The Basel Committee’s risk weighted capital requirements for banks, put the 2007/2008 “Minsky Moment” on steroids.

Sir, John Authers writes: “The greatest dangers to us are not from things we perceive to be high-risk, because we generally treat them carefully. Trouble arises from that which we perceive to be low-risk.”, “Unnatural calm sparks visions of a ‘Minsky Moment’” December 31.

Sir, you know I have written more than a thousand letters to FT over the last decade pointing out exactly that. For instance in July 2012 Martin Wolf wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

Unfortunately FT has refused to accept the complete implications of this truth.

Authers, as if it suffices as an explanation now writes: “The crisis that came to a head in 2008 revolved around securities that the rating agencies had given the maximum rating of triple A — it would not have happened if they had been considered speculative”.

No! The full truth is that not only did markets and bankers consider and acted as if those AAA rated securities were safe. Regulators did too. With Basel II of 2004 they assigned what was AAA to AA rated, a risk weight of only 20 percent. Thereby they allowed banks to leverage 62.5 times to 1 their equity with these securities. Had banks been allowed to only leverage 12.5 times to 1, as they were limited to with loans to “risky” SMEs and entrepreneurs, that crisis might not even have been identified as a “Minsky Moment”.

Sir below is a link to the full explanation to what really happened with the AAA rated securities backed with mortgages to the USA subprime sector. Do you have it in you to share it with your readers?

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

Free Greece from regulatory shackles that make banks finance more the safer past & present than the riskier tomorrow

Sir, when commenting on the tensions between a “eurogroup” of ministers and the IMF about how to solve the problem called Greece you, as you should, clearly argue in favor of some additional relief of that debt “overhang that can only depress confidence”, “The IMF should stay in the Greek rescue squad”. October 12.

The problem though is that even if all Greece’s debt was condoned, but bank regulations stayed the same, that nation would just repeat its and most other countries’ recent mistakes.

Sir, nothing expresses a more depressed confidence in tomorrow as Basel’s risk-weighted capital requirements for banks. If Greece, and all the rest, is not freed from it, its banks have no chance of allocating credit so as to achieve a sturdy and sustainable growth. And besides if such growth does not happen, the banks’ own stability is also endangered.

That Europe, IMF, and the rest of regulators, do still seem to be unaware of what nasty effects their current bank regulations produce, is just amazing. Or perhaps they are all aware of it, but, with a little help from their friends, like FT, are just circling their wagons in order to defend their little mutual admiration club of technocrats.

There should be claw-back clauses for failed regulators and blind journalists (and editors) too!

@PerKurowski ©

Are some doing their best for the market not to regain confidence?

Sir Martin Wolf in “This crisis is a moment, but may not be a defining one” May 20, writes “The willingness to trust the free play of market forces in finance has been damaged.” Of course, how could it be otherwise, when even the Financial Times (notwithstanding my over 200 letters on the subject) refuses to describe in detail the amazing interference with the risk allocation processes in the financial markets made by the bank regulators in Basel.

Through their minimum capital requirements for the banks the regulators allowed for a 62.5 to 1 leverages (and that in some cases can even reach 179 to 1) and all based on the credit rating agencies’ triple-As. How on earth could the free play of market forces in finance stand a chance to correctly handle that?

If you really want the market to regain confidence then you have to explain what really happened.

How to start putting the socks back on the market

Sir, the current crisis did not arise because the market took speculative positions in Argentinean railroad bonds, it resulted from having followed whom it had been informed by their regulatory agencies were the utmost experts on risk, the credit rating agencies, into one of the least risky countries, the United States, and into a very well known market, housing finance. No wonder the crisis has scared the socks off of the market. There is nothing so scary like not understanding what has happened, and though it is nice to see so much being done to help out, it is equally scary not seeing any real efforts to avoid repeating the mistakes.

Therefore “politics and policies” and “a decline in commodity prices” could indeed be helpful to “prevent a downturn becoming a depression” as Chris Giles, Krishna Guha and Ralph Atkins discuss in “Can we go up again? The world economy”, November 6, but if full confidence is not re-established, fast, it will most probably not suffice.

How can we put the sock back on the market then? First and foremost by having the regulators guarantee they will do their utmost that never again so many will follow so much the opinions of so few. In this respect, the bank regulators, after a proper mea culpa, should announce their intention to swiftly move from a system of minimum capital requirements based on vaguely defined risks and that has induced some dangerous regulatory arbitrage, and to immediately stop imposing the opinions of the credit rating agencies on the banks and, as a result, on the markets.

To restore confidence in banks you need first to restore the banks self-confidence

Sir in “Need for action on the banking panic” September 26, you open with a “Banks are not to be trusted” and you mention that this is the view of the public and policymakers, and that something needs to be done. You then propose very sensible steps, all with which I fully agree, but you leave out the vital task of rebuilding the self confidence of the banks, and that was effectively lost when the regulators declared the banks not trustworthy and imposed on them the credit rating agencies as the risk measuring experts.

My first action as a regulator would be to tell the markets…

“Hold it there, those that really got us all into trouble were the credit rating agencies and we are very sorry we empowered them so much. Therefore, effective immediately we suspend all the regulations that assign a formal role to the credit rating agencies. Truth be said, admittedly late, we do believe that the banks are more capable if they have all the authority to decide on their own what is best for them.”