Where would Philip Tetlock or Robert Armstrong forecast the next bank system-threatening crisis to appears

Sir, I refer to Robert Armstrong’s lunch with Philip Tetlock, ‘It doesn’t matter how smart you are’, July 9.

How I would have loved being at that table and be able to ask them:

Gentlemen, where do you think the next major bank crisis resulting from excessive exposures to something really bad is going to happen, between something that was perceived as safe when incorporated to bank’s balance sheets, or between something that was ex-ante perceived as risky?

And applying simple common sense, and looking at empirical evidence, I would absolutely forecast the first, that what’s perceived ex-ante as safe is, ex-post, the much riskier.

And I ask this because our current regulators, with their risk weighted capital requirements for banks, forecast that what is ex-ante perceived as risky, is ex-post, what is truly dangerous.

In my mind they never heard of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”

And the biggest problem now is that, though the regulators were clearly proven wrong in 2007-08, they do not admit their mistake and they keep on forecasting the same.

Sir, if artificial intelligence is to help us, we must keep it free of weak human egos.

@PerKurowski ©

By giving weight to credit rating forecast that already had weight, bank regulators poisoned these Pringles.

Sir, I refer to Tim Harford’s “Why predictions are a lot like Pringles” January 9.

He argues than when we hear a forecast because “we imagine it happening… other scenarios, equally plausible, fade into the background” and also that “forecasts offer us a lazy way to understand a complex world… it will probably be wrong. But at the instant it is consumed, it gratifies… a lot like Pringles

And Pringles, although they can seriously dent your losing weight plans, basically just gives you “the fleeting pleasure of consuming them”, and that’s it.

But what if you bet on the predictions, like on credit ratings, if you then see an AAA and the rest of possibilities “fade into the background” and you use them as a “lazy way to understand a complex world” then those Pringles carry poison.

For instance bank regulators, with Basel II, set the risk weight of an AAA rated asset at 20 percent while the risk-weight of a below BB- rated asset was 150 percent… which (with a basic capital requirement of 8 percent) meant banks were allowed to leverage their equity over 60 times with AAA rated asset but only around 8 times with assets rated below BB-.

First there is no way below BB- rated risks are riskier to the stability of banks than what is AAA rated. But also since banks already considered the ratings when setting interest rates and size of exposures, the regulators de facto poisoned the AAA Pringles the ratings agencies offered, and the whole world suffered as a consequence.

PS. I now need to reference often Emma Jacobs’ “Teachers who make risk child’s play” January 8. In it Jacob’s describes how Daniel Kish, he himself blind, teaches blind children how to manage risks they cannot see. And I beg you to compare that, to bank regulators who, with credit risk weighted capital requirement for banks, try to help bankers to manage the risks they already see. What a crazy world!

PS. January 2003, in a letter published in FT I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough.” Unfortunately the world wanted Pringles.

@PerKurowski ©