Showing posts with label incestuous relations. Show all posts
Showing posts with label incestuous relations. Show all posts

October 01, 2013

At long last, the truth about the incestuous relation between banks and sovereigns, is coming out of the closet

Sir, at last someone in the highest spheres, Jens Weidmann, the president of the Deutsche Bundesbank, speaks out. In “Stop encouraging banks to load up on state debt” October 1, he dares to admit that the banks’ “Sovereign exposures are privileged by low or zero capital requirements”

What Weidmann now denounces is that viciously incestuous relation I have denounced for more than a decade and which can be described in terms of: “I government allow you banker to lend to me without capital, and I in my turn will guarantee your obligations to the market” 

And as Weidman daringly admits: “This undermines market discipline for governments and reduces their incentive to carry out the necessary reforms” and “banks, which can obtain unlimited cash against sovereign collateral from the central banks, are protected from discipline from investors who provide the funding.”

In this respect let me remind you of my letter to you, published on November 18, 2004, and which said:

Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits. Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters

As an Executive Director at the World Bank 2002-04, I also protested loudly against privileging the sovereign, but to no avail.

Over many years I have not seen anyone in the Financial Times even mentioning the issue of how privileging so much the sovereign, and others like the AAAristocracy, completely distorts the allocation of bank credit to the real economy. I must say that speaks quite badly about your journalists, unless of course you want to excuse them by having to push a political agenda.

So will some of them now, again, bash Jens Weidman’s rational arguments for being excessively austere?

Of course, Mr. Weidman seems to just recently be waking up to the problem, and is not yet totally clear about it. For instance when he states “No market participant would judge a French bond to be as risky as the Greek one: the riskiness of each is reflected in their prices” he is probably not aware that he is with that really explaining why the whole idea of setting capital requirements for banks, based on an ex ante perceived risks, as Basel regulations does, is so utterly dumb, and only dooms banks to overdose on perceived risk.

December 18, 2009

Sheer regulatory lunacy!

Sir Anousha Sakoui in “S&P in rating threat to covered bonds” December 16, writes that these bank issued will be rated among other based on “the likelihood of government support”. Given that governments appoint financial regulators who now use the credit risk ratings issued by the credit rating agencies to decide how much equity banks need to have, presumably so that the banks won´t fail and the governments will not have to bail them out, it is absolutely crazy that the credit rating agencies when rating the risk also measure the government´s willingness to bail out the bank. Is this dangerous and incestuous circle of opinions not sheer lunacy?

November 24, 2008

We need to diversify our portfolio of regulators.

Sir Walter Maatli and Ngaire Wood in “Who watches the watchdog?” November 24, and in reference to our current financial regulators say that “The Basel Committee is dominated by central banks. They do not represent the broad range of interests likely to be affected by bank failure. They are not politically accountable… many have a culture of discretion and secrecy, rather than of transparency and openness to public scrutiny.” This is indeed a source of problems. We cannot afford to have the regulations of our financial systems correlated exclusively to the risk-adverse brainwaves of one special brand of regulators.

But, when they suggest the use of the Financial Stability Forum (FSF) as the check-and-balance for the regulators I must alert that just widening its country representation could perhaps not suffice, since the sole fact that new members could come from different geographical areas does not guarantee any less correlation. Often the new are completely correlated with the old by means of having gone to exactly the same courses with exactly the same professors using exactly the same financial models and that rely on exactly the same financial data.

September 19, 2008

Worse than the admiration of the golden calf is the mutual admiration between the golden calves.

Sir David Bodanis in “How we were all blinded by the golden calf”, September 19, says “Raise an institution such as the unfettered financial world to the role of an idol and you are not critical of anything it does.” He is right though I would have to add that even more blinding than that is the mutual admiration between the golden calves.


Suffice to look at how all our financial regulators belong to the same club, with all the members having exactly the same set of mind and priorities in life namely “whatever… except for a bank-default, on my watch”; and where even those who are supposed to provide regulators with oversight overwhelmingly belong to the same club.

How is a club of mutual admiration born? One way is to create a debate forum reserved for “the world’s most influential economists” and then make sure that you never analyze why the members of the group did not help to influence in averting disasters like the current financial crisis.

March 30, 2007

Incest and irony

Sir, by reading your “CPDOs add more complexity”, March 30, that states “The rating agencies are key to creating the [financial] products” and that “The “agency is working with numerous banks on various deals”, one must realize how the rating agencies have in fact themselves become more and more a part of the same product they are rating. This does present the potential for some very incestuous relations and given that so much of the decision power about where the financial flows in the world should go has been (stupidly and arrogantly) deposited in the hands of very few credit rating agencies, this is without any doubt something extremely dangerous.

Now also, while observing the ever growing financial complexities, one cannot but reflect on how ironic it is that the whole financial world is currently holding its breath, just because some extremely primary and basic mortgage lending seemingly went haywire. Could it be time to ask all those experts that work so diligently in their financial laboratories, to take a short respite, and walk around in the real world for a while?