Bank regulators violated the holy intergenerational social contract that Edmund Burke spoke about.

Sir, Philip Stephens writes: “Nostalgia has always had its place in politics. Respect for tradition is at the heart of Burkean conservatism. The deep irony about the now mythologised postwar decades, however, is that these were times when citizens looked unambiguously to the future.” “Nostalgia has stolen the future” July 27.

I am from 1950, and I do feel nostalgic whenever I think of all those savvy credit officers who were now substituted by equity minimization financial engineers.

When regulators, in order to make our banking system safe, ludicrously decided that what was perceived as risky was more dangerous to bank systems than what was perceived as safe, they distorted the allocation of bank credit in favor of the “safer” present so much that they de facto sacrificed that risk taking the “riskier” future needs. That is an egregious violation of that holy intergenerational social contract that Edmund Burke spoke about.

Those regulators are autocratic besserwisser populists who concoct their ideas, in a groupthink séance, in their Basel Committee mutual admiration club!

“Populists”? “We will safeguard your bank systems with our risk weighted capital requirements for banks” As if they knew what those risks were. Sir, can you think of something more populist than that?

@PerKurowski

What if there had been a plumber and a nurse in the Basel Committee for Banking Supervision? Would the 2007-08 crisis have happened?

Sir, I refer to Andy Haldane’s “Diversity versus merit is a false trade-off for recruiters” July 23.

After just a couple of months as an Executive Director of the World Bank, I told my colleagues that since most of us seemed to have quite similar backgrounds (although I came from the private sector), if by lottery we dismissed two of us, and instead appointed a plumber and a nurse, we would have a better and much wiser Board. That of course as long as the plumber and the nurse had sufficient character to opine and ask, and not be silenced by any technocratic mumbo jumbo. 

For example what if when the Basel Committee for Basel II in 2004 set their standardized risk weights for the AAA rated at 20% and for the below BB- at 150%, a plumber or a nurse had been present to ask the following three questions:

1. Has that credit risk not already been very much considered by the banker when deciding on the size of their exposures and the risk premiums they need to charge?

2. My daddy always told me of that banker that lends you the umbrella when the sun shines and wants it back when it looks like it might rain, so is it not so that what is perceived as safe is what could create those really large exposures that could turn out really dangerous if at the end that safe ends up being risky?

3. And is credit risk all there is about banking? What if that below BB- rated has a plan on what to do with a credit that could mean a lot for the world, if it by chance turns out right? Are you with these risk weights also not sort of implying that the AAA rated is more worthy of credit?"

Those very simple questions could have changed the course of history as the banks would not have ended up with some especially large exposures to what was perceived (houses) decreed (sovereigns) or concocted (AAA rated securities) as safe, against especially little capital (equity), dooming the world to an especially serious crisis.

Sir, how do we get some nurses and plumbers, meaning real diversification, not just gender or race diversification, into the Bank of England and the Basel Committee? These mutual admiration club types of institutions, with their groupthink séances, urgently need it 

https://teawithft.blogspot.com/2004/11/basel-is-just-mutual-admiration-club.html

https://subprimeregulations.blogspot.com/2018/05/if-only-these-four-simple-questions-had.html

@PerKurowski

Feeble regulatory minds, seeing risks in what’s perceived risky, doom our banks to die trapped in the last safe-haven

Sir, Robin Wigglesworth quotes Paul Singer of Elliott Management with: “Given groupthink and the determination of policymakers to do ‘whatever it takes’ to prevent the next market ‘crash’, the low-volatility levitation magic act of stocks and bonds will exist until it does not. And then all hell will break loose” “Calm waters raise fears of a leverage comeback” June 7.

Indeed, only an intellectual degenerating incestuous groupthink can explain current bank regulators fixation with what is perceived risky. Their risk weighted capital requirements are based on the perceptions of risk being correct, while as all logic screams for, these should be based on the possibilities of these perceptions being incorrect. The riskier something is perceived, the safer it is; and the safer something is perceived, the more dangerous it can become. “May God defend me from my friends, I can defend myself from my enemies”, Voltaire dixit.

Those regulations, by favoring so much what is perceived, (concocted) or decreed as safe, like assigning a 0% risk weight to sovereigns, cause sovereigns to be getting too much credit on too easy terms; and that banks could end up holding only sovereigns on their balance sheets. When that happens who is going to be able to kick the can forward to another safe-haven (gold?), sovereigns or their central bank agents?

Sir, our whole banking system is set on a path that with signs of “follow this safe route”, leads directly to a precipice.

You insist in keeping mum about that. There will come a day you, or at least your children, will deeply regret that.

When will regulators stop feeding us fake tranquilizers?

“Risk weighting” So we are to suppose risks have been duly considered?

“Living wills” So we are supposed to think that trustees are capable to enforce these?

“Stress tests” Tests that ignore the stress to the real economy because of what should be on bank’s balance sheets but is not, like “risky” loans to SMEs?

Dodd-Frank’s “Orderly Liquidation Authority” “Orderly”? No Sir, when the last safe haven runs out of oxygen, I assure you it is going to be anything but orderly… then all hell will really break loose.

Per Kurowski

@PerKurowski

Tim Harford, lack of the limited diversity is bad, but much worse is groupthink within mutual admiration clubs.

Sir, Tim Hartford argues that one argument in favor of diversity is “to engage with people who may see the world differently because of their race, nationality, sexuality, disability or gender.” “Economics: a discipline in need of diversity” November 12.

That is a way too restricted view on the importance of diversity. As an Executive Director of the World Bank, back in 2002-04, I often argued with my colleagues that if by lottery we would get rid of two us with so much alike backgrounds, substituting the eliminated with a nurse and a plumber, we would not only have a more knowledgeable Board but, more importantly, a much wiser one. Not surprisingly there was a general lack of enthusiasm in the response to this line of argument.

Likewise, if bank regulators had beside those with banking experience included some with borrowing experience within their ranks, those who could attest to the difficulties they already faced accessing bank credit when perceived as risky (even if all these were white men) we would never have had to suffer the sheer idiocy of the current risk weighted capital requirements for banks.

Sir, so to stuff mutual admiration clubs that can easily fall trap to groupthink with those who meet the current limited meanings of diversity, will result in much less than what is really needed.

@PerKurowski

When does groupthink really become more of a dangerous group-no-think?

Sir, Andrew Hill, discussing the works of Jennifer Chatman from UC Berkeley’s Haas School of Business writes: “Cohesion and co-operation may look like virtues, but they could be symptoms of groupthink. The greater the collective will of the team — and the higher the stakes — the less likely people are to dissent, because, in Prof Chatman’s words, ‘speaking up about risks is like saying you have no confidence in the group’.” “When the stakes are high, dissent is a sign of success”, September 12

So if “dissent and friction are unlikely signals of success” Prof Chatman says: “Maybe we need to live with a little more discomfort and difference to get these valuable outcomes.”

And again I must ask myself; might that be the reason for that no one in the bank regulation community spoke up against that strange theorem that held that what was perceived as risky was riskier to the banking system than what was ex ante perceived as safe? That theorem is in fact so loony that we perhaps should not even speak about groupthink, but more in terms of group-no-think.

And truly dangerous that was, since from that theorem they deducted their risk-weighted capital requirements; which then completely distorted the allocation of bank credit to the real economy.

So what “little more discomfort” should we apply for instance to the Basel Committee? Could a town-hall meeting where doubters could ask their questions suffice? I am not sure, I have spent more than a decade asking the regulators this, and they just don’t answer; worse nobody finds anything strange with their silence.

Or is it that what I confront is not a group but a massive gathering of confused minds; that among other includes you Sir and perhaps all FT journalists; I mean something like that which was the case when the earth was believed flat?

@PerKurowski ©

The Basel Committee’s and FSB’s bank regulators, seems to fit well the description of a Japanese “salaryman”.

Sir, Leo Lewis writes “in 2016, the [Japanese] salaryman — unassertive, allergic to risk and with a growing list of corporate debacles to his name — has switched from asset to liability. To economists who see labour market reform as Japan’s only hope, it ranks among the country’s most insidious threats”, “Curse of the salaryman” May 3

And Koichy Nakano at the Sophia University in Tokio holds that men working in offices tied to group think and respect for authority, “is the very opposite of the creativity and original behaviour that the economy needs at this point”

So what are the key words here? Risk aversion and groupthink.

Sir that is precisely two of the most usual key words I use when commenting on the Basel Committee for Banking Supervision’s and the Financial Stability Board’s work on regulations.

And on "debacles"... what about the 2007-08 crash, which resulted directly from regulators allowing banks to earn much higher expected risk adjusted returns on equity on assets perceived, decreed or concocted as safe than on assets perceived as risky.

   

Could it be that Mario Draghi, Stefan Ingves, Mark Carney and other BCBS’s FSB’s experts are “salaryman”? Well, if not, they are at least clearly not assets but liabilities. 

Here is an aide-memoire about current bank regulator’s craziness. 

@PerKurowski ©

Rules that make all banks behave the same can pose greater systemic risks than all SIFIs put together.

Sir, I refer to Brooke Masters article on “systemically important financial institution whose failure could destabilise the economy” “MetLife’s court win means US regulators should redraft rules” Saturday 2.

Before regulating or redrafting anything, regulators should at least come to understand that their own rules might be the source of the most dangerous systemic risks.

In 2001, in an OpEd I wrote the following onbank regulations:

“The regulatory risk: Before there were many countries and many ways of how to regulate banks. Today, with Basel proudly issuing rules that should apply worldwide, the effects of any mistake could be truly explosive. 

Excessive similarity: Encouraging banks to adopt common rules and standards, is to ignore the differences between economies, so some countries end up with inadequate banking systems not tailored to their needs. Certainly, regulations whose main objective appears to be only to preserve bank capital, conflict directly with other banking functions, such as promoting economic growth, and democratize access to capital. 

Low diversity of criteria: A smaller number of participants, less diversity of opinion and, with it, increased risk of misconceptions prevailing. Whoever doubts that, should read the dimensional analysis that ratings agencies publish. 

Backlash: The development of decision-making processes has benefits but also risks. Thus we see that the speed of information itself, which promotes quick and immediate response, can exacerbate problems. Before, those who took the problem home to study it, and those who simply found out late, provided the market a damper, which often might have saved it from hurried and ill-conceived reactions.”

And already in 1999 in another OpEd I had written: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

And then Basel II’s 20 percent risk weight for AAA rated securities, caused the financial crisis 2007-08; while Basel I’s zero riskweight assigned to sovereigns, doomed sovereigns like Greece.

Of course there is a need to think about the systemic risk of SIFIs, but even more important, is looking to minimize the systemic risks of bank regulations… or at least to recognize their existence.

A million of individual small banks can easily be turned into a very dangerous Systemic Overall Important Banking System, by just some rules drafted by some members of that mutual admiration club known as the Basel Committee for Banking Supervision.

@PerKurowski ©

Globalizing the conclusions of members of mutual admiration clubs, like the Basel Committee’s, is a huge systemic risk.

Sir, I refer to Gillian Tett’s interesting discussion of Paula Jarzabkowski’s “Making a Market for Acts of God” “The doublethink insurance club”, September 26.

Tett writes: “insurance executives …love to talk about how they are now using diversified strategies that bundle different risks together, and price this according to a global pattern of supply and demand – or a “market”… But there is a rub. As consolidation has taken hold, this has cut sharply the number of players who handle reinsurance products – And [so] while the insurance companies say they want to “diversify” their risks, they are all doing this in exactly the same way –which produces less, not more, diversity.”

Indeed that of diversifying more and more in ever fewer and fewer diversified ways is a clear and present danger in days of increased globalization. The following is what I had to say on that subject in April 2003 at the World Bank, as an Executive Director:

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they is just the tip of an iceberg… A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

Tett writes “this project touches on a point that matters beyond the insurance world: namely we all have an amazing tendency to fool ourselves… insurance brokers…they are so clubby that they are susceptible to both groupthink and doublethink – and an inability to see the contradictions that underpin their world.”

And if that goes for insurance brokers, then think of what a mutual admiration club of regulators could come up with, when trying to impose the same one and only set of regulations on the banks of the world. Holy moly! Just for a starter, when setting the capital requirements needed to partly cover unexpected Acts of God losses, without blinking, they decided to use the human perceptions of the expected losses… and no member of the Basel Committee club objected... naturally... members are not supposed to do that.

@PerKurowski

Political correctness is a society-wide groupthink that can be very dangerous.

Sir, In the Shrink and the Sage’s “Can we get used to anything?” of May 16, the Sage mentions “society-wide groupthink”. And the best example of current society-wide groupthink I can think of is “political correctness”.

I just came back from a week in Sweden. There I heard many expressing to me, in sotto voce, sort of ashamed, sort of “don’t tell anyone about this”, some very ordinary and human concerns about there being too many migrants and about the risk they felt that could dilute their meaning of being a Swede.

My immediate thought was that political correctness, if it blocks this way citizens from venting their concerns, then it must be a dangerous powerful growth hormone for extremism.

In other words, if you use a “That’s like Hitler” in response to too many of people concerns, then too many might end up thinking “That Hitler guy sound’s quite right for me”.

Let us never forget that the emotions involved in the not liking something for the wrong reasons, are just as strong as that of the not liking something for "the right reasons".

PS. My father suffered years of concentration camp because of Hitler. I don’t remember him saying, “That’s like Hitler” about anything or anyone… perhaps because he would never want to diminish Hitler’s evilness to something being sharable.

@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

McKinsey has fallen for the same groupthink as the Basel Committee and the Financial Stability Board.

Sir, I refer to the McKinsey report “Financial Globalization; retreat or reset?" March 2013 and on which Gillian Tett bases her comments in “Davos Man’s belief in globalization is being shaken” March 8.

As I see it that report, which measures the volumes of funds sloshing around the globe, lacks the information needed to comprehend not only the causes of the current crisis, but also what is keeping us from being able to work ourselves out of the current crisis.

I refer of course to the global capital controls so inconspicuously imposed by regulators on bank’s credit flows, by means of allowing these to leverage so much more the expected risk and cost adjusted net margins when lending to what is perceived as “absolutely safe” than when lending to what is perceived as “risky”.

If only the McKinsey had explored how, because of these regulations, the perceived safe-havens in the world have and keep on becoming dangerously overpopulated, while the perhaps more productive but more “risky” bays are not being sufficiently explored, that could have opened many eyes, including of course McKinsey’s own.

Instead it recommends staying firm on course implementing the regulatory reforms initiatives that are currently on the way, even though Basel III, by adding liquidity requirements based on perceived risk, could only increase the border controls and protectionism that separates “The Infallible” from “The Risky”.

And when the reports mentions “unlocking what could be a major source of stable, long-term capital and higher returns at lower risk for savers and investors” one can only wonder where on earth they intend to stock the risks of the real economy? Are they thinking about some risk-sink similar to what is used in carbon sequestration? Under which backyard are those toxic deposits to be deposited?

The report speaks about the importance for financial institutions and regulators to have access to better information about risks, like “more granular and timely information from market participants” and “standardized rating systems”. That is indeed important, but the problem is that when both financial institutions make use of the same information simultaneously, as they do now, the banks in the interest rates and amounts of exposure, and the regulators in the capital requirements, then the whole system overdoses on that information, and crashes.

And blithely ignoring what is most constraining the access to bank credit of “The Risky”, the “constrained borrowers”, like large investments projects, infrastructure and SMEs, the report suggests that their needs should be taken care by a full range of new “public-private lending institutions and innovations funds, infrastructure banks, small-business lending programs and peer to peer lending and investing platforms”, as “this can increase access to capital for underserved sectors”. In other words it says: “Keep those filthy “risky” away from our banks, these belong to the AAAristocracy.

Really, is that the way we want to go? Is that the way we the Western World became prosperous? No way Jose! God make us daring!

Sir, McKinsey seems to have been captured by the same groupthink that has captured the Basel Committee and the Financial Stability Board, and some other regulators and experts. And that groupthink, sadly, has our real economies stalling and falling, gasping for that oxygen that risk-taking signifies.