Risk weighted capital requirements for banks caused the animal spirits of hyenas to substitute for those of lions.

Sir. We had a crisis, which resulted directly from the distorted incentives for the allocation of credit to the real economy that the risk weighted capital requirements for banks caused. If anyone doubts that, just consider that Basel II, of 2004, allowed banks to leverage equity a mindboggling 62.5 to 1 with private sector assets, as long as these assets had an AAA to AA rating. If they did not posses a credit rating then a 12.5 to 1 leverage was the max.

True, FDIC and the Fed did not allow USA’s commercial banks to follow these Basel II rules initially, but the SEC did allow the investment banks to do so, as were European banks allowed to do. That set off the most voracious appetite ever for AAA rated assets, and the markets, understandably, set out to satisfy that demand, in any which way it could, even if by means of fraudulent behavior. Because that is what markets do!

To top it up, with Basel I of 1988, the regulators had risk-weighted Sovereigns with zero percent, and consequentially banks were allowed to build up huge exposures against little capital for sovereigns such like Greece.

And then we had Central Banks, Fed, by means of QEs, injecting the mother of all liquidity in the markets, and again, by foremost buying up sovereign debt, mostly benefitting governments, and indirectly those who already owned assets like stocks.

Sir, the can of the crisis was simply kicked down the road; and the regulations that make banks earn higher risk adjusted returns on equity when financing the “safer” past and present than when financing the “riskier” future kept in place. Our grandchildren will hold us accountable for this.

Martin Wolf nonetheless gives a very positive review of Obama’s eight years of economic policy, “How Obama rebuilt the economy” January 11. How come?

The truth is that Wolf does not get it yet! Here he writes of “a broader post-crisis loss of animal spirits” without being able to understand that those risk weighted capital requirements for banks that I referred to, pre and post crisis, what they have done is to substitute the spirits of hyenas for the spirits of lions.

@PerKurowski

I am a whistleblower on Basel Committee’s monstrous mistakes, but FT might not have seen my 2.375 letters either

Sir, Ben McLannahan discussing whistleblowers and the fake-account scandal at Wells Fargo writes: “One even wrote an email in exasperation to John Stumpf, the former chairman and chief executive. (He said he had not seen it.)” “Providing incentives for whistleblowers will improve bank culture” October 21.

Well I have been denouncing, for over a decade, among other with 2.375 letters to FT, this one not included, that the risk weighted capital requirements for banks concocted by the Basel Committee for Banking Supervision and supported by the Financial Stability Board, and not questioned by for instance IMF, is a dangerous monstrosity.

Not only does it distort the allocation of bank credit to the real economy, but it also does so for no good purpose at all, since major bank crises never result from excessive exposures to something that was perceived as risky when booked.

Perhaps one of these days its editor, and many of its columnists, will also argue they never saw these letters.

If someone who like me has argued consistently and extensively against these globally imposed regulations, cannot be helped by a Financial Times to at least obtain from the regulators clear and unequivocal the responses to his objections, then it could seem those regulators might also be using some very insidious pressures to silence those who “Without fear and without favour” are supposedly best equipped to give whistleblowers some voice.

PS. Here again is an aide memoire with some of my objections.

@PerKurowski ©

Creativity needs a chair in any mutual admiration club to somewhat dent any ongoing groupthink

Sir I agree with Gillian Tett in that “A degree of creativity should be on the college curriculum” March 21. But that must also include making sure that creativity has a chair wherever important decisions are taken.

I say it again… had there for instance been some genuine representation in the Basel Committee of historians, and why not of anthropologists, these would have questioned the wisdom of the risk-weighted equity requirements for banks that have so completely distorted the allocation of bank credit to the real economy.

At least the chance of having someone able to quote Mark Twain in that “bankers are those who lend you the umbrella when the sun shines and want to take it away as soon as it looks like it is going to rain” could have given those central-banker-regulators some second thoughts, while they were doing their groupthink, in their cozy mutual admiration club.

@PerKurowski