Our banking systems have been made especially fragile, because of especially bad bank regulations.

Sir, Martin Wolf writes “The world’s economy and financial systems are fragile … the most important source of fragility is political… In country after country, populists and nationalists are in, or close to, power. Salient characteristics of such politicians are myopia and entrenched ignorance. Inevitably, they spread uncertainty.” “Politics puts the skids under bull market” October 17.

In April 2003, as an Executive Director of the World Bank I delivered a statement that contained the following: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

One of those “Best Practices” has been the risk weighted capital requirement for banks. These give banks incentives to create especially large exposures to what is perceived or decreed as especially safe, against especially little capital; making our banks, and the sector lending thereby favored, like sovereigns and houses, extremely fragile.

Populism? Sir, few things as brazenly populists as “We will make our bank systems with our risk weighted capital requirements because we sure know about risks. 

PS. Wolf, during the last annual meetings of IMF and the World Bank in Bali when interviewing Christine Lagarde, mentioned: “As a journalist I am paid to be skeptical”

But Wolf refuses to ask bank regulators about what they were thinking when they assigned a meager 20% risk weight to assets that because rated AAA represents great dangers to bank systems, compared to a whopping 150% for the so innocous below BB- rated. Sir, could it be you are not paying Wolf enough?

PS. In a similar vein during the interview Mme Lagarde said, “In IMF’s view capital flow management measures should: not be first order of priority, only be used in exceptional circumstances, not be a substitute for macroeconomic and macroprudential policies.”

So why does IMF keep mum about the risk weighted bank capital requirements? In a letter FT published in November 2004 I wrote: “our bank supervisors in Basel are unwittingly controlling the capital flows in the world.” Could it be that IMF still does not understand that that regulation distorts, controlling credit flows in favor of the “safe” present and against the “risky” future

PS. Ref the same interview: Trade protectionism? What neo-Bretton Woods Conference will be needed to help us get rid of bank regulations made to protect banks but that only endangers bank systems?

PS. Ref the same interview: Balance sheet vulnerabilities. Are not the consequences of central banks huge liquidity injections, with QEs, especially for emerging countries, precisely the same as those of the 1974 to 1981 recycling of oil revenues surpluses?

PS. Ref the same interview: Is the eurozone crisis over? “No!” says Mme Lagarde. After 20 years way too little has been done about solving the challenges of the euro and that, if not solved could bring EU down… and still Wolf categorizes his homeland Britain as “my idiotic country” because of Brexit.

PS. Ref the same interview: With respect to Greece, not a word was said about the EU authorities 0% risk weighting of Greece, which doomed it to its excessive public indebtedness.

@PerKurowski

Basel’s risk weighted capital requirements for banks, a de facto capital control, blocked bank credit globalization

Sir, Martin Wolf writes: “The financial crisis brought with it regulatory measures, many of which are bound to slow cross-border financial flows”, “The tide of globalization is turning” September 7.

Again Wolf ignores what was there before the financial crisis, namely the risk weighted capital requirements for banks. That piece of regulation favored awarding bank credit to the “safe”, the rich, houses, the developed, the government or anything else that could be perceived, decreed and concocted as safe; and thereby de facto disfavored awarding bank credit to the “risky”, the poor, job creation, the undeveloped and the non AAArisktocratic private sector.

That is an effective capital control that was bound to slow cross-border financial flows.

Before I became a sort of pariah to FT, in a published letter of November 2004, I wrote, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world.”

And in 2007, at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled “Are the Basel regulations good for development?” and which touches a lot on how the risky are discriminated.

So no Mr. Wolf, 28 years after Basel I and 12 years after Basel II, don’t try to put the blame on the crisis and Basel III.

“Globalization’s future depends on better management. Will that happen?” Alas, with media empowered opinion forming dominators like Martin Wolf, I am not optimistic.

@PerKurowski ©

Central banks, when are you going to lift that dangerous capital control the Basel Commitee concocted? Its urgent!

Sir, Donal O’Mahony speaks out loud and clear. We do have many reasons to question whether central bankers have a good idea about what they are doing, or only making it worse with their "we invent as we go along" creativity. “Experimental policies of central banks pose threat to confidence” March 10.

O’Mahony refers primarily to QEs and zero or even negative interest measures. I personally concern myself much more with their much more insidous and so very dangerous distortion of bank credit allocation to the real economy.

Their credit risk weighted capital requirements for banks, are in all essence a strict capital control. It tells banks “Lend to ‘the safe’, the sovereigns and members of the AAArisktocracy, and stay away from ‘the risky’, the SMEs and entrepreneurs”

That capital control must be lifted, urgently, if we are ever going to have a chance of a sturdy economy able to generate those jobs our kids need.

Sir, you know I have mentioned it before but again, between you and me, perhaps we should seriously consider firing all central bankers. They are just too dangerous for our health.

Already in 1995, in “The Confidence Game” Steven Solomon wrote of “how central bankers have shaped the course of economic and political events in the past fifteen years, why their influence relative to elected political leaders has reached a historical zenith, and how it reveals one of the greatest pressing dangers facing free democracy.”

@PerKurowski ©

Mark Carney's worries over financial risks, are influencing the results of BoE’s monetary policy.

Sir, Martin Wolf writes: “Worries over financial risks are legitimate. But they must not determine monetary policy” “Carney is right not to follow in the Fed’s footsteps” January 21.

But worries over financial risks have influenced the results of monetary policy for quite some time now, but few seem to care.

The credit risk weighted capital requirements that allow banks to earn higher risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky, act like hidden capital controls, and clearly distorts the allocation of bank credit to the real economy, favoring The Safe and discriminating against The Risky. And, as a result, the benefits of the low interest rates that are here discussed flow much more to “The Safe” than to “The Risky”.

Current bank regulations reflect the belief that for instance ‘highly speculative’ below BB- rated assets, is far more dangerous to the bank system than the ‘prime’ AAA rated. I find that to be a crazy notion. But, since Mark Carney, chair of the Financial Stability Board and Martin Wolf seems to agree that it is so, I must confess being a bit at loss when it comes to value their recommendations.

@PerKurowski ©

Stupidly distorting bank regulations are inhibiting lending to small and medium sized businesses

Sir, Lawrence Summers writes: “regulatory pressure is inhibiting lending to small and medium sized businesses.” “Central bankers do not have as many tools as they think” December 7.

In other words he is referring to that the stimulus of QEs and ultra low interest rates is not reaching fundamental economic agents, such as small and medium sized businesses. I wonder is this not a major issue?

As I have been writing for over a decade (and more than 2.000 letters to FT) current credit risk weighted capital requirements for banks utterly distort the allocation of bank credit to the real economy.

In November 2004, in a letter published by FT I wrote: “our bank supervisors in Basel are unwittingly controlling the capital flows in the world. We also wonder in how many Basel 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.”

When are supposed experts on bank regulations face up to the fact that supposed experts on bank regulations do not know what they are doing… among others because they have so shamefully neglected to even define the purpose of our banks before regulating these.

@PerKurowski ©

Capital controls imposed by bank regulators caused the problem that threatens to push Greece out of the Eurozone.

Sir, Ferdinando Giugliano writes: “Greek authorities have imposed sweeping capital controls to prevent a collapse of the banking system that threatens to push Athens out of the Eurozone. But with economic activity grinding to a near halt and the country’s banks still bleeding deposits, the price of these extraordinary measures is becoming apparent… The downturn is bound to curtail tax revenues, worsening the Greek government’s dire finances”, “Capital controls squeeze a suffocating economy” July 3.

That, though entirely correct, does not tell the whole story. It was when regulators introduced credit-risk-weighted capital requirements for banks, which distorted the allocation of credit to the real economy, that an inconspicuous and dangerous form of capital controls was introduced. And since the lowest risk-weights were assigned to sovereigns (governments), the greatest beneficiaries of such controls were statist ideologues and government bureaucrats, which was a very inconspicuous form of clientelism too.

For instance, although admittedly it must be hard to believe, between June 2004 and October 2009, European banks were allowed to leverage their capital 62.5 times to 1 when lending to the Greek government. And of course that caused the banks to lend too much to a government that found it too hard to say no to credit.

But now many governments, like Greece, need to build up their tax-base, something that requires allowing ordinary SMEs and entrepreneurs to have fair access to bank credit. And this has created a conflict for those statist ideologues and government bureaucrats who feel they still have room to benefit from these regulatory advantages. How are they supposed to recommend their less lucky-colleagues to give up, what they had all considered to be entitlements gained for their class written in stone?

The more you stabilize, the more you risk making the system brittle, so the more you really destabilize.

Sir, I refer to Paul Tucker’s “The world needs different ways of taming capital flows” October 10.

I have always, in the case of small bath-tubes placed next to the global oceans, been in favor of capital controls. And I have most specially liked what Chile used to do, namely forcing funds to park themselves for a time doing nothing, in order to show their serious intentions, before these were allowed to court beautiful Chilean daughters.

But, I have also been aware that every time you stop funds from going somewhere, those funds could remain somewhere even more dangerous.

Here Paul Tucker, a former deputy governor of the Bank of England, holds that “the objective [of capital controls] should be limited: guarding against threats to stability”

But, when regulators, with their credit risk weighted capital requirements for banks decided to create great incentives for banks not sailing risky waters, and instead stay in safe havens… they completely ignored that safe-havens can become dangerously overpopulated… in a very short time.

In other words, the more you stabilize, the more you make the system brittle, so the more you really destabilize.

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

FT, Sir I shiver at the thought of what you would think to be “not-light-touch” bank regulations.

Sir, I refer to your “Lloyds and lessons from past scandals” July 30.

Sir we have bank regulators who told the bank: “Here you have ultra low capital requirements for whatever is perceived ex ante as absolutely safe, so that you can make ultra high returns on your equity financing that, and so that you stay away from financing those risky SMEs and entrepreneurs, even though these need and could do the most good with bank credit”.

In other words… the mother of all capital controls.

And in “Lloyds and lessons from past scandals”, July 30, you refer to this as “the ‘light touch’ regulation that characterized the pre-crunch period”? I shiver at the thought of what you would call firm handed regulations.

PS. I was recently censored, in Venezuela. But you know Sir, that is not the first time… so thanks for the preparation :-)

FT, don't you get it, there is absolutely nothing so far away from laisser-faire, than capital requirements for banks based on risk weights

Sir, in “Save business from the businessmen” November 6, you write “More intrusive regulation should be reserved for special cases such as banking”, and you refer to “the laisser-faire approach of the past three decades”. Are you out of your mind?

We have bank regulations which, by means of using risk weights, allow banks to earn much higher expected risk adjusted returns on equity on assets that are perceived, ex ante, as absolutely safe, than on assets perceived, ex ante, as risky. And those regulations are de facto capital controls which direct the allocation of bank credit. Have you ever seen regulations so far away from laisser-faire than this?

I am sorry to say it but, FT, when history catches up to this you are certainly going to look like fools.

But IMF never said a word against the mother of all capital controls.

Although I have been a long opponent on capital controls for outgoing flows, I am a great believer in capital controls on inflows, the Chilean type, which helps small economies in their small bathtubs not being drowned by global financial tsunamis. And so of course I welcome the International Monetary Fund´s less dogmatic standing in respect to this sort of “Capital controls” December 4. 

But to say “As far as intellectual shifts go, the turn by the IMF on capital controls is remarkable” is in truth a big exaggeration. 

I say this because with respect to the greatest and most subtle and harmful capital controls ever, namely that of capital requirement for banks based on perceived risks, I have never heard one iota from IMF opposing it. That control helped to channel trillions of dollars to “The Infallible”, most especially the “infallible sovereigns”, and away from “The Risky”, like small businesses and entrepreneurs. And the saddest part is that the overwhelming capital in the world is not even aware of that control.

But freedom does not require formality and survives even in prisons

Sir Russell Napier holds that “Tower of debt will force a roll back of the free markets” April 14. I do not understand where he gets such an outlandish idea… if anything the markets, whether free or controlled, will topple the growing public tower of debt.

He also says “Commercial bank’s new capital adequacy ratios already require banks to hold higher levels of government debt”. Well no, the already quite old capital “inadequacy ratios”, allow banks to hold higher levels of debt if these debts are without risk and bank capitals are right now under enormous pressure because these public debts are being downgraded.

In fact that public debt has received such an unjustified preferential treatment by the financial regulators was just their pay-back to governments for giving them their independence and leaving them alone in their secluded quarters in Basel.

And so when Napier writes that “Western governments are left with no option but to restrict and corral markets and force capital private sector capital into action is support of public debt markets” what he is describing is not necessarily an exit plan but how we got into the mess to begin with.

Yes governments might be tempted to impose “capital controls”… perhaps like those China has and which allows it to keep an undervalued currency… but, as I see it, that could just lead to accelerate the rate by which the world goes informal, illicit and illegal, in order to survive their respective governments. The more capital controls the more are the havens worth… ask China… whose government does not even dare to spend its own money in China.

Basel is just a mutual admiration club of firefighters seeking to avoid crisis

Published in FT November 18, 2004 The link is gone! You will find the copy below.

Sir, If a citizen from a developed country wishes to obtain finance from his local bank to buy a pricey retirement home in his local overheated market, then Basel poses no problem.

But should he want to buy a much more affordable home in a developing country and have his bank finance him, then Basel slaps such capital reserve requirements on the bank as to make it an impossibly onerous proposition.

This is just one way by which our bank supervisors in Basel are unwittingly controlling the capital flows in the world.

We also wonder in how many Basel 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.

Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost - even at the cost of growth.

PS. Just before the fall of the Berlin Wall, statist/socialist/communist regulators, decided banks need to hold zero capital when lending to the governments in their domestic currency but must hold 8% when lending to their unrated citizens.

PS. To top it up: It is what’s perceived as safe which is most dangerous to our bank systems.

PS. Here my 2019 letter to the Financial Stability Board

PS. Here my 2019 letter to IMF: Risk weights are to access to credit what protectionist tariffs are to trade, only more pernicious.

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

PS. Here are my dialogues #AI ChatGPT – Grok, about Basel's risk weighted bank capital requirements.