If you want accurate data on bank risks, you have to start by removing all the incentives for banks to misrepresent their data

Charles Taylor, a former chair of the supervision and implementation group of the Basel Committee on Banking Supervision writes: “big banks should always be able to paint an up-to-date, comprehensive picture of the risks they face… [But] management often seem not to care” “Banks’ approach to risk data is deeply inadequate” July 16.

Sir, if a big bank reported an increase risk in a category of assets, what would the regulators most likely response be? To “either restrict banks’ activities or boost their capital requirements”… even Charles Taylor dixit.

While, especially the large banks are more in the business of obtaining their highest risk adjusted returns on equity, not by traditional lending but by minimizing capital requirements, that will simply not happen. And to believe it could, is just further proof of how naïve the current bank regulators are.

Taylor writes: “One of the lessons of the 2008 financial crisis was that watchdogs need timely information for the system as a whole.” Nonsense! The prime lesson from that crisis is that the watchdogs have no idea about what they’re up to. Imagine, just for a starter, their risk weighted capital requirements are based on such crazy theorem that holds that what is perceived as risky is more dangerous to the bank system than what is perceived as safe.

Sir, just as an example, we are talking of a “watchdog” that thought it was ok for banks to leverage 62.5 times if only a human fallible credit rating agency had assigned an assets and AAA to AA rating.

The “watchdog” seems to invest a lot of hope in “the Legal Entity Identifier [will] make it easier to track specific buyers and sellers” Ok, but what are they supposed to do with that? Make the risk weighted capital requirements for banks portfolio variant? Good luck with that! But please remember, bankers can screw up the portfolio of their bank, while regulators could do the same with all banks, simultaneously.

Taylor writes: “By 2017, only three of the 30 “global systemically important banks” were up to snuff” And so the question that has t be made is, could those three not be the most able to game it all? Like Volkswagen gamed carbon emission tests?

What to do? Although the road there is full of dangers, the final destination must be one single capital requirement (10%-15%) against all assets. No more distortions! 

Sir, again, I am amazed on how FT can, at this late stage of the game, still buy in so much into what the so utterly inept Basel Committee regulators try to sell. 

@PerKurowski

An all out war against inequality would be extremely harmful to us all.

Sir, Tim O’Reilly writes: “Clayton Christensen’s, “law of conservation of attractive profits” holds that once one thing becomes commoditised, something else becomes valuable.” And that “Hal Varian, Google’s chief economist, noted that ‘if you want to understand the future, just look at what rich people do today’. “People power, not robots, will overcome our challenges” October 20.

But I ask, does that not require a strong supply of rich and unequally wealthy, in order to power that demand for the new, that which majorities never generate? And, if so, does that not put a dent on the argument of: “the fundamental question of our economy today is not how to incentivise productivity, but how to distribute its benefits”?

Sir from this perspective the current all out war against inequality could be extremely harmful for all. For instance, as I have, unanswered, often tweeted to Mr. Thomas Piketty “Visit the Museum of Louvre in your Paris and try to figure out how much of it would have existed, had it not been for extreme inequality.”

And O’Reilly, as a source of jobs refers to that “there is the looming spectre of climate change”. Indeed but who is going to pay for the fight against it? If government takes on debts to fight climate change, who will volunteer to repay those debts tomorrow, whether we are successful or not? No one!

That is why I have argued so much in favor of creating a whole new generation of social incentives, which could help get the world to work in the same direction on at least some important issues.

For instance, if there was a huge carbon tax, which revenues did not go to the redistribution profiteers but were shared out equally among all citizens, then we could link up the fight against climate change with the fight against inequality, without affecting the remaining societal incentive structure… that which helps to create the inequality we need.

PS. And please never forget, just in case there will not be enough jobs tomorrow, to think about how we can create decent and worthy unemployments.

@PerKurowski

How a great bankers’ game show, got to be disastrously distorted by the Basel Committee.

Sir, I refer to Tim Harford’s interesting and fun article discussing probabilities based on Monty Hall’s ‘Let’s Make a Deal’ game shows: “Stick-or-switch inspires an onion of a puzzle” October 7.

In order to try to shed light on what I find so utterly disturbing with current bank regulations, let me then try use the example of an imaginary weekly-televised game among bankers, in which the contestants has to pick one of two boxes.

Box1 contains one 3 year $1 million loan to someone very safe at a very low interest rate.

Box2 contains one hundred 3 year ten thousand $ loans to many riskier borrowers but at much higher interest rates.

Which box would the banker contestant pick?

If he could analyze the second box in detail, the answer would clearly depend on if those higher interest rates seemed sufficient to cover the increased risk.

If the risk adjusted value at the end of the 3 years seemed the same for both boxes, or Box 2 produced only a slightly higher value, the ordinary risk adverse banker would surely go for “safe” Box1. Otherwise he would, he should, pick “risky” Box2, because that is precisely what bankers do… or at least did.

But that was not how bank regulators wanted that game to be played.

Considering bankers were not risk adverse enough, they wanted the contestants to pick Box 1 many times more and avoid Box2 much more; and to that effect they introduced risk weighted capital requirements.

That rule meant that if the banker picked “risky” Box2, while waiting for the 3 years result, he had to hold more capital (equity) than if he picked “safe” Box1.

As a result bankers would, from that moment on, prefer Box1 to Box2 much more; with what should have been expected consequences.

First to keep the game show going, many more boxes of the “safe” Box 1 type were needed, something that also meant the producers had to offer lower interest rates on the “safe” loans.

And in order to keep the audience interested, so that a Box2 had also a chance to be selected, the game show host also had to make sure to compensate the additional capital required, with still higher interest rates on the loans in Box 2; something which de facto made these loans even riskier.

What was the end result? Too many loans and too low rates were given to the “safe” and too few or at too high rates were given to the “risky”

For the bank system and for the real economy this was a disaster. Bankers would choke on “safe” loans to sovereigns, AAA rated borrowers or mortgages (causing crisis type 2007-8); and the economy would suffer from the “risky” SMEs or entrepreneurs lack of access to competitively priced credit (causing low growth).

Are we to appreciate these regulators interference? I don’t! 

@PerKurowski

The risk-weighted capital requirements, using Martin Wolf terminology, sound like voodoo Corbynomics.

Sir, Martin Wolf explaining, “Why has European social democracy been such a success?, [mentions the ] “government… must recognize the crucial role of incentives in shaping human behavior… [and] it must understand that the private sector, foreign as well as domestic, must play a leading role in the economy.” “The calamitous consequences of Corbynomics”, October 6.

I fully agree with that, but what I then cannot understand, is how Wolf is so utterly indifferent to the distortions produced by the risk weighted capital requirements for banks.

First, by allowing banks to leverage differently different assets, these create irresistible incentives for banks to finance what is perceived, decreed or concocted as safe; and to stay away from financing what is perceived as risky, like unrated SMEs.

Then by assigning a 0% risk weight to the sovereign it clearly states, loud and clear, that the government and its spending bureaucrats have the right to especially favorable bank credit, presumably because they allocate resources more efficiently than the private sector.

Sir, in Wolf terminology, that sure sounds like pure voodoo Corbynomics to me.

PS. The following link takes you to a litmus test all aspiring central bankers and bank regulators should take.

@PerKurowski

The financial packaging / securitization process includes an evil incentive

Sir, Patrick Jenkins in the Spectrum special “Financial crisis: 10 years on: Where are we now?” September 1 writes: “So great was investors’ appetite for these high-yielding MBSs and CDOs that mortgage companies lowered their underwriting standards to feed the securitisation sausage machine.”

Yes and no! First these MBSs had the additional quality of being rated by the credit rating agencies as very safe, AAA in many cases; and so in fact offered extremely high risk-adjusted yields, which made their great attractiveness perfectly logical. Naturally many investors would fall for these.

But then we have the problem with the securitization process itself. If you package something safe and sell it of as something safer, the profits are much smaller than if you manage to package something very risky and are able to sell it off as safe. So “mortgage companies lowered their underwriting standards”, not only because of the demand, but also because that allowed the original mortgages to carry higher interest rates, and so the profits of the packaging team would be larger larger. Here is how I have described that on my blog for more than a decade.

“If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy profit of $210.000”

@PerKurowski

In crossroads where some cars are allowed to speed through at 62.5, and other at 12.5, which would cause the greatest accidents?

Robert A Denemark writes: “the financial system provides incentives to engage in risky behaviour that tends toward crisis… It is a good idea to avoid accidents even when there are no traffic laws, but if vehicles collide there can be no official blame. Legitimacy, the focus of the editorial, comes from the recognition of most people that the rules make sense. Do they?” “Financial system itself makes crises likely” August 18.

Do current rules make sense? Let me answer that question this way: In that crossroad where bankers take decisions about credit, regulators allowed bank equity to be leveraged much more with the net margins if these came from “safe” borrowers than when produced by “risky” ones. For instance Basel II, allowed a 62.5 times leverage for the AAA rated and only 12.5 times for SMEs.

Sir, where would you think the biggest and most dangerous crashes could occur?

The 20% risk weighted AAA rated securities, and 0% to 20% risk weighted sovereigns, like Greece, is a good hint for you to come up with the right answer.

Sir, Bank regulators should learn about risk compensation and shared space philosophy.

@PerKurowski

Its worse! To central banks’ holdings of public debt we must add that of normal banks holding it against zero capital

Sir, Kate Allen and Keith Fray with respect to the QEs write that “The Fed’s balance sheet has expanded significantly several times in the past, including during the second world war when it soaked up debt sales in a bid to improve market conditions. But the current era is the first time in history that such a large group of central banks has undertaken such a substantial volume of co-ordinated buying over the space of nearly a decade.” “Decade of QE leaves big central banks owning fifth of public debt” August 16.

That’s not the only “first time in history” event. Thomas Hale and Kate Allen, in “Europe weighs potential ‘doom loop’ solution” write “A critical factor in deciding demand for sovereign bonds is risk weightings, which determine how much capital a bank needs against its investments in different kinds of asset. Sovereign bonds in Europe have benefited from a zero risk weighting, making them highly attractive to banks, many of which borrowed cheaply from the European Central Bank to buy sovereign debt after the crisis.”

That should make clear for anyone not interested in hiding it that, to whatever public debts the central banks hold, we must add those that all banks hold only because they are allowed to do so against zero capital. Q. What is a 0.1% return worth if you can leverage it 1000 times? A. 100%

Sir, as I have told you umpteenth times before, in 1988, one year before the Berlin wall fell, that which was taken to be a big blow to statism, bank regulators, through the back door, introduced a zero risk weighting of sovereign debt. The statists have been playing us for fools ever since.

And now, when reality is catching up, they want to package and hide all this public debt in some securities they have the gall to name these European Safe Bonds “ESBies”, issued in order to “make the continent’s financial system safer”. Or, as Gianluca Salford, a strategist at JPMorgan disguises it, to “transport sovereign risk to a place where it’s more manageable”.

Sir, try to sell all central banks’ and banks zero weighted held public debt into a free market and see what rate you get. Taking current artificial public debts for real, or for being revenue neutral rates, or for being risk free rates, or for justifying public investment in infrastructure, is either stupidity or a shameful manipulation of truth. 

Sir, the day our citizens discover what is being done by these statist they will flee all sovereign debts and governments will be left, like Maduro in Venezuela, with central banks that can only print money to keep the can rolling and rolling until…

PS. Mr Salford argues: “Securitisation is not an innately bad thing — it can be used well as a stabilising source” No! If securities are sold at their correct securitized risks they do not provide remotely as much profits as those sold incorrectly offering securitized safety. In other words, suffering from innately bad incentives damns these.

@PerKurowski

Current bank regulations also guarantee Canadian covered bonds will have more demand than Italian.

Sir, Thomas Hale while explaining the appetite for Canadian covered bonds quotes Michael Spies, a strategist at Citi with: “I’m buying a collateralised bank bond rated triple A, from a bank which is rated double A, in a country which is rated triple A,” he adds. “Now let’s put this together and compare it to an Italian covered bond.” “Canada’s housing rally owes a debt to Europe” July 12

That is not the whole story. Those Canadian covered bonds can, as a consequence of the risk weighted capital requirements, be held by banks against less capital than those “risky” Italian ones; and so therefore the banks can multiply their equity with more Canadian net risk margins than with Italian; and so banks will earn higher expected risk adjusted returns on equity with the Canadian than with the Italian; and so the Canadian covered bonds, when compared to the Italian, will have more demand than these would have had in the absence of the risk-weighting, and the Italian less.

That the distortion in the allocation of bank credit to the real economy the risk-weighted capital requirements for banks cause is not more discussed, is one of the great mysteries of our times.

PS. I was kindly informed of that "The risk weighting for a highly rated Italian covered bond is actually significantly lower (10%) than for a Canadian covered bond of the same rating (20%). This is because the European legislation (CRR) affords preferential treatment to issuers in the European Economic Area." I did not know that, but it sure makes me question whether Canada is aware of that it is subjected to this kind of European regulatory protectionism. 

@PerKurowski

Are those who impose regulations that create generous incentives for these to be gamed entirely without blame?

Sir, Brooke Master while discussing regulations for carmakers and banks refers to “mis-sold mortgage-backed securities and payment protection insurance” “The diesel scandal echoes bankers’ woes” July 27.

The regulators, with Basel II of 2004, allowed banks to leverage 62.5 times if a AAA to AA rating was present… while for instance only 12.5 times if there was no credit rating. That temptation set up the banks to, sooner or later fall into a trap. Are these regulators innocent?

In the same vein carbon emission controllers set up procedures that evidently could easily be cheated on. Are these controllers also entirely innocent?

I ask these questions because from what we have seen neither regulators nor controllers have been demoted, on the contrary, at least with respect to banks many, like Mario Draghi and Stefan Ingves, have been promoted.

Had the credit-rated-risk-weighted capital requirements for banks that distort the allocation of credit to the real economy not been introduced, the 2007/08 crisis and the ensuing slow growth would not have happened.

If a country decides to impose a 1.000% tax on liquor, does it not have any responsibility in that its citizens (including its legislators and tax collectors) start smuggling liquor?

@PerKurowski

So now European small businesses are being exploited like "subprime" buyers of houses were

Sir, Robert Smith writes: “‘It’s not quite 2006, but it does feel a bit like we’ve heard this script before’” “Europe looks to repackage bank debt: Return of securitisation coincides with concerns over slipping standards”

He sure has, or should have heard it! That because the incentive structure in the process of securitizations is as bad as they come.

If you take very good credits, let us say A+ rated, and you package it so it comes out an AAA rated security, you might have done a good job but it will not earn you much.

If on the other hand you manage to package a lot of substandard BB- loans into an AAA rated security, then you will make fabulous commissions when selling these into the market.

It was precisely that which originated the AAA rated securities backed with mortgages to the subprime sector in the USA, and which caused the 2007/08 crisis.

The worse and higher paying interest mortgages you cant put into these securities the better for the whole team was the rallying cry. In the end those buying their homes with these mortgages and those investing in these securities, they were all defrauded by a wrong set of incentives. 

So now the small businesses and entrepreneurs in Europe, those who are risk weighted by the regulators at 100%, will be packaged into securities for which “double-A credit ratings were most likely” and thereby seeing their risk weight magically reduced to 20%.

Will this in any way shape or form really benefit European SMEs and entrepreneurs? The answer is if so, certainly very few of them.

What Europe needs is to get rid of the risk weighted capital requirements for banks, those that have so profoundly distorted the allocation of bank credit to the real economy. Then your bankers will be forced to become bankers again; maximizing their returns on equity by normal lending, to all, and not by minimizing their capital requirements.

PS. Here’s some numbers on the prime subprime deal! If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the Joe mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy and instantaneous profit of $210.000

@PerKurowski

To sell the Paris Climate Agreement as a real solution to our pied-a-terre’s environment problems, that’s a disgrace

Sir, Pilita Clark writes: “Mr Trump has exposed the fragile nature of the Paris accord. Countries face no legal obligation to meet any emissions-reduction target in their national climate blueprints, including the US. Nor is there anything legally to prevent them from submitting weaker plans” “US dithering exposes fragility of Paris accord” June 1.

If so then all those who sell us the illusion of the Paris Climate Agreement being a real solution, are more in fault hanging on to it, than Trump reneging it.

I have of course not read the Agreement. Who has read it all? To me this type of global agreements too often just feeds crony statism. To me this type of global agreements becomes too often just another photo-op for politicians.

To have a chance to really dent the environmental problems of the world, we need to come up with incentive structures that are green-profiteers proofed. Otherwise we will most probably not be able to afford it.

My preferred solution is to send the right market signals by means of for instance carbon taxes, and distribute all those revenues to all citizens in order to compensate for the increased costs. That would help many citizens to contaminate less, while affording to do more of something else they could want.

Another example: The Economist writes: “Climate policy, a jerry-rigged system of subsidies and compromises, in America and everywhere, needs an overhaul. A growing number of Republicans want a revenue-neutral carbon tax. [Like the one I suggest] As this newspaper has long argued, that would not only be a better way of curbing pollution but also boost growth. A truly businesslike president would have explored such solutions. Mr Trump has instead chosen to abuse the health of the planet, the patience of America’s allies and the intelligence of his supporters.” “The flaws in Donald Trump’s decision to pull out of the Paris accord”, June 1.

The question is then: Why does The Economist not denounce the Paris Climate an Agreement for what it is, a political convenient illusion of a solution? Just because being against Trump trumps all other considerations?

http://ourpiedaterre.blogspot.ca/2017/04/solutions-that-share-out-all-benefits.html

@PerKurowski

How many university professors know they are educating kids for jobs not to be had?

Sir, Mo Ibrahim writes: “the more time young people in Africa spend in education, the more likely they are to be unemployed… It highlights the worrying mismatch between the skills our young people are taught and those needed by the contemporary job market. This is a recipe for frustration and anger” “Africa’s youth, frustrated and jobless, demand attention”, April 13.

Scary! But it is even scarier if we connect this to Rana Foroohar “Dangers of the college debt bubble”, April 10 and Alex Pollock’s letter of April 12, “Colleges are acting like subprime loan brokers”.

A question. In our universities how many of the professors might be aware of the slim chances of their students’ landing a job in the future that will allow them to service their student debt and have a life… and still say nothing?

In many occasions over the years I have written about the needs to better align the remuneration of professors, at least their pensions, with the future of their students.

It is amazing to see so many professors criticizing bankers for poaching their clients while they de facto behave just the same. Load up the kids with loans, so that we can collect (bonuses) today! 

It will not work, and it will come back and bite us all.

PS. If I owed a student loan I would ask for a debt to equity conversion, offering a percentage of my after tax earnings over a certain amount for a definite number of years.

http://teawithft.blogspot.com/2010/04/if-incentives-are-correctly-aligned-all.html

http://onechildonevote.blogspot.com/2007/01/should-not-higher-education-be-more-of.html

PS. We need worthy and decent unemployments

@PerKurowski

Anything that might weaken the future real economy, destroys pensions which depend more on tomorrows than on todays

Sir, Tim Harford argues “it’s far from clear that the Bank really is destroying pensions. It is true that low interest rates make future obligations loom larger in today’s company accounts. This creates a problem for any pension scheme. But, on the other side of the equation, low interest rates have boosted the value of shares, bonds and property and thus the value of most pension schemes” “Carrots with bite” September 24.

What? Does the Undercover Economist believe that lifting short-term the values of shares, bonds and property has much to do with the long-term value of those assets when they need to be liquidated so as to fulfill retirement expectations? 

Harford writes “Pensions campaigner Ros Altmann recently launched an eye-catching attack on the Bank of England for paying generous pensions to its own staff while undermining everyone else’s retirement plan.” Of course central bankers, and bank regulators, should be held much more accountable for what they do to the economy… and not only by pensioners but also by those needing the jobs that Andy Haldane comments with: “I sympathise with savers but jobs must come first.”

The risk weighted capital requirements, which give banks clear incentives to only refinance the safer past and stay away from financing the riskier future, will hurt both the pensioners when trying to sell assets into a sinking economy, and the young who need jobs in order to at least conserve an ilusion of a decent retirement. 

Harford writes: “The basic principle for any incentive scheme is this: can you measure everything that matters? If you can’t, then high-powered financial incentives will simply produce short-sightedness, narrow-mindedness or outright fraud.”

Harford should really read a recent working paper published by the ECB, “The limits of model-based regulation”. That describes what should go wrong, if you allow banks, by mean of their own complex risk models, to set their own incentives. Perhaps with that Harford who like so many other with close to willful blindness trusted Basel’s risk based regulations, will see that some other than little me, are now reluctantly beginning to have some serious doubts.

@PerKurowski ©

Could Gillian Tett possibly find something positive in removing the incentives for banks to lend to SMEs and entrepreneurs?

Sir, Gillian Tett, discussing whether to have or not to have bins, as these could be used by terrorists writes: “Losing them shows …– that trust and confidence can unravel in the face of terrorism and fear. Indeed, the symbolism is so stark that I am tempted to argue that it is a mistake to “give in” by removing those bins; in statistical terms, the risk of actually dying in a terrorist bomb attack is exceptionally small.” “Don’t throw our bins away” September 24. 

Well, the risk of having a bank crisis resulting from excessive exposures to what was ex ante perceived as risky, is exceptionally small, I would say none. Yet bank regulators clearly gave in to some imagined fear and decided the capital requirements for banks should be much higher for what is perceived as risky, than for what is much more dangerous, namely what is perceived as safe. 

And contrary to how Ms. Tett might find something positive in the removal of bins, and which with one could agree, I cannot understand what positive one could possibly find in removing the incentives for banks giving loans to “risky” SMEs and entrepreneurs; those who in fact most need bank credit; those who we in fact most want to have bank credit, so that our economies do not stall and fall. 

Perhaps Ms. Tett would be interested in reading a recent working paper published by the ECB, “The limits of model-based regulation”. It shows that some of those who like Ms. Tett with close to willful blindness trusted Basel’s risk based regulations, are now reluctantly beginning to have some serious doubts. 

@PerKurowski ©

As banks “pressure employees to hawk products”, regulators pressure banks to odiously discriminate against the risky

Sir, John Gapper writes about “the intense pressure Wells Fargo placed on employees to hawk products” “Wells Fargo reaches the end of its journey” September 22.

But, by means of the risk weighted capital requirements for banks, regulators have placed much pressure on banks to lend to what was perceived, decreed or concocted as safe; because that’s were they could leverage the most their equity; because that’s where they could earn the highest expected risk adjusted returns of equity; and so banks end up with excessive exposures to residential home financing, AAA rated securities, loans to sovereigns like Greece and other such fancy safe stuff.

That created also a de facto immoral regulatory discrimination against the access to bank credit of those who ex ante are perceived as “risky”, like SMEs and entrepreneurs. I place quotation marks around risky because in fact, by being perceived as that, they are never as dangerous to the bank system than what is perceived as “safe”.

Incentives are temptations, aren’t they? 

@PerKurowski

​​FT, without fear and favour, take a long hard look at the incentives regulators dangle before banks

Sir, while discussing some possibly very shady FX operations, you correctly suggest that “the whole banking industry should take a long hard look at the incentives it dangles before traders” “HSBC case is another blow for trust in banks”, July 22.

But, why do you so steadfastly refuse to take a long hard look at the incentives the regulators dangle before banks?

By allowing banks to hold less capital against what is perceived decreed or concocted as safe than against what is perceived risky, banks can leverage more their equity, and the support they receive from the society, with the “safe” than with the “risky”.

And that incentive means banks can expect higher risk adjusted returns on what’s “safe” than on what’s “risky.

And so that incentive means banks will lend too easily to what’s safe and too little to what’s “risky”

And so because of that incentive the “safe-havens”, like lending to the sovereigns, the AAArisktocracy and financing houses will, sooner or later, become overpopulated, and therefore very risky.

And so because of that incentive the “risky-bays”, like SMEs and entrepreneurs, will be less explored and, in order to compensate for the discrimination, will have to pay more for credit, which makes these riskier yet.

And so because of that incentive, today billions in bank credit will be awarded in too favorable terms to those who do not deserve it, and thousands of SMEs and entrepreneurs will see their applications refused.

And so because of that incentive the real economy is mostly fed with carbs that makes it obese, and does not receive enough proteins to remain muscular.

Sir, what incentives do someone dangle before FT to have FT being so mum about these so horrible incentives that so distort the allocation of bank credit to the real economy… and all for nothing!

@PerKurowski ©

Is not graduation time a bit late to inform students: “There is more to university than money”?

Sir, Nancy Rothwell, the president and vice-chancellor of the University of Manchester, writes: “Each year I tell graduating students that if they leave university with only a degree and greater “earning power”, I consider we have failed them. A university experience should be about so much more than this.” “There is more to university than money” April 16.

Absolutely! But is not graduating time a bit late to disclose that? How much debt would students dare to take on in order to pay the tuition fees, if the request of admission papers contained a: “Warning, universities are more than about making money”.

By the way, has there recently been some academic research on the evolution of the remuneration of professors? These Piketty days, it would be interesting to see how that has evolved.

In 2007 I argued that higher education should be more of a joint venture between professors and students. Of course I did not mean all the professors’ salaries were to be based on the earning powers of students. As I said, I fully agree that universities are much more than that, but, some better alignment of incentives, seems to be much called for.

It would seem that just like easy house financing translates into higher house prices, easier education financing just translates into higher tuition fees. But, I may be wrong, so as I said research is needed… any papers coming up on this?

PS. Someone commented. "There must be a little sadism involved here, since graduation time is precisely when students most begin to think of money."

@PerKurowski ©

Tim Harford. Avoiding the risky and embracing the safe, is that a good New Year resolution for banks at the Basel gym?

Sir, Tim Harford, a self-declared undercover economist, writes about incentives in “How to keep your gym habit” February 6. It is very interesting but, as an economist writing for FT, he should perhaps be more interested in the incentives that guide the actions of our banks.

The regulators, by means of risk weighted capital requirements; which allow banks to leverage more with assets perceived or deemed safe than with assets perceived risky; which allow banks to earn higher expected risk adjusted returns on equity with assets perceived or deemed as safe than with assets perceived as risky; have created great incentives for banks to stay away from what’s “risky”, like the SMEs and entrepreneurs, and to embrace what’s “safe” like sovereigns, the AAArisktocracy and housing.

To me, also an economist, that would, in terms of a gym, indicate incentives for banks to stay away from anything that could break out a sweat; and in terms of a diet, to stick with chocolate cake and forget the spinach.

Short term everyone but “the risky” can love it; higher expected risk adjusted profits on what’s safe than on what’s risky sounds like a banker's wet dream. But, in the not so long run, that is clearly unsustainable and will cause a dangerous increase of obesity among banks and in the real economy. 

And so, in the particular case of banks, it is not that the incentives don’t work, it is the New Year resolution imposed on banks by the Basel Committee that is plain wrong.

@PerKurowski ©

If the incentives are correctly aligned all bonuses make sense.

Sir, John Kay in “When a bonus culture is just a poor joke” April 28, that he would have felt insulted if as a teacher he were to receive a bonus from a student on the successful completion of a course.

Why should he feel that way if the incentives were well aligned? You see it is really not the completion of a course that matters, as Kay seems to believe, but what you do in life with that completion. In this respect let me share with Kay some brief paragraphs I posted on one of my umpteenth blogs a couple of years ago.

Don’t give your teacher an apple; offer him a couple of basis points in your earnings instead.

Parent and students need some way of sorting through the reams of college information in order to make rational investments, but may I remind you that even when finding the absolute perfect college that you might benefit from aligning the incentives better.

In this respect what I am currently recommending my young friends when they take off for their MBA is that they offer a couple of basis points on their first 10 years earnings to those teachers they feel could best advance their careers…it makes wonders! 

Aligning the incentives could in the long run also be the best way of getting information for the picking of a college to, as education should in fact be a joint venture between students, teachers, and colleges.

Don’t just pick on the fallen bankers.

Sir it is clear as Martin Wolf writes “Reform of regulation has to start by altering incentives” June 24. That said it is hard to understand exactly what incentives Wolf is referring to since most of the problem he describes are an intrinsic part of the realities of banking and therefore, if he just wishes to eliminate banks and go for safe mattresses instead, then he should perhaps say so.

The incentives I most worry about are those arbitrary incentives created by the regulators in Basel and that state among others that if a bank lends to a corporation without a credit rating it can leverage its capital 12 to 1 but if lending to a corporation that has managed to obtain a credit rating of AAA to AA- then it is allowed to go for an incredible leverage of 62.5 to 1… and as if the good risks needed additional subsidies.

Talk about incentives to pursue the AAAs! With incentives like these no wonder many of the AAAs weren’t for real. Like many, Wolf also expresses concern about the “too big to fail banks”. Had he participated in the few debates prior to the approval of Basel II in June 2004, he would have known that this was exactly one of the major concerns and that unfortunately was finally brushed aside.

We know that the bankers are down for counting so it is understandably tempting to pick on them but please let us first and foremost go after on the truly horrendous regulatory incentives which perhaps are also easier to correct.