What keeps IMF and World Bank so silent on bank regulations that go against their respective mission?

Sir, you argue, “If the IMF and the World Bank were to disappear, the absence of their combination of expertise, credibility and cash would soon be painfully obvious.” “Bretton Woods twins need to keep adapting” July 18.

Absolutely but they would also be sorely missed as the right places for having serious discussions on many serious issues that can affect our economies. 

But in that respect both have also been somewhat amiss of their responsibilities. The Basel Committee’s credit risk weighted bank capital requirements, which so dangerously distort the allocation of bank credit, have not been sufficiently discussed.

The World Bank, as the world’s premier development bank, knows that risk taking is the oxygen of any development. With this in mind it should loudly oppose regulations that so much favors the safer present’s access to bank credit over that of the riskier future. Doing so dooms our economies to a more obese less muscular growth. 

And IMF should know that all that piece of regulation really guarantees, is especially large bank crises, caused by especially large exposures to something perceived or decreed as especially safe, and that turn out to be especially risky, while being held against especially little bank capital. 

Why the twins’ silence? Perhaps too much group think, perhaps too close relations with regulators, something that could make this topic uncomfortable to discuss. 

PS. My comments to the Financial Stability Board

If AI systems were trained on using historical data that could sometimes help to avoid human biases.

Sir you write “Just as with any other computer system, the adage “garbage in, garbage out” applies to AI. If systems are trained using historical data, they will reproduce historical biases.”“Guidelines are a welcome step towards ethical AI” April 15.

Not necessarily so. Currently because human regulators suffer from something known as confirmation bias, they introduced risk weighted capital requirements for banks based on that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe. The analysis of historical data about the origin of bank crises would clearly have shown this to be totally wrong. 

@PerKurowski

Regulators gave banks great incentives to smoke around drum barrels marked “empty”, and to stay away from drums marked “full”.

Gillian Tett writes “before 2008 the big banks spent a great deal of time fretting about issues that seemed obviously risky — hedge funds or highly leveraged companies — but tended to ignore anything that seemed safe or boring, such as AAArated mortgage-backed securities” “What the Hopi culture teaches us about risk” June 23.

Sir, if you go to my TeaWithFT blog and click on Gillian Tett, you will find that over the years I must have written her at least 100 letters explaining that what is perceived as risky, drums marked “full”, is never as dangerous than what’s perceived as safe, drums named “empty”. 

But, if a 70 year old paper by US fire-safety inspector Benjamin Lee Whorf, based a lot on Hopi Native American culture, is more convincing to Ms. Tett than my arguments, so be it.

My real complaint though is that Ms. Tett only refers to what bankers did, and does not mention the fact that bank regulators, on top of it all, with their risk weighted capital requirements, allowed banks to smoke (leverage) much more around drums named “empty”, than around drums named “full”. 

So when Ms. Tett writes: “In theory, this danger has now receded: banks have been trained to take a more holistic view of risk and to question whether even AAA ratings are always safe”, let us not forget that with Basel II, regulators allowed bank to leverage a mindboggling 62.5 times if only an AAA to AA rating was present. Since that besserwisser regulatory mentality still prevails, and risk weighting derived incentives still exists, unfortunately I do not share the hope that dangers have receded. New dangerous “absolutely safe” always lurk around the corners.

And Sir, come on, we have European central bankers who told banks “You can smoke as much as you like around that 0% risk weighted drum named Greece”; and they have still not been made accountable for that… and, between you and I, you FT is not entirely without blame for that.

PS. The sad complement to this analysis is that what regulators decreed as drums marked “full”, and made banks stay away from, includes entrepreneurs and SMEs, something which must erode the dynamism of the economy. 

@PerKurowski

Major bank crisis, are they most likely to result from excessive exposures to what’s perceived risky than for what’s perceived safe?

Izabella Kaminska ends her fun “Festive inefficiencies would be missed in Big Tech’s perfect world” of December 20 with “Since inefficiency has a way of popping up no matter what we do, it is human experience that should be prioritised before all else.”

Sir, let me phrase some questions:

How long could it take for a bank system to suffer a major crisis because of excessive exposures to what is perceived risky?

How long could it take for a bank system to suffer a major crisis because of excessive exposures to what is perceived safe?

Do our bank regulators care at all about human experiences when they require banks to hold more capital against what is perceived as risky than for what is perceived as safe?

Sir, do you really care about what human experiences teaches us?

@PerKurowski

Loony bank regulators based the capital requirements to cover for uncertainty, on the “certainty” of expected risks.

Sir, Rana Foroohar, when reviewing the former Securities and Exchange Commission regulator and Treasury department adviser Richard Bookstaber’s book “The End of Theory”, begins it with “Economists are forever running forensics on past financial crises to discover clues as to how the next one might occur.” “Uncertainty principles” April 15.

I don’t know about all my economist colleagues, but our current bank regulators, those you most should thought would do that in order to regulate, they definitely did not do that.

If they had done so, they would clearly have noted that all major bank crises result from a. unexpected events (like devaluations) b. criminal behavior (like lending to affiliates) and c. excessive exposures to something ex ante perceived safe, but that ex post turns out to be very risky.

As a consequence they would never ever have come up with something as dumb as risk weighted capital requirements for banks that were lower for what was dangerously perceived as safe, and higher for what was made innocuous, precisely because it was perceived as risky.

Indeed bank capital should be there for the unexpected, to take care of the ex post uncertainties. That is why current regulators, when basing their capital requirements for banks on the ex ante perceived risks, evidence they haven’t a clue about what they are doing.

Sir, as you have silenced some 2.500 letters of mine on this, I know you don’t want to raise this issue but do you really believe it is in your best interest to keep quite on it?

@PerKurowski

A “Council of Historical Advisers” should advice the Council of Economic Advisers, on the origins of bank crises

Sir, Gillian Tett discussing Afghanistan’ Gandamak writes about the importance of knowing where you come from to know where you would want to go. “History lessons would be good for the White House” September 3.

Indeed, and I sure hope the “Council of Historical Advisers” comes to fruition, since the Council of Economic Advisers, and the Basel Committee, sure need some history lessons about the origins of bank crises.

Currently the pillar of bank regulations, is the risk weighted capital requirements for banks; more perceived risk more capital – less risk less capital.

And there is absolutely nothing in history that points to a banking crisis ever having resulted from what was, ex ante, when incorporated in their balance sheets, perceived as risky.

These have only resulted from unexpected events, or from the accumulation of excessive financial exposures to something erroneously perceived as safe. In fact the safer something is perceived, the worse the unexpected consequences that could result. Motorcycles are correctly viewed as much riskier than cars… and therefore much more people die in car accidents than in motorcycle accidents.

To sum it up, the risk weighted capital requirements for banks, dangerously distort the allocation of bank credit to the real economy, for no good reason at all. 

@PerKurowski ©