Global and local inequality is much driven by dumb bank regulations. World Bank and IMF should do something about i

Sir, Branco Milanovic, with respect to “global inequality” writes: “While for national statistics and inequality measures, there is at least a national government that citizens can blame for high inequality, there is no comparable body globally.” “Putting a number on global inequality is long overdue" September 19

Oh no! For quite a lot of that inequality, I totally blame the Basel Committee on Banking Supervision. With its risk-weighted capital requirements for banks, which favor the access to bank credit of the “Safe”, the developed, the rich, the past, it is basically decreeing inequality.

The interesting aspect with that global inequality driver is that it also causes inequality on a local national level. Just try to figure out how many millions of SMEs and entrepreneurs, all around the world, have been denied access to bank credit because of this regulation.

And yes both the World Bank and the International Monetary Fund have a role to play correcting this.

The World Bank, as the world’s premier development bank, knowing that risk taking is the oxygen of any development, should send bank regulators clear signals to the effect that nothing is as dangerous as excessive risk aversion.

And the IMF, in charge of worldwide financial stability, should also tell regulators to stop being silly, since no major bank crisis has ever resulted from excessive exposures to something ex ante perceived risky. 

PS. And FT should stop covering up for dangerous and failed bank regulators.

@PerKurowski ©

Just you wait till the young discover what the Basel Committee for Banking Supervision has been doing to their future

Sir, Anne-Sylvaine Chassany tells us that “Océane, a 21-year-old Nice resident with purple hair, tattooed forearms and stretched earlobes would love to move to London and open a tattoo parlour” “A waitress with tattooed arms opens my eyes to the youth vote” July 27.

Well that would quite likely require Océane to get a bank loan. But what would Océane say if she understood that her chances of getting a loan at reasonable rates, which might never have been that great to begin with, are now much smaller, because of the regulators.

The risk-weighted capital requirements favors the lending to what is perceived, decreed or concocted as safe, that which always have had ample access to bank credit, over the lending to the risky… and by favoring it unfairly discriminates against the access to bank credit of those ex ante perceived as risky. 

One day, some researcher will calculate the number of loan applications by SMEs and entrepreneurs that have been denied, or approved at much higher interest rates, as a direct consequence of these regulations. When those figures are published and the young realize discovers that banks stopped financing their risky future, and are only now refinancing the safer past, like placing a reverse mortgage on the economy, then, as long as the young are able to look up from their iPads, all hell could and should break lose.

Hear the young: “Baby-boomers why did you do that to us? The banks of your parents did take the risks needed for your future!”

And nothing can foster inequality as much as denying opportunities of fair access to credit… with “fair” meaning here, a not-distorted free-market based risk evaluation process.

@PerKurowski ©

The access to bank credit manipulation costs us infinitely more than Libor and all other manipulations put together

Sir, Michael Skapinker, referencing a traders working conditions, gives a well reasoned and heartfelt explanation of why he feels sorry for at least one of those recently found responsible for manipulating the Libor rate. I sure hope it will be read before any sentencing, “The Libor trial and how to deal with a bullying, dishonest boss” July 7.

But let me add to that the following:

I am absolutely convinced that the risk weighted capital requirements for banks, introduced by the Basel Committee in 1988 signifies an outright manipulation of the access to bank credit. By favoring what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential housing, these sectors have received way too much bank credit on way too easy terms. And, as a consequence, those perceived as risky, like SMEs and entrepreneurs, those upon much of the future economic growth and job creation depends, have received way too little credit, in way too harsh relative terms.

If we add the costs of having dangerously overpopulated safe havens like AAA rated securities and Greece, and around the world hindered millions of small loans to be given to those who most needed it, the costs of this distortion for the society are mind-blowing. These exceed thousand fold whatever damages might have been produced by all other recent manipulations put together.

And what has happened to the bank credit access manipulators? Absolutely nothing, in many ways they have even been promoted.

And what has happened to whistle blowers like me. Not much, except for having to suffer seeing my arguments ignored, while being sure this will affect negatively the future of my own constituency, my children and grandchildren; as well as the future of those of the baby-boomer generation about to retire.

The costs of a Libor manipulation, winners and losers, these net out.

The costs of distorting the access to bank credit do, medium and long term, only produce losers, and so they are boundless.

And even though all that access or bank credit manipulation implies absolutely no criminal act, I believe it was done unwittingly and with only good intentions, and only pure innocent stupidity prevailed, it sure help to put all other manipulations in a different perspective. 

@PerKurowski ©

Mark Carney and Bertrand Badré, if sincere, should be concerned with the abandonment of the vulnerable “risky”

Sir, Mark Carney, chairman of the Financial Stability Board, and Bertrand Badré, the chief financial officer of the World Bank Group write: “The financial abandonment of whole groups of customers — or even countries — is not something that can be ignored by the members of the G20. The FSB and the World Bank are playing our part in co-ordinating efforts to prevent the loss of basic banking services needed to finance investment in some of the most vulnerable areas in the world… if legitimate institutions cannot channel funds between countries through a well-regulated financial system, money will instead circumvent the official channels.” "Do not shut out vulnerable from banking" June 3.

They refer mostly to anti-money-laundering regulations but the truth is that the moment regulators confused bank assets perceived as risky with banks assets being risky, and concocted credit-risk weighted capital requirements for banks, then they abandoned all vulnerable “risky” borrowers, who could then no longer count with fair access to bank credit.

The World Bank’s Global Development Report 2003 (GDR-2003), commenting on Basel II, had the following to say: “The new method of assessing the minimum- capital requirement is expected to have important implications for emerging-market economies, principally because capital charges for credit risk will be explicitly linked to indicators of credit quality, assessed either externally under the standardized approach or internally under the two ratings-based approaches. The implications include the likelihood of increased costs of capital to emerging-market borrowers, both sovereign and corporate; more limited availability of syndicated project-finance loans to borrowers in infrastructure and related industries; and an “unleveling” of the playing field for domestic banks in favor of international banks active in developing countries…A recent study by the OECD (Weder and Wedow 2002) estimates the cost in spreads for lower-rated emerging borrowers to be possibly 200 basis points.”

As an Executive Director in the World Bank (2002-04) I did what I could to fight this odious regulatory discrimination against those already being discriminated against by the banks, precisely because they are perceived as risky. I found no resonance whatsoever… and whatever little World Bank criticism was present in the GDR-2003, has seemingly been abandoned.

If Mark Carney and Bertrand Badré are really sincere, this is where they should start.

Bank nannies can worry about perceived risks and dirty fingernails. Bank regulators should mostly concern themselves with distortions and illusions of safety. Much more than safe banks we need functional banks.

PS. And, whatever you do, banks are much too important for us to allow these to be exploited as combustible material by interested politicians.

@PerKurowski

In finance the structurally discriminated are those perceived as “risky”, the SMEs and entrepreneurs

Sir, Gillian Tett refers to an almost all female conference on economic and finance to ask: “whether it is time to organize an all-black or all-Hispanic financial policy-making event of this sort?” “The power of role models” May 9.

And referencing Simon Kuper’s article “How to tackle structural racism” she reflects: “And, if that occurred, would it help to combat that structural discrimination”.

That is off target. In matters of banking, financial reforms and the future of global finance and economics, the truly structurally discriminated, the “all-black or all-Hispanics”, are those perceived as “risky”, like SMEs and entrepreneurs, while the structurally favored, the “all white males”, are “the safe”, like sovereigns and AAArisktocrats.

So we need more a conference with large representation of those perceives as risky. It would be so interesting if Senator Elizabeth Warren who has exposed “constant criticism of Wall Street and of America’s wealthy elite” were also present there. Can you imagine a small entrepreneur asking Senator Warren the following?

“From a credit point of view I am perceived as risky. I therefore face many difficulties to borrow that umbrella from bankers they only want to lend out when the sun shines. I accept that as a natural fact of life. But why must the regulators make it even harder for me to access bank credit, by allowing banks to have much less equity when lending to “the infallible” than when lending to me?

That results in that banks can leverage their equity, and the implicit or explicit support taxpayers give them, much more with the risk-adjusted net margin dollars paid by “the infallible” than when those same dollars are paid by me.

We the “risky” entrepreneurs and SMEs, we hear we are good for the economy, that we generate growth and jobs and, as far as I know, lending to us has never detonated a major bank crisis… so Senator Warren, can you explain to me why is there such an odious regulatory discrimination against us?

There exists an Equal Credit Opportunity Act (Regulation B) and so I must also ask: Senator Warren why does its benefits not extend to us?

@PerKurowski

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Brussels and US, when ruling on cyber space, never forget it is we, the undefended accessed, who most need assistance.

Sir, Carl Bildt holds that “Digital mercantilism — a misguided attempt to regulate away competition, or build up new boundaries to achieve some imaginary sovereignty in cyberspace — can only hurt Europe’s ability to innovate, compete and succeed in this new world.” “Brussels should resist the urge to rig the rules of cyber space” May 4.

Absolutely, but that does not mean all is fine and dandy.

Bildt writes: “Google, Facebook and Twitter have been extremely successful in establishing services that have a commanding lead in the markets in which they operate… not by exploiting the advantages of incumbency, but through groundbreaking innovations that have led users to flock to the services they provide.”

Indeed, but those companies did not create the internet Mr. Bildt; and all of us flocking to obtain their services are paying a price for it, by means of allowing these to access information about us, in order for them to resell advertising access to us. And that price could be reasonable or not.

If it constrains too much our ability to access information freely, the price would be way too high.

And it is in the area of unfair restrictions in the competition for information of all sort, that we, the undefended accessed, sure need some assistance from regulators, whether European or American, or from anywhere else on the globe where they might be hosted.

PS. Should I have a copyright over my own preferences, so that I could share in the ad-revenues from advertising directed to me, because of my preferences?

@PerKurowski

Allow the SMEs and entrepreneurs to help build up the economy, and bridges to somewhere will follow.

Sir, Alan Beattie writes “The IMF, transformed from an agent of neoliberalism to a Gosplan-style advocate of public works, also supports a government investment push”, “The less appealing way to abolish boom and bust” April 11.

IMF, in Chapter IV of its recent World Economic Outlook of 2015, titled “Private investment: What’s the hold up” acknowledges: “Firms with financial constraints face difficulty expanding business investment because they lack funding resources to do so, regardless of their business perspectives” (page 11); “financially dependent sectors invest significantly less than-less dependent sectors during banking crisis” (page 15).

Yet the primary “Policy Implications” reached by the study is: “a strong case for increased public infrastructure investments…[and] for structural reforms…for example reforms to strengthen labor force participation and potential employment, given aging populations. By increasing the outlook for potential output, such measures could encourage private investments” (page 18). 

And only then, almost as an afterthought, is it that the IMF puts forward: “Finally, the evidence… suggests a role for policies aimed at relieving crisis-related financial constraints”.

What “suggests a role”?

How on earth can IMF consider public infrastructure investments more important for the economy than relieving financial constrains?

One explanation could be that the study includes only data that “cover public listed firms only” and not data about “unlisted small and medium sized enterprises” (page 13). Clearly, if you do not study those most in need of access to bank credit, then you will of course not be able to measure the real importance of relieving financial constrains.

The second explanation is that IMF’s professionals insist in covering up for the mistakes of colleagues, the bank regulators. That is because relieving the real financial constrains, requires exposing how the current credit-risk-weighted equity requirements for banks odiously discriminates against the fair access to bank credit of those who most need it, like the SMEs and entrepreneurs.

Sir, the most important thing to do is to get rid of the regulatory distortions so as to enable banks once again to allocate their credit more efficiently to the real economy. If that is done, then you might find places whereto bridges should be construed. Otherwise the risk of building too many bridges to nowhere, is just too big for any economy to manage.

@PerKurowski

That banks do not lend to small businesses in Europe has a reason and is not something irreversible

Michael Sherwood and Richard Gnodde write “The international regulatory response to the financial crisis, which is intended to make sure that banks are better capitalised and their lending operations more cautious, could in some ways make the predicament of small business worse”, “A ‘big bang’ to expand the European economy” February 24.

And they go on: “Robust banks will strengthen the financial sector as a whole. But bank credit is likely to become less freely available and more costly — to the detriment of those companies and economies that are more dependent upon it.”

Sir, are we supposed to believe these two vice-chairmen of Goldman Sachs Group do not know, that is not an irreversible process? That what is making it difficult for small businesses to have access to bank credit in Europe, is foremost that banks need to hold much more equity when lending to these than when lending to something able to be perceived as less risky from solely a credit point of view?

I doubt it, the problems is that they, as bankers, have a vested interest in maintaining the current system which allows banks to earn higher risk adjusted returns on equity with exposures to assets perceived, or made to be perceived safe. It is after all a bankers dream come true… a big ROE without having to take risks.

What is hard for me to understand though is why FT, who is not a bank, does not even want to acknowledge the distortionary impact produced in the allocation of bank credits to the real economy by requiring banks to hold different amounts of equity against different assets.

What would make a Negro slave on a cotton plantation in 1800 America, not feel being discriminated against?

Sir, I refer to Luke Johnson’s valedictory essay for the FT “A farewell after eight years championing founders” January 28.

The following Johnson writes is extraordinary: “I believe independent ownership of business assets is incredibly important if we want a vibrant economy. Founders possess animal spirits and optimism that contribute disproportionately to innovation, job creation and tax generation. They are the essential ingredient for a more prosperous society, together with the rule of law and sound property rights. These inventors, mavericks and would-be tycoons exist to take risks most of us seek to avoid in our careers.

Start-ups renew industry and society, and pioneer and implement new technology that established institutions shun, because it would upset their cosy oligopolies. Crony capitalists — whose annual conference was held last week in Davos — are not entrepreneurs, but corporate managers who hate free markets and the idea of proper competition, while squandering most of their time on office politics and games of patronage.”

How extremely sad then that Luke Johnson completely missed out on how bank regulators, with Basel I favoring the “infallible sovereigns”, and with Basel II favoring the AAArisktocracy… impeded the fair access to bank credit of his “risky” risk-taking entrepreneurs.

What is it that makes those who should most see a distortion and discrimination in order to fight it, not seeing it?

Stress testing of banks should foremost test whether these serve the real needs of the real economy.

Sir, I refer to your “Stress testing should not just apply to the banks” December 31.

In it you argue that “Regulators need a holistic approach to risk in the financial system” and therefore they should also include “the non-banks that are playing an increasingly important role in supporting the economy” so that “the world can be confident that the process of making banks safer is not simply shifting risk elsewhere”.

And again Sir, you totally ignore what is the biggest risk with a financial system, namely that it does not allocate bank credit adequately for the needs of the real economy. Again you seem to imply there is a possibility of having save banks standing there in shiny armor in the midst of the rubbles of the real economy… and of that being a worthy goal to pursue.

No Sir! The stress testing of banks we most need now, starts with ascertaining whether our risky small businesses and entrepreneurs are having fair access to bank credit. The stress testing of banks we most need now, should foremost test whether banks are serving the real needs of the real economy.

PS. As I have told you more than a hundred times, banks are not doing that, thanks to our stupid bank regulators... so perhaps they do not dare to stress-test their own mistakes.