Pity the Basel Committee’s small leverage ratio; it sure has to carry a lot of risks on its back.

Sir, with interest rates and size of exposure the expected credit risk is the risk most cleared for by banks. Yet bank regulators also wanted to clear for it, and imposed their expected credit-risk weighted capital requirements. That left out of consideration, at least until Basel III, all other risks, like for instance that of cyber attacks to which Gillian Tett refers to in “Hackers target the weakest links in the financial chain”. May 20.

I say “until Basel III”, because now banks are by force of a leverage ratio, to hold at least 3% of capital against all exposures to cover for any risk.

But the Financial Stability Board has also “Task Force on Climate-related Financial Disclosures” which reminds us of risks from climate change.

And then there are the risks of demographic changes; the risk that the economies do not react to stimulus; the risks that credit risks have not been correctly perceived; the risk of war; the risk of epidemics, negative interest rates, deflation… and a never-ending list of risks of expected or unexpected losses. 

And you know I have repeatedly called for banks to also hold some capital against the risk regulators have no idea about what they’re doing, a risk that has morphed into a frightening reality.

But what’s the enticement for banks to cover for these types of risks when they can leverage as much as they currently do? Very little… in the same vein that the bonuses you can pay out to bank managers, when little bank capital is required, can be very big.

What do I propose? The abandonment of all dumb credit risk weighted capital requirements, and move towards a leverage ratio of 8 to 12%. That should increase the importance of the shareholders vis-à-vis management. And that should help to generate more interest among shareholders into making sure better risk avoidance or risk preparedness takes place.

The process of implementing those changes must though be very carefully designed, so as not to worsen the current capital scarcity driven bank credit austerity.

PS. The fact Basel Committee argued that “a simple leverage ratio framework is critical and complementary to the risk-based capital framework” was already a confession of not knowing what they were doing, but that notitia criminis was foolishly ignored. 

@PerKurowski ©

A Cloud should provide us with legally non-contestable statements of our investments, a nanosecond before a cyber-blackout.

Sir, I refer to Robin Wigglesworth “HFT chief warns of ‘hole’ in electronic system”, February 5.

Getting into the paperless, and the soon perhaps currency-less society, requires someone somehow to provide security for everyone… from the holder of a small savings account to the plutocrat with a billion-dollar portfolio.

I believe everyone would sleep better were they sure they had access to a legally non-contestable file that proved what assets they held since the last transaction recorded, and until that nanosecond before the horror of a blackout occurred.

Is that something a government should offer? They might contract it out, I don’t mind, but this is clearly among the security sovereigns should provide their citizens… although external auditing and extra guarantees would not be bad to have in the case of the so and so existing sovereigns… and in the case of the in waiting so and so sovereigns, which could, sooner or later, be all sovereigns.

@PerKurowski ©

We must make sure our bank regulators possess sufficient mental bandwidth to perform their duties

Sir, Tim Harford writes that a study in 2006 led by David Strayer, a psychologist at the University of Utah, found that: “The problem with talking while driving is not a shortage of hand. It is a shortage of mental bandwidth” “Multi-tasking: a survival guide” September 6.

What an interesting piece of information. Now we only have to find a reliable way to measure mental bandwidth, so as to be able to make sure vital decision makers have sufficient of it.

Clearly that was not the case of bank regulators. As a minimum these should have sufficient mental bandwidth so as to be able to simultaneously regulate against the risks of the banking system collapsing, and make sure that banks adequately achieved their purpose, like that of allocating credit efficiently to the real economy.

As is their mental bandwidth was so scarce they could (and can) only handle the risks of individual banks failing. As a result our whole economy is failing here and there.

Had they had enough of it they would have understood that the speedier an individual bank that cannot perceive adequately risks or manage these fails, the safer the whole system.

Had they had enough of it they would have understood that the last thing they should do in order impose capital requirements as a shield against unexpected losses, was to base these on about the only risk that was already being sufficiently cleared for, namely credit risk. 

Had they had enough mental bandwidth they could have set their capital requirements based on a thousand more appropriate risky events, like cyber attacks, China’s economy imploding, an asteroid hitting the earth, or central bankers not having a clear idea of what they are doing. 

@PerKurowski

Will drones and robot soldiers send the drill sergeants home?

Here is the short version of a letter to FT as it was published in FT Magazine on August 1, 2015

Like drones, robots also present challenges to the national psyche of their users (“Robot soldiers”, July 18/19) – the possibility of a diminishing human fighting spirit hiding behind drones and robots.

I think it is hard to visualize 
the same type of national “good feeling”, with homecoming parades and memorials, when scientists and mechanical engineers have done the real fighting. And what will be more important for the advancement of a military career in the future: knowledge about robots or knowledge about your men?

Will the traditional drill sergeant just become a figure featured in History channel documentaries?

What keeps me coming back
 to these issues is that 70 years 
ago my father was freed from a concentration camp in Germany by courageous American boots on the ground... not by drones or robots.

Per Kurowski
 Rockville, Maryland, US

Here is the original longer version of that letter:

Sir, I refer to Geoff Dyer’s interesting “Robot Soldiers”, FT Magazine July 18.

It is a comprehensive article, except for, like with drones, robots also present challenges to the national psychic of its users. I refer concretely to the possibility of a diminishing fighting spirit of the humans hiding behind drones and robots. And what about in comparison to the fighting spirit of others who cannot do so? What if these others, by for instance a cyber attack, manage to neutralize the drones and robots and it then comes down to a real man to man struggle? 

And I am not joking when I say that it is hard to visualize the same type of national good feelings with homecoming parades and memorials, when scientists and mechanical engineers have done the real fighting.

Also, when Dyer quotes Mary Cummings with “I don’t think we have enough competent people within the government to be able to set up acquisition programmes for autonomous weapons or anything robotic,” it makes one think about what will be more important for the advancement of a military career in the future, knowledge about drones and robots, or knowledge about your men… and the implications of that. Will the traditional drill sergeant just become a figure featured in History Channel documentaries?

I must confess though that what keeps me coming back to these issues is that this year 70 years ago, my father was freed from a concentration camp in Germany by courageous American boots on the ground… not by drones or robots. And the question that keeps popping up it my mind is; will American or other soldiers still have what it takes to free other future imprisoned fathers, if need be?

@PerKurowski

Regulators believe those perceived as “safe”, will originate less unexpected losses for banks than the “risky”. Loony!

Sir, I refer to your Special Report “Risk Management – Property” April 27.

It mentions the risks of: climate change, cyber security breaches, terrorism, earthquakes… all those risks that are difficult to currently estimate but that can produce extraordinary unexpected losses… including for banks.

But those risks are not considered at all by regulators who, when setting their equity requirements for banks, use the expected losses derived from perceived credit risks as a proxy for the unexpected… more-credit-risk-more-capital and less credit-risk-less capital

It sort of translates in that regulators would seem to believe that risks, like those listed affect more the “risky” like the SMEs, than the sovereigns and the members of the AAArisktocracy. I can’t believe you believe that too.

@PerKurowski

Risk of cyber-attack weighted equity requirements for banks make much more sense than the credit-risk weighted

Sir, I refer to Gillian Tett’s “Will cyber attacks mean the light go out?” April 25.

In it Tett describes the possibility of some huge unexpected losses that could happen to banks or to borrowers. And unexpected losses is precisely against which for instance banks, should be required to hold equity.

Instead our current regulators in the Basel Committee require banks to hold equity against the expected losses reflected in the perceived credit risks. As if the unexpected would be a function of the expected? Now how dumb is not that?

But perhaps there is a relation, though not the one the regulators see. The truth is that the safer something seems, the worse could be the consequences of something unexpected.

@PerKurowski

The Basel Committee's bank regulation's Achilles heel