BoE’ Sam Woods, like all current Basel Committee bank regulators, is in serious breach of the do-no-harm fiduciary rule.

Sam Woods, deputy governor for prudential regulation at the Bank of England discusses the differences in calculating the capital requirements for banks in which “Larger firms typically use internal models” and “Smaller or younger groups typically use standardised weights” and “there can be large disparities between the two calculations” “Our financial standards benefit everyone” February 26.

Sir, did you see that Venezuelan amateur showing off his total absence of cross-country skiing skills in an international setting? One Venezuelan who confessed to similar difficulties told me that he at long last completely identified with a Venezuelan sportsman. I replied “Indeed, but with his difficulties of understanding how deep his amateurism is, he also reminds me of the current Basel Committee inspired bank regulators”. 

Sir, anyone who has some capital to invest, needs to assess the individual risks of assets, from the perspective of how well it fits into his portfolio. Any adviser who would tell an investor to only look at the individual risks, like current bank regulators do with their risk weighted capital requirements, would be in serious breach of any sort of fiduciary rule. 

Here are some of their “standardized” risk weights extracted from Basel II. Sovereigns 0%, AAA rated 20%, not rated (the usual SME) 100% and below BB- 150%.

As a result banks, because when doing so they are allowed to leverage more and so obtain higher risk adjusted returns on equity, are de facto being instructed to lend to what is perceived, decreed (or concocted) as safe; and to abstain from lending to what is perceived risky, without any consideration to their portfolio… and without any consideration to the credit needs of the real economy.

In case you doubt me, I invite you to read “An Explanatory Note on the Basel II IRB Risk Weight Functions”. It specifically states that the risk weights are portfolio invariant, since it otherwise “would have been a too complex task for most banks and supervisors alike.” 

Sam Woods writes: “The first job of the Prudential Regulation Authority is to keep the UK banking system safe and sound.”

“Safe and sound” Hah! The regulators, with their foolish and so unwise credit risk aversion, only cause our banks to no longer financing the riskier future but only refinance the safer past; while guaranteeing that some “safe-haven” (like AAA rated securities and Greece), sooner or later will become dangerously overpopulated, and it will all crash, again and again.

Now, Woods inform us “the PRA will look at capital requirements in the round rather than assuming that a simple “sum of the parts” approach will necessarily deliver the right answer.”

Sir, should these failed regulators be given a chance to dig our banks further into a hole, by now doing what they previously told us was too complex for them? I don’t think so. They have clearly breached their do-no-harm fiduciary duty to society way too much! Better get rid of them all and take refuge in something simple, like a 10 percent capital requirement against all assets. 

But, when doing so, remember that taking our banks from here to there is also fraught with great dangers, especially if guided by those who cannot understand, or do not want not to admit to where these banks come from.

PS. Current bank regulators know so dangerously little about risks

@PerKurowski

Risk weights of 20% for AAA rated and 150% for the below BB-, evidences the Basel Committee’s intellectual failure

Sir, Brooke Masters makes a lot of good points in her “Loss of a safety-first regulatory regime is no reason to party” February 4. Unfortunately, again, as is usual for almost all commenting on bank regulations, these are solely from the perspective of the safety of banks; so rarely from the perspective of the borrowers, most specially the “risky” borrowers, like the SMEs and entrepreneurs, and whose borrowings are taxed with the highest capital requirements for the banks.

When Masters’ writes that relative to some large institutions “Some smaller banks are struggling with high compliance requirements”, it is so in much because the natural borrowing clientele of smaller local banks belong to the “risky” group.

Masters ends by recommending: “just trim back the Dodd-Frank rules and stay in the Basel process but temper its safety drive… even try leaving the fiduciary rule in place”

I do not agree. The Basel Committee has produced regulations that make no sense to the real economy and, if you really want banks to have a chance to be sustainably safe, you must make sure the allocation of credit to the real economy is efficient and adequate. The Basel Committee with its risk weighted capital requirements dangerously distorts that allocation. And all based on the completely erroneous theory that what is ex ante perceived as risky is riskier ex post to the banks than what is perceived as safe.

That the AAA rated, so dangerous in that a perceived safety can easily cause very high exposures, have a risk weight of 20%, while the really so innocuous below BB-rated are assigned a risk weight of 150%, is about the best example of how confused current bank regulators are. To rebuild those regulations using the same builders and who are not even recognizing the mistakes cannot lead to anything good. Face it, banking after around 600 years of functioning, was in 1988, with Basel I, dramatically changed for the worse. 

The Dodd-Frank Act? What can I say: to me it is a monument to legislative surrealism. For instance in its 848 pages it does not even mention the Basel Committee for Banking Supervision.

Fiduciary role? Since no one can really guarantee that any fiduciary responsibility is complied with, it is better not to imply such thing with regulations. The best approach is just explaining to investors what its acceptance or not by the advisors, is “supposed” to mean. 

PS. It would be great if Brooke Masters used her influence to get some answers from any bank regulators to these questions.

PS. The sad truth is that our banks are in the hands of Chauncey Gardiner type regulators.

@PerKurowski

How much should we claw-back from inept bank regulators who neglected their fiduciary responsibilities?G

Sir, Gillian Tett writes: “If bankers are going to defend their craft, let alone their high pay, they have to start truly sharing risks with shareholders and taxpayers…If clawbacks had been in place a decade ago, those scandals at Deutsche and Wells might never have erupted in the first place.” “Clawbacks emerge as a vital weapon in finance” September 30.

That applies to regulators too.

The Basel Committee neglected to define the purpose of the banks before regulating these and so came up with the risk weighted capital requirements for banks that have so distorted the allocation of bank credit to the real economy.

The Basel Committee also neglected to do the empirical studies to determine what cause bank crises and so placed much higher risk weights on what was perceived as safe, when actually all crises have resulted from unexpected events like natural disasters, illegal behavior like lending to affiliates, or excessive exposures to what was erroneously perceived as very safe.

The results? A banking crisis because of excessive exposures against too little capital to what was perceived, decreed or concocted as safe; and economic stagnation resulting from too little financing to the “risky” SMEs and entrepreneurs.

Is that not an amazing fiduciary negligence that merits, as a minimum minimorum. some claw-backs?

PS. And all those journalists and famed columnists that so blithely ignored the regulatory faults when denounced over and over again, should they go scot-free?

@PerKurowski ©

The fiduciary duty of financial journalists includes drawing attention to violations of the bank regulators fiduciary duties… capisce FT?

Sir John Kay writes “The reputation of finance has been degraded by the actions of few. But the few have been running the show” and I totally agree with him, though let me be clear, he refers to some few bankers, and I refer to some few bank regulators, “A Swansea ballboy¸ a union leader and the duty of bankers”, February 6.

If “fiduciary standards describe how people should behave when they manage the affairs of others” and if “in a sector as extensively regulated as financial services [where] the main determinant of behavior is the rule book”, is it not so that the absolutely highest fiduciary standards should then have to be expected from those who write the rule books for banks?

The whole package of Basel Committee bank regulations is in my mind in total violation of a regulators' fiduciary duties. Not only does it give banks immense incentives to create excessive and exposures to what is perceived as absolutely safe and which has always been the source of bank crises, but also, by discriminating against “The Risky” it hinders the banks to perform their most important societal duty of allocating economic resources efficiently.

And let me also remind you that one very important fiduciary duty of financial journalists is to, “without fear and without favour”, draw their readers’ attention to violations of bank regulatory fiduciary duties… capisce John Kay, and all you others in FT?