To save us from “calm waters” and recover economic dynamism, get rid of risk weighted capital requirements for banks

Sir, Tim Harford writes: “economic dynamism is at risk… John Haltiwanger has charted a fall since the early 1980s in the rate of start-ups, business exits, job creation and job destruction…Calm waters eventually stagnate. It is time to agitate the real economy…But how? …support for small-business finance, would all add much needed fizz to the economic system.” “Eerie quiet marks Black Monday’s anniversary” October 22.

That “how?” must include getting rid of the absolutely insane risk weighted capital requirements for banks

Sir, as a member of the Civil Society, during the Annual Meetings of World Bank and IMF, and for the umpteenth time during such occasions, I asked the following question:

“As the world’s premier development bank the World Bank must know that risk-taking is the oxygen of any development. So why is it still not speaking out against the risk-weighted capital requirements for banks that put a brake on risk-taking, like on the lending to SMEs small and medium sized enterprises…even though never ever has a major bank crisis erupted because of excessive exposures to something ex ante perceived as risky.”

After Jim Yong Kim gave a very valid answer, but not one that directly addressed my concerns, IMF’s Christine Lagarde jumped in with:

“I am actually tempted to address also this question, is that okay?

Because I think it is an important point and one that has very complex ramifications. It has complex ramifications in the banking regulations business, in the banking supervision business, and in the accounting business.

And then it is at the very junction of between sorts of self-established model by the banks versus models established by the supervisors. 

I think we both would agree that methods that would actually encourage the lending by banks and by insurance companies and by pension fund to SMEs, you know with the risk associated with it, should actually be very much in order.

At the moment the risk weighing methods and the models that are being used are discouraging from actually investing and taking risk to benefit the small and medium sized enterprises 

And that’s not necessarily the best avenue to support the economy and to support entrepreneurs who want to have access to financing.”

Sir, as you can see the IMF is finally opening up its eyes to the distortions in the allocation of bank credit that are produced by current bank regulations… those which FT has been so steadfastly silent on… even though I have over the years sent you about a thousand letters on this specific issue.

FT, when will you be fearless and without favour enough to take up this issue?

Here is a transcript of my question and the answers received during AM2017.

And here is an old homemade YouTube in which I try to give an explanation as simple as possible of what is so wrong with the risk weighting.

God make us daring!

PS. By the way are you not at all curious how regulators, in their standardized risk weights of Basel II, came up with only a 20% for those so dangerous AAA rated, and a whopping 150% for the so innocuous below BB- rated, those that bankers do not touch even with a ten feet pole?

@PerKurowski

With current bank regulations a pervasive drop in economic dynamism should come as no surprise

Sir, Sam Fleming writes: “The US has seen a pervasive drop in economic dynamism in every one of its states since the early 1990s as new business formation sinks and workers move jobs less frequently, according to research that underscores the challenges in restoring entrepreneurial verve.” “Fall in US dynamism underlines Trump challenges” May 24.

How could that not be? Since 1988, our banks are in hand of regulators who decided that, in order to make banks safer, it would be better for these to finance home ownership, which can somewhat reduce mobility, and to avoid financing the risky, such as SMEs and entrepreneurs, those number one economic dynamism providers.

It amazes me how so few understand the distortion in the allocation of bank credit to the real economy that the risk weighted capital requirements cause. The day the world wakes up to that fact, the regulators will have a lot of explaining to do… perhaps even in front of International Courts of Justice.

@PerKurowski

With tighter bank capital rules and lower bank profits, risk weighting hurts economic dynamism more than ever.

Martin Wolf asks “Is globalisation reversing?” And answers “No, but it has lost dynamism… partly because opportunities for expanded processing trade have diminished, and partly because the era of large-scale trade liberalisation is over.” “Sluggish global trade growth is here to stay” October 26.

Indeed that matters, but Wolf refuses to acknowledge that the economies could also have lost much dynamism, because of credit access protectionist regulations, applied globally, that have banks refinancing more the “safer” past and present than financing the "riskier" future.

How can Wolf ignore that? I haven’t the faintest Sir; you must of course know him much better than I.

Anyone besserwissing I can besserwiss better, I can betterwiss better than you, Mr Wolf.

PS. Here again is an aide memoire on some of the monstrous mistakes of the risk weighted capital requirements for banks.

@PerKurowski ©

A mindless structural reform of regulations castrated the banks and helped to kill the dynamism of the economy.

Sir, Martin Wolf quotes Robert Gordon with “Ours is an age of disappointing growth because the technological breakthroughs are relatively narrow”, and then dicusses what could be done. Wolf concludes “The tendency to believe that some “structural reforms” will fix this is, similarly, an act of faith. It is essential for policy to promote invention and innovation, so far as it can. But we must not assume an easy return to the long-lost era of dynamism”, “An end to facile optimism about the future” July 13.

But “structural reforms” can kill dynamism too. And as you Sir and Wolf already know, in my opinion, nothing has done more harm to the economy than the risk weighted capital requirements for banks introduced with Basel I in 1988, and applied much more intensely with Basel II in 2004.

By allowing bank to leverage more their equity, and the support they receive from society with “safe” assets, regulators made it harder for those perceived as risky, like the SMEs and the entrepreneurs, to compete for access to bank credit.

Since perceived risks were already cleared for with the size of the exposures and the risk premiums charged, having bank clear again for those same perceptions in the capital, basically castrated our banks.

Now banks no longer help provide the “risky” proteins the economy needs in order to grow new muscles, they just finance the “safer” carbs that only makes the economy more obese.

Sir, when compared to what is needed to give the future a fair chance to deliver something good, it is clear that never ever before has a generation consumed so much borrowing capacity to sustain its own current consumption.

PS. And with their zero risk weight to sovereigns, and 100% of citizens, bank regulators de facto stated that government buracrats make the best use of bank credit. If that is not runaway loony statism what is?

@PerKurowski ©

Martin Wolf, stupidity is not "frighteningly near", it is already here, and it is well entrenched.

Sir, Martin Wolf, with respect to immigration, correctly argues that “the presence of hard-working and ambitious people speaking a multitude of languages and offering a diversity of culture, while fitting with the predominantly liberal culture of the UK, should surely be welcomed”, “Fear of immigration is no reason for Britain to leave Europe” November 28.

And Wolf rightly concludes “It would be folly to let a paroxysm of anxiety over immigration drive the debate on whether UK should stay in EU… unfortunately, that degree of stupidity seems frighteningly near”.

But, let me ask Martin Wolf, sort of for the umpteenth time: what’s the use of inviting immigrants who could provide much dynamism if at the same time, you are fighting against the number one source of dynamism, namely risk-taking?

The credit risk weighted capital requirements for banks, which provide banks with much more incentives to finance the “safer”, the old, the history, than the “riskier”, the new, the future, tells me stupidity has already arrived. And, observing how the debate ignores the distortions in credit allocation these regulation produce, I would venture that stupidity is firmly entrenched.