EU bank regulators have clearly proven themselves to be a source of systemic risk

Sir, Jan Toporowski writes that the “White House…represents a much more serious systemic threat to European banks. European governments and the ECB need to rethink how European banks are funded and regulated.”, “Threat to European banks of US political agenda”, August 14.

That could be but, foremost, it is the EU that needs to rethink how European banks are regulated. The 0% risk weight that for the purpose of bank capital requirements was assigned to Greece was, without any doubt, what caused that country’s excessive public debt tragedy. And did any EU authority offer to help Greece in order to compensate for that mistake? No! Not even the slightest “We’re sorry”. They do not even acknowledge their mistake… they just keep on blaming Greece.

@PerKurowski

Is banking regulation unfinished business? You bet, risk weighted capital requirements are still used

Sir, I have not read Tamim Bayoumi’s “Unfinished Business” yet, so for the time being I have to go on what John Authers writes in “A fresh way to learn from the financial crash” October 2.

From what I see the book seems in much like another example of Monday morning quarterbacking. For instance when it states “In early 2007 anyone in Wall Street would have said that naive European banks were the most enthusiastic buyers for dubious debt securities” we must really ask what is meant by qualifying European banks as naïve? These were AAA rated securities, these were the type of securities that their own regulators had just in 2004 with Basel II authorized the to leverage 62.5 times to 1 their capital with.

What we had (and still have) is amazingly naïve bank regulators… who for instance still allow banks to use their own models, as if banks were not interested in generating the largest risk adjusted returns on equity, something that, because of regulators, is nowadays foremost done by minimizing capital requirements.

It also says: “the US widened the collateral that banks could use in repo transactions [this] rule encouraged them to create mortgage-based securities, and “game” rating agencies into giving them undeserved strong ratings”. But that is wrong, or at the most, just a minor cause of the disaster.

Anyone who has taken time as I did to understand what had happened (I passed exams for real estate and mortgage intermediation licenses in the US for that purpose) would be clear on the following. The profit potential in securitization is a direct function of the quality difference between what is put into the securities, and what comes out. To be able to feed the sausage with subprime mortgages yielding 11 percent, and then because of AAA ratings be able to resell these (to Europe) at 6%, was a profit opportunity to big and juicy to miss.

Finally Authers comments: “Meanwhile, models resting on assumptions disproved during the crisis are still in use. There is indeed unfinished business.” Indeed, the risk weighted capital requirements are still used.

Sir, the first of about 50 letters I have written to John Authers since July 2007, more than a decade ago, ended with: “This all is lunacy and we are being set up for even bigger disasters and it must end, before it ends us. We need urgently to punish the regulators, at least on the count of being very naive.”

But clearly someone in FT did not want to hear my arguments, or at least not these coming from me.

@Per Kurowski

In crossroads where some cars are allowed to speed through at 62.5, and other at 12.5, which would cause the greatest accidents?

Robert A Denemark writes: “the financial system provides incentives to engage in risky behaviour that tends toward crisis… It is a good idea to avoid accidents even when there are no traffic laws, but if vehicles collide there can be no official blame. Legitimacy, the focus of the editorial, comes from the recognition of most people that the rules make sense. Do they?” “Financial system itself makes crises likely” August 18.

Do current rules make sense? Let me answer that question this way: In that crossroad where bankers take decisions about credit, regulators allowed bank equity to be leveraged much more with the net margins if these came from “safe” borrowers than when produced by “risky” ones. For instance Basel II, allowed a 62.5 times leverage for the AAA rated and only 12.5 times for SMEs.

Sir, where would you think the biggest and most dangerous crashes could occur?

The 20% risk weighted AAA rated securities, and 0% to 20% risk weighted sovereigns, like Greece, is a good hint for you to come up with the right answer.

Sir, Bank regulators should learn about risk compensation and shared space philosophy.

@PerKurowski

Odious debts, odious credits and odious regulations are all yin-yang elements of the financial sector

Sir, M Shepherd, when commenting on Alex Pollock's letter "Sovereign debt has a pretty bad record" August 16 writes that “All too often, debates about defaults on government bonds focus on the borrowers and neglect the lenders.” “The other side of the sovereign debt story”August 18.

Absolutely, and that is why when I write about odious public debt, like that contracted in Venezuela, I always follow it up with one about odious public credit, like those awarded to Venezuela.

But, of course I have to add a point. For instance the immensely excessive public debt in Greece would never have happened had regulators not, for the purpose of setting the capital requirements for banks, assigned Greece a zero percent risk weight.

Those regulators have not been held accountable either, among others because of the network solidarity FT has showed them … in fact they have been promoted to central banks… and our banking system still lives under the distorting thumb of risk weights.

@PerKurowski

Mme Lagarde. With regulations that distort the allocation of bank credit, any recovery is on shaky grounds.

Sir, I refer to Chris Giles’ “IMF chief warns of risks to recovery” July 6.

Of course, with regulations that distort the allocation of bank credit to the real economy, any recovery is on shaky grounds.

To help Mme Christine Lagarde of the International Monetary Fund understand the issue, better, I have drafted a short and polite letter she could send to her friends the regulators in the Basel Committee and the Financial Stability Board. Their answer, or their no answer, should reveal a lot. 

Dear regulator.

You set your risk-weighted capital requirements based on the ex ante perceived risks already considered by bankers when determining the size of the exposure and the risk premiums to charge. Could that not imply that perhaps the ex-ante perceived risks are excessively considered?

I often wonder if it would not be wiser of you and your colleagues to set these based on those risk not having been adequately perceived, or that bankers are not capable of manage the risks they perceive; or with an eye to somewhat unlikely but nevertheless potentially catastrophic events.

You and I know that one vital function we expect our banks to perform is to allocate credit efficiently to the real economy. Remembering that context, I wonder if the risk weighting you and your colleagues customarily make in your regulatory function is perniciously, if also unintentionally, distorting capital allocation -- by favoring the safer? past over the riskier? future?

Sincerely,

PS. If they do not answer Mme Lagarde could find a summary of some of the mistakes with risk weighting here.

@PerKurowski

Just as there is room for higher taxes, there is also room for much lower margins for the redistribution profiteers

Sir, Rana Foroohar writes: “It is likely that companies would put any extra money from a lower rate on repatriation of foreign cash into share buybacks. The 2003 dividend tax did not increase investment, but the 2004 repatriation holiday bolstered buybacks 21.5 per cent.” “The case for higher taxes” May 22, 2017

What? Does she mean that the “foreign cash” is in cash (stashed away under a mattress) and not already deployed in assets like for instance US Treasury Bills?

What? Does she mean that was has bolstered the immense buyback we have seen over the last decade has more to do with repatriation than with the low interest rates imposed on markets by the Fed, by means of QEs and bank regulations?

Clearly there is room for higher taxes, but never ever crazy 83% ones, and not those that enrich the redistribution profiteers, but those that would allow to initiate the payment of a Universal Basic Income, perhaps starting at only $300 per month, and then taking it from there.

That could help growth and that could help reduce inequality.

@PerKurowski

If President Trump makes unfit profit on his hotels, so might those who are in the business of opposing him.

Sir, Edward Luce’s “America’s monetiser-in-chief” of February 13, could easily end up being used by all those who by email and other means, ask us to give money to them so that they fight Trump on our behalf.

Currently too many are reminded of Irving Berlin’s song “Anything You Can Do” from the “Annie Get Your Gun” musical. The days open up with a: “Some say they can fight Trump, but I can do that better, I can fight Trump, better than all”, which is then followed by an ever increasing number of voices belting out their, “No you can't. Yes, I can. No, you can't. Yes, I can. No, you can't. Yes, I can, Yes, I can!”

Luce writes: “Even where Mr Trump has the highest motives, he will fail the Caesar’s wife test”. In what world does Luce think we are living? Do not failed Caesar’s wife tests surround us everywhere? Is political profiteering really so much different from business profiteering? Surely if Trump is caught in an act of extending an overt invitation to be corrupted, I am sure that the consequences for him and for the corrupter, will be much more severe than for all those politicians who daily mingle with their dedicated lobbyist.

Sir, I am not condoning any possible Trump shenanigans, and I will protest it as much as you, or even more than you, if and when any real evidence is presented. But, meanwhile, there is a vital need for staying focused on realities and not being distracted by anti-Trump populists or anti-Trump profiteers. 

First, as a Venezuelan still living the “Chavez” era, what Luce describes when preaching for the choir, means nothing in terms of eroding the popularity of a populist. Quite often the opposite happens.

Second, there are too many infinitely more important and urgent issues at hand. Just think of all those robots that compete with us humans for jobs without being burden with payroll taxes and similar handicaps. Just think of those regulatory gnomes distorting as they see fit, with their risk weighted capital requirements, the allocation of bank credit to the real economy.

Third, Trump represents a new wind in Washington, so let’s try to use it as much as we can. For instance the proposal by the Climate Leadership Council of imposing a carbon tax, which revenues would go directly to the citizens, is the best win-win possibility I have seen in many years. If that would be its price, I would gladly look the other way, if those horrendous anti America and anti economic plans of Trump Hotels to quintuple its outlets in America become reality.

PS. Hotel building needs financing, and bankers and investors, must consider the after 4 or 8 years profitability of the hotels.

PS. I have just received an email where someone indicates that after a review they have found that I have yet to donate the minimum $3 to fight Trump, and that I must hurry up. I wonder if someone keeps a list of the 10 largest anti-Trump-movement's profiteers?

@PerKurowski

Why has society ignored for so long the structural unemployment that is already here, and that will grow so much worse?

Sir, Sarah O’Connor does all of us an immense favor putting forward data such as “America’s unemployment rate may be close to the lowest in a decade at 4.8 per cent [but] the rising share of people in their prime years (between 25 and 54) who are neither working nor looking for work, now stands at about 20 per cent” “‘Jobs for the boys’ is just half the story in America” February 7.

History is sure going to analyze the question of how a generation that prides itself from having so much knowledge and information at its disposal, could have turned such a totally blind eye to one of the greatest challenges it faces, namely the structural unemployment caused by robots and automation.

Where can we find data about how much robots and automation have substituted for human jobs and salaries, year by year, during for instance the last 20 years? It might exist, but I certainly have not found it.

In 2012, having been worried for quite some time about this issue I wrote an Op-Ed titled “We need worthy and decent unemployments”. But only quite recently are possible remedies to a real inexistence of jobs surfacing into public debate, like that of a Universal Basic Income. Though much too late that is good. Nonetheless the “whys” or the “how comes” of all social blindness to this issue, needs also to be studied.

PS. Why is there no concern with that humans have to so unfairly compete for jobs with robots that are not handicapped by having to carry weights like payroll taxes?

PS. Just like the “whys” or the “how comes” about the silence on stupid bank regulations, based on the silly notion that what is perceived as risky is more dangerous to the bank system than what is perceived as safe, needs to be studied.

@PerKurowski

Why is obvious crony statism referred to as crony capitalism?

Sir, I refer to Martin Wolf’s “Why Xi cannot succeed with his reforms” December 14.

In it, Wolf quotes the following from Minxin Pei’s “China’s Crony Capitalism”: “The emergence and entrenchment of crony capitalism in China’s political economy, in retrospect, is the logical outcome of Deng Xiaoping’s authoritarian model of economic modernisation… because elites in control of unconstrained power cannot resist using it to loot the wealth generated by economic growth.”

But “Capitalism” (at least according to Wikipedia), “is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market.”

Sir, so why does it refer to “crony capitalism” when it is clearly much more a case of “crony statism”? Could it be that the “unconstrained power of the elites” also cover the terminology we are to use? Like for instance when references are made to our economies being under the yoke of “neo-liberalism”, all while bank regulators gladly risk-weigh Sovereigns with 0%, and We the People with 100%. Or like when intrusive and complex bank regulations are mentioned to have happened in a period of "deregulation".

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter dangerous nonsense.

@PerKurowski

Europe, if you do not remove current risk weighted capital requirements for banks, no stimulus will really help.

Sir, Reza Moghadam from Morgan Stanley writes: ECB should switch from buying sovereign bonds to funding the removal of troubled assets from European banks…[that] would do more to alleviate the constraints on economic recovery than sovereign bond purchases ever could. “How to redirect easy money and encourage banks to lend”, December 6.

Of course that would help, but only for a while. If you do not remove the risk weighted capital requirements for banks, those which distort the allocation of bank credit to the real economy, and which therefore impede any stimulus like QE or a European type Tarp to reach were it can do the most good, you’ll soon be back on the cliff, albeit higher up.

Sir, the lower the capital requirement, the higher the leverage of equity, the higher the expected risk adjusted return on bank equity be. Therefore you cannot be so naïve as to expect a banker like Moghadam to say one world that would imply higher capital requirements for anything. In fact, by allowing banks to earn the highest risk adjusted returns on what is perceived as safe, the Basel Committee has made the bankers’ wet dreams come true.

When will you invite someone, like me, who speaks out for the access to bank credit of the “risky” SMEs and entrepreneurs? Or are these beggars for opportunities, those who could help open new gateways to the future, just not glamorous enough for you?

@PerKurowski

ECB and other statist still believe the way to a better future is lowering the debt costs of governments.

Sir, Claire Jones writes: “Altering the capital key rule would relieve banks [ECB] of the need to buy as many German Bunds as at present and allow them to purchase more bonds from heavily indebted states, such as Italy. “ECB fears legal action will limit scope to extend QE” September 23.

Even after monstrous amount of QEs have not led to sustainable growth worthy to write home about, central bankers, bank regulators, interested government bureaucrats and many of their statist colleagues, still believe that keeping the cost of debts of their government artificially low, is a way out to the current problems.

I don’t! I believe much more that the future potential for jobs, and for decent retirements, is in the hands of allowing SMEs and entrepreneurs an equal access to funds.

And that begins by throwing the risk-weighted capital requirements for banks out on the closest garbage landfill, where it belongs.

@PerKurowski ©

As banks “pressure employees to hawk products”, regulators pressure banks to odiously discriminate against the risky

Sir, John Gapper writes about “the intense pressure Wells Fargo placed on employees to hawk products” “Wells Fargo reaches the end of its journey” September 22.

But, by means of the risk weighted capital requirements for banks, regulators have placed much pressure on banks to lend to what was perceived, decreed or concocted as safe; because that’s were they could leverage the most their equity; because that’s where they could earn the highest expected risk adjusted returns of equity; and so banks end up with excessive exposures to residential home financing, AAA rated securities, loans to sovereigns like Greece and other such fancy safe stuff.

That created also a de facto immoral regulatory discrimination against the access to bank credit of those who ex ante are perceived as “risky”, like SMEs and entrepreneurs. I place quotation marks around risky because in fact, by being perceived as that, they are never as dangerous to the bank system than what is perceived as “safe”.

Incentives are temptations, aren’t they? 

@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 ©

Bank regulators distorted and unleveled the access to bank credit playing field

Sir, Shamit Saggar, a former Non-Executive Director of the Financial Service Authority (1998-2004) writes: “Regulators cannot avoid getting involved: their role is to level the playing field” “Regulators must keep banking culture in check” January 14.

Exactly! But then he should explain to us why he kept mum when regulators, by means of credit risk weighted capital requirements for banks, unleveled the whole playing field.

They allowed banks to leverage much more with loans to those perceived or deemed as safe, than with loans to those perceived as risky; which meant banks would earn higher risk adjusted returns on exposures to those perceived or deemed as safe, than to those perceived as risky.

And so “The Safe”, like the sovereigns and the AAArisktocracy, got much easier and cheaper access to bank credit than usual; while the Risky, SMEs and entrepreneurs, had to face much lesser and more expensive bank credit than usual.

Mr. Saggar, like so many others of his regulatory colleagues, should be ashamed of what he allowed to happen on his watch.

@PerKurowski ©

Bank regulators have set their highest bank capital requirements for what poses the least dangerous tail risks

Sir, I refer to your “World economy of so-so growth and fat tailed risk” January 4, and your reporters “Unlikely suspects are in the wings for 2016” of January 2.

The latter states: “Some risks are quotidian. Will a company struggle to generate cash flow, or will a particular asset fall out of vogue. Then there are outcomes that exist in the narrow, far reaches of statistical probability distributions, known as “tail-risks”. A hefty blow to investments is usually the result when such shocks occur.”

And with respect to current bank capital requirements, those that are supposed help cover for unexpected losses I have two questions for your reporters.

First, what can cause more unexpected losses, quotidian risks like credit risks, or the kind of events that they exemplify as some possible dangerous tail risks?

Second, in the case of credit risks, what has the capacity to produce the most sizable unexpected losses, what is perceived as safe or what is perceived as risky?

The correct answer to those questions should indicate the absurdity of setting the highest capital requirements for that that in terms of a quotidian credit risk is perceived as risky.

Think of it. The risk weight for a private sector asset rated below BB- was set at 150 percent, while that of an AAA to AA rated was only 20 percent. Is below BB- rated, something which scares away any risk adverse banker, really more dangerous to the banks than what is AAA rated? 

Sir, how long will your reporters ignore this sad truth? Is there a tail risk they personally have to be afraid of?

Laura Noonan in “EU board budgets for 10 bank failures” December 4, writes that the Single Resolution Board is seeking €40m in accounting advice, economic and financial valuation services and legal advice, to be used in the resolution of struggling Eurozone banks from 2016 to 2020.

Sir, have any of the possible big shot candidates for that consultancy ever informed bank regulators that their capital requirements make no sense? Sorry, just asking.

@PerKurowski ©

COP21 Paris, do not let a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

Sir, Narendra Modi is walking on a very fine and dangerous line between the “it is all humans’ obligation to encounter any global threat that could result from affecting the environment of our planet” and it is the responsibility of the rich. “Do not let the lifestyles of the rich world deny the dreams of the rest” November 30.

Of course, when it comes to assigning financial resources to mitigate or combat climate change, the rich countries have more to give. But I would always hold that the starting point of all these efforts must be that the poor and the rich, as humans, have an equal right to participate in fighting anything that threatens humanity… and that the right and duties of the poor are not lesser because they are poor.

Let not a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

PS. Narendra Modi would benefit from understanding that bank regulators' credit risk aversion is much worse for the opportunities of India to develop than any coal aversion by self appointed climate change regulators.

PS. You want to see some real anti-climate change action? Throw out credit risk capital requirements for banks and adopt SDG weighted capital requirements for banks.

PS. And a renewed warning. If anything like a Basel Committee for Banking Supervision takes over the worldwide regulation on climate change… we are toast.

@PerKurowski ©

Lord Adonis, as your National Commissioner, could do more for UK’s infrastructure by going to Brussels and Basel than staying in London.

Sir, I refer to your “A commission for firing up Britain’s bulldozers” October 7.

You write: “In economic terms, more infrastructure ticks every box. It enhances productivity, while building it also creates jobs. With interest rates near to all-time lows, the financing costs are nothing to fear. Should prudence or ideology demand the use of private instead of public money, there are pension funds crying out for a stable return, if the state bears the construction risk.”

Not so fast! In infrastructure, what could and how it will be financed, in the UK, depends a lot on what the financial regulators think; as they express in their capital requirements for banks and insurance companies. These regulators are in so many ways the real Great Disrupters. 

In fact, your Lord Adonis would be well advised to take a little study trip to Brussels and Basel to learn about all this. In fact you’re your Lord Adonis could well be doing UK’s infrastructure sector much more favors staying there, helping to eliminate the distortions to infrastructure finance that regulators create, than what he could achieve by remaining in London leading the National Infrastructure Commission.

Per Kurowski

@PerKurowski ©  J

Some comments that I would like to be voiced during the upcoming IMF and World Bank annual meetings 2015 in Peru

Sir, Gillian Tett writes that one of the most important questions the IMF and the World Bank need to tackle during the upcoming meetings in Peru is: “What happens when the emerging market private money goes into reverse” “The credit bubble, the bears and central bankers” October 2.

If I had a voice in that debate I would repeat three comments that I’ve made over and over again for more than a decade, and that until now have been ignored (by FT too).

The first: Any forced deleveraging that might result will unfairly hit the most those who because they are perceived as risky, cause the highest capital requirements for capital scarce banks. And since emerging markets need those “risky” but tough SMEs and entrepreneurs to keep going when the going gets tough, as an emergency measure, they should lower substantially the capital requirements for banks for that type of lending. This by the way is far from being as risky as some could believe. (And this also applies to developed economies).

The second: In a letter published by FT in October 2004 I wrote: “We wonder in how many Basel [bank regulation] propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” That comment remains just as valid 8 years later.

And so emerging markets must make absolutely sure that access to bank credit of the private sectors, is not jeopardized by giving preferential access to the governments. Anyone who believes government bureaucrats are more capable to use efficiently borrowed funds has plenty of examples to make him change his mind. Look at Greece, look at Venezuela… in fact look at most countries… (And so this also applies to developed economies).

The third: In October 2007 I presented a document at the High-level Dialogue on Financing for Developing at the United Nations titled: “Are bank regulations coming from Basel good for development?” My answer then (and now) was a clear and rotund “NO!” The silly and purposeless risk aversion contained in the pillar of said regulations, the credit-risk weighted capital requirements for banks, make no sense whatsoever for an emerging country, since risk-taking is the oxygen of any development. (And it also equally applies to developed countries that need fresh risk taking in order not to stall and fall).

@PerKurowski

Philanthropists of the world, we need a great prize for the competition to pick out bank regulations that work

Sir, Gillian Tett writes about: ‘a fashion among philanthropists for handing out big prizes [and] today, four-fifths of all prize money are ‘incentives’, to spur innovation in different fields” “The prizes for invention that leave everyone a winner” July 4

I have for quite sometime hoped for a competition to be held to find the best bank regulations, and a generous monetary prize on top of the honor would help a lot.

I can guarantee the winning proposition would include such crazy notion as allowing banks to leverage their equity over 60 times to 1 when buying AAA rated securities or lending to the Greek government.

I can guarantee the winning proposition would not include such crazy notion as basing capital requirements on credit risk, the risk already most cleared for by bankers.

I can guarantee the winning proposition would not include such crazy notion as impeding the fair access to bank credit to those most in need of bank credit, like SMEs and entreprenuers.

@PerKurowski

Britain’s Royal Statistical Society, for our sake, please give also bank regulators a course in statistics.

Sir, Anjana Ahuja reports that “Britain’s Royal Statistical Society has launched the #ParliamentCounts campaign, offering all MPs a free training course in statistics”, “Our collective innumeracy adds up to a big problem”, April 20.

What a marvelous initiative. I just hope they could follow it up with a similar course for our bank regulators. I say this because the regulators, while trying to make our banks safer by setting their risk-weighted equity requirements for banks, have been looking at the completely wrong series of statistics. Instead of looking at why banks failed, they have been looking at the risks of bank assets, how bank clients fail, and all of us who have some basic knowledge about statistics know very well that c'est pas la même chose.

That lack of elemental statistical knowledge caused bank regulators to set higher bank equity requirements against assets perceived as “risky” when in fact, what is truly dangerous for banks, have always been assets erroneously perceived as absolutely safe.

PS. April 21 I send the Members of the Royal Statistical Society a letter requesting an urgent Statistical Literacy Initiative