fear and without favor” FT journalist dares to asks that question. I must confess though that investment will be quite small, as I want to avoid having to be so disillusioned again.

PS. Conditional probabilities and risks for the bank system

@PerKurowski

The Financial Times’ FT’s lack of curiosity is astonishing

Sir, to this date I have written you 50 letters questioning the wisdom of those bank regulators who assigned a risk weight of only 20% to what is AAA rated, and of 150% to what is below BB- rated.

It is precisely what’s perceived as very safe, AAA rated, that could cause the buildup of dangerous exposures that could result in major bank crisis if those perceptions turn out to be wrong; and it is precisely what’s perceived as very risky, below BB-, that is the most innocuous to our bank systems, since banks would never ever create any larger exposures to borrowers or investors so rated.

One could have thought that Financial Times would be interested in exploring and analyzing the arguments regulators could have been using to come up with such strange risk-weights.

But Sir you are clearly not curious at all about this. Why? Is not your motto "Without fear and without favor"?

PS. I have tried to make sense out of it all but failed

@PerKurowski

Should we not also be concerned with the behaviourism of the Financial Times? I mean FT having such a delicate ego?

Before we need to concern ourselves with the behaviourism and the market, which is quite some nonsense, unless we want to ordain the markets to behave in some special way, we should concerns ourselves with those whose behaviourism could most distort the markets… like the bank regulators.

So, what behaviourism could cause them to regulate banks without defining the purpose of the banks, more than that of being safe mattresses to stash away the cash?

So, what behaviorism could cause them to believe that what bankers perceived as risky was more dangerous than what bankers perceived as safe?

So, what behaviourism could cause them to believe they needed to tilt so much in favor of the public sector so as to assign the sovereign a risk weight of zero percent and to us, We the People, one of 100%?

So, what behaviourism could cause them to believe the world becoming a better place with the banks avoiding taking the risks of lending, like for instance to SMEs and entrepreneurs?

Etc., etc. 

Why do I ask? Because I have sent FT thousands of letters on this issue, and which they have 99.9% ignored, because, though they might say otherwise, they are not without fear nor without favour.

At least Lucy Kellaway defends with honor the “Without fear and without favor” motto of the Financial Times

Sir, Lucy Kellaway does great living up to “Without fear and without favor” when she socially sanctions all the full of themselves experts, and those who socially suck up to these. Well done! “Boneheaded aphorisms from Davo’s windy summit.” February 1.

It is a real pity there are not many more like her at FT. The world could benefit a lot if the journalists at FT dared to, for instance, question more current bank regulators on what they are up to… like for instance with their zero risk weight to sovereigns and the 100 percent risk weight for that private sector that makes the sovereign strong.

@PerKurowski ©

That’s it Lucy Kellaway. Keep them honest.

Sir, setting of course aside the pay package of £8.25m a year, I would not like to be in Jes Staley shoes having to face those who when meeting him discreetly look away after having read Lucy Kellaway’s “Barclays boss needs to ditch his inexcusable focus on value”

Good for her. To reveal haughty arrogant stupidity among the powerful is the absolutely most important role journalists have.

That’s the “Without fear and without favor” spirit we expect from the Financial Times. I have sure been missing a lot of it lately.

@PerKurowski ©

Let us hope FTs new found belief in that “Banking cannot prosper within a culture of fear” stays strong.

Sir, Alessandro Ciravegna was not “the only reader of yesterday’s FT who thought they had bought the wrong newspaper” “Regulators must help dispel the paranoia” September 25. I was much surprised too. 

Ciravegna writes “However successful UBS or any other bank may be in beginning to change the climate of paranoia and the culture of risk-avoidance that has now taken hold across the financial services industry, there will be little improvement until regulators and politicians also begin to backtrack.” The sad truth is that to regulators and politicians, until one day ago, we would have needed to add newspapers like FT.

Your “Banking cannot prosper within a culture of fear” editorial of September 24 expresses, though years or decades late, a much-welcomed 180 degrees change of attitude. Let us only hope that change of heart is strong enough, so you can at least live up to one part of your motto.

@PerKurowski

FT, have you envisioned that in the future you might now have to apologize Japanese style for your omissions?

Sir, you write “The FT has thrived, and continues to thrive, in an age of global economic interdependence defined by the free movement of capital, goods and people and instant digital communication”, “A new future for the FT, without fear or favour” July 26.

What free movement of capital? Is not bank credit one of the most important means by which capital moves around? And when bank regulators allow banks to leverage more on some assets than on other, based on perceived credit risks, something which clearly distorts the allocation of bank credit, is that not a capital control?

Let me recap for you what I have been arguing for over a decade, for now with over 1.900 letters to you, and which have basically been ignored. 

Regulators first decided that banks should hold 8 percent in capital against asset… no problems with that. But, in 1988, with the Basel Accord (Basel I), in order to determine how much of that basic capital banks should hold against different assets, regulators set the risk weight for loans to the governments of OECD at zero percent, and the risk weight for loans to the private sector at 100 percent.

That meant banks could lend to governments against no equity of their own (8% x 0%), and had to hold 8 percent (8% x 100%) when lending to the private sector. What did that mean?

That meant banks could leverage their equity and the support they received from tax payers, like with deposit guarantees, unlimited times when lending to governments, and only 12.5 times to 1 when lending to the private sector.

That meant banks could obtain much higher risk adjusted returns on equity when lending to governments than when lending to the private sector, or; that the dollars in net interest margins paid to banks by governments are worth much more than the same dollars paid to banks by the private sector.

And that meant banks lend more and at lower rates to governments, and less at higher rates to the private sector, than what they would relatively have done in the absence of these regulations.

That implies bank regulators believe governments present less credit risk than the private sector… as if governments do not depend on the private sector… as if governments don’t default in so many ways, like for instance by means of inflation, requests for higher taxes or outright haircuts.

And of course that must mean regulators believe government bureaucrats can use bank credit much more efficiently than the private sector.

Now why on earth would regulators believe such crazy things?

They might be communists or statists, or it all might just be some good old hanky-panky scheming going on between bureaucrat and technocrat colleagues.

Whatever, they are surely sinking our economies and we should absolutely not bet our children’s future on such bank regulations.

And why on earth should a newspaper like FT who proclaims itself without fear and favor, keep mum on something extremely important like this? I dare you to answer that.

Sir, have you envisioned that in the near future you might now have to apologize for this omission in Japanese style?

@PerKurowski

“Unwittingly”… or simply stupidly and irresponsibly?

Sir, Charles Goodhart in “Basel marches down wrong path to tackle systemic risk” July 7, writes “Regulation may unwittingly have actually added to procyclicality and systemic fragility by encouraging similar behavior.” Seriously, where goes the border line between “unwittingly” and either stupidly or irresponsibly?

In January 2003 the Financial Times published a letter I wrote which ended with “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.” And if that was clear to me, an ordinary strategic and financial advisor, that should have been perfectly clear to bank regulators. 

The regulators bet the health of the financial sector on capital requirements for banks based on the credit ratings being right, instead of taking the precautions to safeguard the financial system for when these ratings would, sooner or later, be wrong, and now we are all paying the price of it. 

Sir, if FT’s “Without fear and without favour” motto means anything to you why do you insist on being so lenient with the bank regulators? If it had been many bridges collapsing because of structural design flaws, I am sure you’d gone after the engineers responsible of that. Is it really so that a BP management can be held accountable but a Basel Committee not? It is truly amazing to see basically the same bank regulators keep on regulating with basically the same faulty paradigms... and an FT keeping mum!