Eliminating bank failures by means of risk-weighted capital requirements, just sounded too good to be questioned.

Tim Harford discussing statistics writes: “We often pay attention to the wrong thing, scrutinising the numbers with a forensic eye without asking about what those numbers really describe. Sometimes there is no intent to deceive; there doesn’t need to be… We deceive ourselves… If we don’t understand the definition there is little point in looking at the numbers. We have fooled ourselves before we have begun.” “Where the truth lies with statistics” May 13.

Indeed and one of the reasons we fool ourselves is that what those statistics are supposed to offer us, sound so attractive that we ignore to look to closely at them.

Basel I and II offered: “In order to make your banks safe we are going to require these to hold capital based on the risks they take”. Who would say no to such an offer? It sounded so attractive that all were willing to overlook that the formulas and calculations provided had nothing to do with the failure of banks, but all to do with the failure of the clients of the banks, which of course is pas la meme chose.

The Basel II offer also included: “And if you order now, we also throw in, for free, those few experts that can expertly decide for all of us what’s risky or not, namely the credit rating agencies”

Basel III now offers: “And if you order now, we also throw in, for free, some liquidity weighted assets requirements holdings that will guarantee banks have the money available to repay when asked”

In short, because regulators offered the moon, the world was gladly disposed to accept anything, even if it would be something like going back to a geocentrically view of the world.

As long as bank regulators, even in the face of failures, are capable with such straight faces insist in that they can make our banks safe, it seems we can’t refrain from believing them. Sir, we are indeed a sorry bunch.

PS. Here are some questions that seemingly are not to be made less we must abandon our hopes that regulators know what they are doing.

@PerKurowski

Banks are dangerously overpopulating the traditional save havens of widows, orphans and pension funds.

Sir, Attracta Mooney quotes Pascal Blanqué, deputy chief executive of Amundi, stating: “QE has proved a mixed blessing. It prevented a 1929-style depression after the collapse of Lehman Brothers in 2008. But it has also delivered unintended consequences for longterm investors. The challenge for policymakers is to address them.” “QE ‘acted like an opaque tax’ on pension funds” November 2.

Again someone is speaking about unintended consequences, instead of referring to what obviously should have been expected consequences.

With QEs injecting liquidity into safe investments; with bank regulations awarding huge incentives through the capital requirements for banks to finance what is safe; with bank regulations awarding additional huge incentives through liquidity requirements for banks to hold what is safe, and with sovereign debt having been decreed as ultra-safe and assigned a zero risk weight, there can be no doubt that the financial safe havens of the world are bound to become dangerously overpopulated. Where is a widow or an orphan to take refuge nowadays… in Argentinian railroad projects?

@PerKurowski ©

Our economies are drowning for lack of oxygen in overpopulated safe havens.

Sir, I refer to John Dizard’s “Central banks enlist ageing populations in the competitive devaluation game”, March 28.

Dizard discusses Bank of Japan’s paper “Demographic Changes and Macroeconomic Performance — Japanese Experiences”; IMF’s “Is Japan’s Population Aging Deflationary?” and a paper by BIS titled “Can Demography Affect Inflation and Monetary Policy?”

One aspect not discussed in connection to this demographic change, is that since increased risk-aversion goes with the investment objectives of an aging population, the demand for safe havens relative to risky bays should be increasing.

Add to that the sad fact that bank regulators decided, on their own, that it was more important for our banks to avoid risks instead of to allocate bank credit to efficiently to the real needs of the economy, that of course also adds immensely to the demand for safe havens.

And it is only getting worse. Now by means of added Basel III liquidity requirements for banks, and Solvency II regulations for the insurance sector, which all-predicates risk-aversion, the demand for what’s “safe” must grow even more.

And, since any safe haven can become extremely dangerous if overly populated, it should be clear that an amazing scarcity of financial safety is lurching around the corner. Poor widows and orphans financially they will be more widowed and orphaned than ever.

But also poor the coming young generations, those who will be denied that societal risk-taking that could help them to have a good future with plenty of jobs.

@PerKurowski

Investors driven out of safe investments by bank regulations and QEs, are they yield-hungry or just yield-starved?

Sir, Tracy Alloway and Michael MacKensie write that “Sales of US corporate bonds reflect a worrying lack of ratings differentiation” and they title that “Yield-hungry investors overlook credit risk” September 19.

All Fed’s QE’s, as well as the risk-weighted capital requirements for banks, as well as the upcoming liquidity requirements for banks, as well as much other risk-adverse regulations, only end up crowding out normal investors from what is deemed as “absolutely safe”, that which used to be said belonged to widows and orphans. 

And in that respect I wonder if “yield-hungry” is really the correct description of investors who seem more to have been yield-starved by official governments actions.

But also, let us not forget to ask ourselves… when can the extremely safe havens become so extremely dangerous crowded, so that suddenly the risky waters outside are actually safer?

And, is it not sad to read that increased corporate leverage is not resulting from increased real economic activity but only from “the combination of share buybacks dividend increases and M&A activities? I bet some years from now some authorities will once again try to explain that to us as just the result of “unintended consequences”… let us not be fooled by that… at least to me they are guilty, until they proved beyond any reasonable doubt it was not their intentions… or they plead insanity :-).

Why is FT such an apologist of absolutely failed bank regulators?

Sir, referring to “a new post crisis world marked by tougher regulation and supervision”, you end with “If bankers are to regain public trust, they must learn the lessons of the past”. “Bankers brace for a brave new world” August 23. 

Excuse me… what lessons of the past? Those lessons regulators themselves have not understood yet and therefore, with their risk-weights, they keep on shepherding banks with little equity into corrals where the most dangerous “absolutely safe” wolfs stroll freely?

Brave world? What a laugh, with now also Basel III liquidity requirements, it sure looks just like the world with too many too frightened nannies of lately? 

PS. FT reporters... dare to ask The Question!

Do not help banks play the liquidity card trying to avoid higher leverage ratios

Sir, Daniel Schäfer begins his “Fix the contradictory rules pushing banks to be riskier”, of August 6, with the question “Can regulations make banks less safe?” And the answer is: Absolutely!

The current crisis was entirely the consequence of bank regulations, primarily Basel II, which allowed banks to hold extremely little capital/equity when lending to or investing in what was perceived as absolutely safe; which meant that banks could earn amazingly high expected risk-adjusted returns on equity when lending to or investing in what was perceived as absolutely safe; which meant that banks went overboard lending to or investing in what was perceived as absolutely safe, like to “infallible sovereigns” and the AAAristocracy; and which finally meant that when the problems arose, like with loans to Greece or with investments in securities collateralized with lousily awarded mortgages to the subprime sector, the banks stood there completely naked without any capital/equity.

The leverage ratio is a tool now used to correct somewhat for the above described miss-regulation, and some banks simply do not like it since it requires them to hold more capital/equity.

From reading Schäfer’s article, it is clear some banks are playing the liquidity card in trying to avoid the threat of even higher leverage ratios, as those proposed for example by Thomas Hoenig of FDIC. I hope the regulators, and the press, do not fall for this dirty trick.

Liquidity for banks was usually provided by the central bank’s discount window, and all it took for the bank in order to access that window, was to have good assets, of basically any kind. The underlying problem with Basel III liquidity requirements, is that is does nothing to solve the problems of Basel II, but layers on new regulations which are also basically based on ex ante perceived risks, on top of the old capital requirements, and thereby distorts and confuses even more.

Schäfer also writes banks will now as a consequence of adjusting to leverage ratios have zillions less in government bonds and deposits in other banks, but the real question is, why should banks have zillions in this type of investments? And what about all the absolutely essential loans to “The Risky”, like the small and medium businesses and entrepreneurs that are not given precisely because of the absence of a non-discriminatory and all encompassing leverage ratio? That to me sounds like a much more important issue, in order to make the real economy less risky, and which is really the best way of making our banking system less risky.

Is John Gapper of the Financial Times now censored? If so I urge him to rebel, “without fear”

Sir, John Gapper writes “banks do not have the capital to spare but institutional investors and some wealthy countries do”, but that “such investors are not risking money on entrepreneurs”, and so “the bulk of current dealmaking has little or nothing to do with the real economy”, “Money, money everywhere – except the real economy”, February 9.

Obviously, in a world with very scarce bank capital, the result of banks having been allowed to hold very little capital against what was erroneously perceived as absolutely not risky, whatever lending which requires the banks to hold more capital, like to the “risky” the real economy, will be the most affected. As a result, more than lack of capital, it is bank regulations that are keeping banks out of the real economy.

And this can become much worse if the loony regulators, with their Basel III, are now allowed to also impose liquidity requirements on banks based on preferring “The Infallible” and avoiding “The Risky”.

What I cannot understand is how John Gapper, who must very well know of this, can write his article without even mentioning this fact of overriding importance. Might he be one way or another censored by someone in FT? If so I urge him to rebel, "without fear"

“Under distortion”

Sometimes I like to peek at sites with an “Under construction” sign to have a look at how things go. Nowadays one can also get a look of “Under distortion” market sites, like thanks to Tracy Alloway’s and Nicole Bullock’s “Banksoffer debt product to help skirt new liquidity rules” January 30.

An nescis, mi fili, quantilla prudentia mundus regatur? Axel Oxenstierna, 1583 – 1654

Do they really trust credit rating agencies less?

Sir, Claire Jones and Robin Harding quote Frederic Mishkin of the Fed saying on August 7, 2007 “The point of the subprime market is just that we now trust the credit rating agencies less,” said Frederic Mishkin. “Fed red-faced as notes reveal officials failed to grasp dangers of 2007” January 19. 

Is Mishkin really sure about that? Last time I looked the Basel Committee for Banking Supervision, on top of the capital requirements for banks based on perceived risks, and as perceived fundamentally by credit rating agencies, and which remain firmly entrenched, are now adding a layer of liquidity requirements also based on perceived risks, and also as fundamentally perceived by credit rating agencies.

When are our utterly naïve regulators going to wake up to the fact that in banking it is what is perceived as safe which can cause most risk since what is perceived as risky takes perfectly care of itself?

Basel Committee tightens the rules on those they do not want banks to lend to

Sir, Brooke Masters reports that the Basel Committee for Banking Supervision has decided to allow “a broader variety of assets, including some equities and all investment grade corporate bonds” to count as part of the liquidity banks will require to have; and she titles it “Basel Committee relaxes liquidity rules for banks” January 12. 

Though the title is technically correct, no doubt, an alternative title would be “Basel Committee tightens the rules on those they do not want banks to lend to”. And that title would be much more significant, since it would directly address one of the most destructive consequences of the Basel Committee’s bank regulations, namely that by giving preferences to “The Infallible” they are odiously discriminating against “The Risky”, and who are, acting on the margin, often the most important actors of the real economy. 

Of course, another title could be that if “The Basel Committee’s Inspector Javert, keeps on fanatically pursuing The Risky”

Basel III sends some back into overheated ovens while leaving others out in arctic colds.

Sir, Mary Watkins and Ralph Atkins title their report on the Basel regulators allowing “highly rated…securities backed by mortgages on homes to be included in liquidity buffers that banks will have to hold”, as “Mortgage-backed securities come in from the cold” January 11.

Has everyone already forgotten that it was precisely that kind of regulations, the allowing of absurd low capital requirements for this type of highly rated securities that set us up for the current crisis? And now the regulators want to send these securities back to the ovens, even increasing the temperature by adding the liquidity requirements based on perceived risk? Sincerely the regulators remain as loony as back in June 2004 when they launched their Basel II!

And, again, where do the regulators get to think they are authorized to send those who because they are perceived as “The Risky” already find themselves in the cold, into extreme arctic colds? Can’t they understand that “The Risky”, the unrated or the not- so-good-rated small and medium business and entrepreneurs, are those we most need to care for and nurture when the real economy goes through difficult times? Sincerely, in the name of all those who will not be able to find employment because of these regulations…Damn the regulators!

In banking the stable doors have not been shut behind the horses, much the contrary.

Sir, John Kay writes about: “The enduring metaphor of regulatory policy is the noise of stable doors being firmly shot behind the horse”, “Leveson should have learnt the lesson of the banking crisis”, January 5. 

Sorry, in the current case that metaphor is not applicable. By keeping capital requirements which are much lower for bank exposures perceived as “absolutely not risky”, than for those perceived as “risky”, and regulators now even making it worse with liquidity capital ratios also based on perceived risk, the doors to the stable are kept wide open, and the few strong calm heavy horses that remain in the stable, are also being frightened into running out, which they will do... sooner or later… because even the safest haven becomes a mortal dangerous trap if overpopulated.

PS. If we humans are supplanted by robots, are we doomed to join Jethro Tull’s “Heavy Horses” in retirement?

PS. If the use of horses by Border Patrol officials in Del Rio, Texas, has now been suspended, will these Border Horses follow the Heavy Horses into history?

Basel is now only increasing the regulatory discrimination of “The Excluded Risky”

Sir, imagine a father with five sons who has declared he just loves the oldest one. Clearly the other four are not happy about that. But now the father declares that he also loves the second son. Will the three remaining unloved sons feel better or worse?

That is the question you have to answer when trying to interpret the meaning of the announced relaxation of the Basel liquidity rules for banks.

Lex in “Basel tov”, January 7, believes that this relaxation should make it “less likely do deter financing of activity in the real economy”. 

Not so! The distortions in the markets in favor of “The Infallible” and against the excluded “The Risky”, will increase. And that could only worsen the conditions in the real economy, as those who represent the least risks for banks, are not necessarily the most important actors on the margin of that economy.

Let me phrase it like this: In the real economy the existence of favorable conditions is much more important for “The Risky” than for “The Infallible”

On January 1, Basel III, the bank regulatory cliff, will just make it all so much worse

Sir, Simon Greaves, in World Diary, December 31, for Tuesday 1 reports “Better bank standards: Key proposals of the Basel III framework of global capital standards for banks become law. Eleven member jurisdictions have published a final set of regulations effective from today… The Basel III package introduces new prudential requirements - capital buffers, a leverage ratio and liquidity requirements”.

But no!, since the capital requirements will still be based on the perceived risks, and now the liquidity requirements will too, we can only expect that the effective discrimination against “The Risky” and in favor of “The Infallible” to persist and increase, and with that the damage this causes to the real economy.

Frankly, in a world with so many concerns, where did the sissy bank regulators get it that their petit bourgeois baby boomer concerns should be prioritized?

Forget about the "Fiscal cliff" this Basel III cliff is much more dangerous

God make us daring!

Basel, stop forcing banks to lend to the King and AAAristocrats

Sir, you argue that the current proposed liquidity requirements for banks under Basel III be widened so as to include more qualified assets, like “blue-chip equities which trade in deep and liquid markets”, “Keeping it liquid”, December 19. It sounds logical, but in reality just adds another layer of that type of Basel II nonsense which has gotten our banks into problems. 

For a start, it can only create a false sense of security. As long as a bank has “good” assets a bank is liquid, as simple as that, and all the liquidity of some “deep” markets can dry up in minutes if the quality of those assets have been compromised. 

The fact that an asset is considered liquid already benefits the value of that asset, and so pushing by means of regulations for banks to hold liquid assets will just help to distort its real value, just the same way the Basel II or proposed III capital requirements based on perceived risk, distort the market in favor of “The Infallible” and against “The Risky”. 

You correctly mention that “the liquidity rule as it stands, is an instrument of financial repression by governments”, but let me remind you that is just the way current basic capital requirements repress, though on that we have not heard any protests from you. Hopefully you are at long last waking up to this fact. But, just extending the beneficiaries of the repression, to besides the King also include the Aristocracy, will only increase the discrimination against those not blessed, like against all who have no credit rating or a not so good credit ratings, but whose access to bank credit is just as or even more important for the economy. 

Basel II sounded logical too, that is as long as you ignored the fact that what is perceived as “risky” has never ever caused a bank crisis, only what has been erroneously perceived as absolutely safe does that… and in that sense, having more regulations that push “The Infallible”, is just a certain way of guaranteeing that when the next bank crisis occurs, it will be even much larger than need be. 

To me it is frankly incredible how a sophisticated paper like the Financial Times can have fallen into the mental trap of being able to believe that a little tweaking here and there, by regulators will do it. And this by regulators who recently allowed banks to leverage their equity 62.5 times to 1 to Greece. On the contrary, the world, and most especially Europe, needs to rid itself of the scheming and tweaking bank regulators who arrogantly push on, even in the face of absolute failure. 

Let the banks fulfill as best as they can their function of allocating economic resources. And for that, nothing distorts less, than one single capital requirement for all bank assets.

With Basel III bank regulators are doubling down on the same mistake as Basel II. They must be stopped!

Sir, you conclude “A Spanish tragedy”, November 13, with “Banking crises have a human cost. “The price paid by some has already been too high. Unless Madrid and the banks face up to the truth, this will only get higher”. Absolutely! 

Spain’s banks excessive financing of housing was a direct consequence of bank regulators who allowed banks to earn a much higher return on equity when doing so, because housing was one of the officially deemed “The Infallible”, and therefore benefited with causing so much lower capital requirements for banks than when lending to “The Risky”. 

And so when are you going to suggest that the Basel Committee and all your other regulatory friends also face up to the truth? Currently it would seem that they are only doubling down on their mistakes, since Basel III, besides keeping the capital requirements based on ex-ante perceived risk of Basel II, will now also include liquidity requirements based on the same silly illusions… and FT does not seem to mind.