The risk weighted bank capital requirements, is just a lean and mean “regression to the mean” machine.

Sir, Tim Harford when discussing luck and reversal of fortunes, holds that genius followed by mediocrity [is] likely a “regression to the mean”, or in simple terms, a return to business as usual. “It can be hard to discern luck from judgment” May 25.

Indeed, but sometimes that reversal to the mean, has nothing to do with such mystical issues as luck, but is a direct consequence of a distortion. 

As I have often written to FT about, allowing banks regulatory privileges when financing what’s perceived as safe, like sovereigns or houses, will result in too much financing of the safe, which will cause “the safe”, sooner or later to revert to become very risky.

In the same vein, those who without correcting for a crisis are now considered triumphant, like ECB’s Mario Draghi, only because they’ve managed to kick a crisis-can forward, will one day be held much accountable, when that crisis can rolls back on some, as it sure must.

@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.

But also beware of the much greater risk derived from excessive lack of testosterone and dopamine

Sir, the fundamental problem with good articles like Sarah Gordon´s “Call in the nerds – finance is no place for extroverts”, April 25, is that they tend to analyze risks from the perspective of when risk-taking goes bad, without caring much for when risk-taking goes right.

The problem we are facing now is that bank regulators, with too little testosterone, and too little dopamine, and too little understanding of what they were doing, gave the banks extraordinary incentives to lend and invest in what was perceived as “safe” and to stay away from what was perceived as “risky”… and so the banks did… and loaded up on AAA rated securities, Greece, Spanish real estate and others safes.

Indeed if regulators had incorporated more behavioral analysis then they would not have based the capital requirements for the banks based on perceived risk, like that in credit ratings, but based to how bankers react to perceived risk. And then, instead of more-risk-more-capital less-risk-less capital, they might have applied a somewhat inverse capital requirements, since bank crisis have never ever resulted from excessive bank exposures to something perceived ex ante as “risky.

PS. As gold is mentioned, just as a curiosity let me remind you that in the Report on Global Financial Stability 2012, of April last year, the IMF listed 77.4 trillion dollars in safe assets and therein gold represented 11 percent.

Let us welcome John Kay’s awakening. Better late than never! Let us now hope he wakes up completely

Sir, John Kay, refers to “Goodhart’s law”, from the 1970s, which states that “any measure adopted as a target loses the information content that appeared to make it relevant. People [bankers] change their behavior to meet the target”, “The law that explains the folly of bank regulation”, September 12. 

Well, if that law was known, one could have presumed someone would have alerted the bank regulators about that, when they in the Basel Committee were concocting their capital requirements for banks targeted based on perceived risks. Where was Charles Goodhart, and those who knew of his law, when we needed him? 

The fact though is that in this case it was even worse, forget about “changed behavior” because when regulators set their capital requirements, they even ignored the initial behavior of bankers when reacting to the perceived risk, and which of course ignored the fact that bankers already had a propensity to go for the “absolutely not risky”. And, in doing so, they doomed our banks to a crisis larger than ordinary bank crisis. 

But now at least John Kay writes about the Basel Committee’s “irrelevant” “conclaves”, held “to give politicians and the public a sense that something is being done while enabling banks and regulators to go on doing what they have always done”. But, honestly, that Kay can do so without the slightest word of “sorry”, after he in the midst of this monstrous crisis has himself, for years, blithely ignored Goodhart’s Law, is sort of sad. 

That said, let us welcome John Kay’s awakening, better late than never, and let us hope he now wakes up completely. 

PS. In http://teawithft.blogspot.com/search/label/John%20Kay you will find the letters I have written in response to John Kay’s articles.

John Kay, we all wish regulators had regulated based on bankers’ behavior

Sir, John Kay in “Finance needs trusted stewards, not toll collectors” July 23, writes of a new regulatory approach introduced in the 1970s and 1980s “based on behavioral regulation”. 

Not so, though we sure wish they had done just that. If so, regulators would have set the capital requirements for banks based on how bankers behave with respect to perceived risk, instead of as they did, based on the perceived risks.. and as if no one was perceiving these. 

And if regulators knew bankers as well as Mark Twain did, “those who lend you the umbrella when the sun shines and want it back when it looks like it is going to rain” then they could have set the capital requirements slightly higher for what is perceives as absolutely not risky, instead of the immensely lower, and then the world would not have fallen into this “safety” trap crisis.