More safer drones now- less risky feet on the ground. That’s great for now… but what about tomorrow?

Sir, Simon Kuper writes: “Every society tries to make the trade-off between security and freedom… According to Google, mentions of “freedom” exceeded mentions of “security” in English-language books every year from about 1830 through to 1985. In 1985, mentions of “security” surpassed “freedom” in books… We entered an era of compulsory seatbelts, bans on public smoking and laws against drink-driving.” “Safety first: the new parenting” October 1.

To which I would add that we also entered into the era of the risk weighted capital requirements for banks (1988 Basel I); with which regulators cared more about the short term safety of banks than about the long term safety of economy.

So when Kuper writes: “Every society tries to make the trade-off between security and freedom”, I would hold that de facto more often that represents a trade-off between short and long term security. That is because unfortunately, c'est la vie, security weakens and freedom strengthens. Simon Kuper, having cycled alone to school at age of eight, and comparing that to his daughter’s (perhaps even supervised) walk of one block to the bakery, knows what I mean.

And one major security issue is that security measures are not all equally applied. Out there, in the real world, there are still “savages” living in strengthening freedom, while we subject our young to suffer debilitating security. What that is going to mean to their future no one really knows… but while our kids are more comfortable [and “safer”] in their rooms socializing on computers, the “abandoned” are perhaps getting stronger and making the streets ever more insecure.

Don’t we wish we had the strength to allow our kids to be more savages? That strength can only come out of fully understanding and accepting the implications… we must allow them to take more risks. But it is so hard to gain acceptance for the concept that there’s nothing as risky as excessive risk aversion… especially when so many nannies are in charge.

Here we are, soon 10 years after a crisis that should have laid bare the stupidity of bank regulations that only lead to dangerous overpopulation of some safe havens (AAA rated securities and Greece) and equally dangerous under-exploration of risky bays (SMEs and entrepreneurs)… and the issue of the distortions it produces in the allocation of bank credit is not even discussed.

Sir, I do fret we, as a society, are slowly drowning ourselves in oceans of imagined security. Even our war capabilities are security driven… more safe drones - less risky feet on the ground. That’s great now… but what about tomorrow?

If our sons are not allowed to lose themselves, how on earth will they learn how to find themselves?

PS. I just refer to “sons” as I had only daughters, and both my grandchildren are girls, and you know it is not easy to live as you preach.

@PerKurowski ©

Martin Wolf and I have three fundamental differences in opinions. Sir, dare decide, without favour, should I shut up?

Week after week I read Martin Wolf articles, and week after week, though I have clearly been blacklisted, I write letters to you commenting on these. Most of these letters refer to three issues on which I am obsessive, I confess, but on which Martin Wolf is equally obsessed, ignoring these, though he has not confessed. 

I insist in doing so because I truly believe these are issues of utter importance to the well being of my children and grandchildren, and indeed for the whole western society with its Judeo-Christian traditions to which I belong.

First: I know that, allowing banks to leverage equity differently with different assets depending on perceived credit risk, does seriously distort the allocation of bank credit to the real economy. As it permits banks to obtain higher expected risk adjusted returns on what is perceived safe than on what is perceived risky, it introduces a dangerous credit risk aversion that will do no one any good. Risk taking is the oxygen of any development.

Martin Wolf does not think so. In fact he has told me that even if, hypothetically, there were distortions, it is the responsibility of bankers to ignore these, to forget about maximizing shareholder’s returns and to do what is right for the society. Sir, sincerely, I truly doubt any banks and bankers doing so would survive for long in a competitive environment.

Second, Martin Wolf believes, like current bank regulators do, that those perceived as risky are far more dangerous to the banking system than those perceived as safe; and hence Basel II’s 150% risk weight for those rated below BB- and meager 20% risk weight for those rated AAA to AA, do seem logical to them. 

I on the contrary, having walked a lot on Main Street, know that what is perceived as safe, poses intrinsically a much larger threat to the banking system, than what is perceived as risky. To me the regulators are behaving like nannies telling the children to beware of those ugly and foul smelling who approaches them, but to embrace the nice looking gentleman who offers them candy.

Third: Basel I of 1988, by assigning a zero risk weight to sovereigns and a 100 percent risk weight to the citizens upon which the sovereign strength depends, introduced by means of bank regulations, through the back door, a for me unforgivable and hateful statism. Martin Wolf has not voiced any serious objection to the concept of an infallible monarch.

Sir, so what is your opinion, should I stop sending you letters commenting on Martin Wolf’s articles? Until now he has not given me one valid reason for me to believe I am wrong and he is right.

For instance this week Martin Wolf hits down (again) on Germany’s policies versus the Eurozone. “Germany is the eurozone’s biggest problem” May 11.

Had the regulatory distortions I complain about been removed, I might very well have agreed a lot with him. But while that has not happened, I feel sure that any German ECB or other Eurozone stimuli will be wasted, and might very well set Europe up to something worse. Frankly, when push comes to shove, it is always better to build solutions around at least someone being strong, and not based on a by all shared utter weakness. 

PS. Here the most recent aide memoire on what is wrong with Basel Committee’sregulations.

@PerKurowski ©

Mario Draghi, if a nanny, would tell children “Beware of the foul smelling and be kind to the nice giving you candy”

Sir, Wolfgang Münchau comes out in a full-fledged defense of Mario Draghi and ECB against Germany. He argues that had Berlin raised investment spending at home the ECBs´ job of cutting short-term rates to negative levels and buying financial assets, in order to achieve its inflation target would have been easier and it would not have had to cut rates by as much. “The high cost of Germany’s savings culture” May 9.

I will not argue against this but just remind Münchau that no matter how much Germany cooperates, if the resulting stimuli cannot flow to where it can be best used, the whole exercise might just complicate matters more.

And in this respect Draghi is a bank regulator who believes those rated below BB- are more dangerous to the banking system, than those rated AAA... and that should be indicative enough that he, and his regulating colleagues, are simply not up to the job.

@PerKurowski ©

The timidity of bankers is selective, and the result of the very dumb selective timidity of the regulators

Sir, Giles Wilkes writes: “Finance has become … more timid since 2009” “Short View” May 5.

Why since 2009? And “timid” is also only applicable to staying away from what is perceived as risky, because the wanting to leverage as much as possible with what is perceived, decreed or concocted as safe, is still very well alive and kicking.

The banks were instructed to be selectively timid, ever since the risk weighted capital requirements for banks were introduced. With those regulators allowed banks to earn higher risk adjusted returns on equity when financing what was deemed safe” than when financing the “risky”. And so therefore banks were given new incentives to timidly stay away even more than usual of what they already stayed away much from.

Basel II of June 2004 set the risk weight for an AAA rated asset at 20%, and for a below BB- asset at 150%. That in essence was like a nanny telling the kids to stay away from ugly and foul smelling individuals, and embrace much more those nice looking gentlemen who offer them candy.

Yes Sir, that is the kind of bank regulators we have. Holy moly!

And Sir, seemingly, you don’t mind them. Holy moly!

PS. Here again is an aide memoire on other regulatory stupidities.

@PerKurowski ©

FT you’re now inconsistent! You’ve consistently ignored the nannying of banks by the nannies of the Basel Committee

Sir, you hold: “There is a case to intervene when people act in a way that harms those around them, or when it is a case of safeguarding children who cannot take an informed decision and may face bigger risks. If adults take risks with their own health, they should be made aware of the dangers and perhaps nudged into sense, but there is no case for coercion.” “The relentless march of the nanny state” March 18.

Indeed but why then do you keep mum when adult bankers, aware of the ex ante perceived credit risks, are coerced by regulators into considering those risks for a second time, by means of the risk weighted capital requirements for banks?

Can’t you understand that any risk, even if perfectly perceived, leads to the wrong actions, if excessively considered?

If you had two very concerned nannies watching over your children, you might accept them applying the average of their concerns, but never ever the sum of their concerns. Because you know that if they did that, your kids, embracing safety excessively, would grow up seriously disturbed. 

Equally, when now regulators’ risk aversion is added to bankers’ risk aversion, the result is a much disturbed banking system, that embraces excessively what is perceived or has been decreed as safe. Do you get it?

@PerKurowski ©

The Basel Committee has never cared one iota about the purpose of banks, like that of industrial revivals.

Sir, Patrick Jenkins writes: “A structurally low-profit banking system was the price Germany decided to pay for its industrial revival”, “European banks set their sights on German expansion”, September 15.

Compare that to the current banks, living in an environment of credit risk weighted capital requirements for banks. Banks are now allowed to make massive profits, derived from massive leverages of their equity and the support received from society, as long as they stay to something that is perceived or can be construed as being absolutely safe.

No! Not a single second did the overanxious and overprotective bank nannies in the Basel Committee for Banking Supervision waste thinking about the purpose of banks, like that of industrial revival.

Sir, I ask you again: Whose dreams should regulators most try to help come true, the bankers’ or those of entrepreneurs or unemployed?

@PerKurowski

Psychological barriers to entrepreneurship, like an overanxious nannie mentality, thrive in developed nations too.

Sir, Sarah Murray writes: “the biggest barriers to entrepreneurship are psychological.”, “A variety of barriers thwart entrepreneurs in poor nations” September 15.

Indeed, so it is, and not only in poor nations.

Entrepreneurs, because they are most often ex ante perceived as poor credit risks, need to pay higher risk premiums, and have access to smaller loans; and therefore represent, ex post, quite little danger for banks.

Those ex ante perceived as very good credit risks, are required to pay much smaller risk premiums, and have access to much larger loans; and therefore, if ex post they turn out to be risky, represent much bigger dangers to banks.

Unfortunately, because of some psychological weakness, a sort of overanxious and overprotective nannie mentality, the current batch of bank regulators confuse the ex ante expected losses with the ex post unexpected losses, and so require banks to hold more capital when lending to “risky” entrepreneurs, than when lending to “safe” sovereigns and highly rated private sector borrowers.

And that allows banks to earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky… and we know what that means to the access to bank credit of the entrepreneurs.

@PerKurowski

Mark Carney and Bertrand Badré, if sincere, should be concerned with the abandonment of the vulnerable “risky”

Sir, Mark Carney, chairman of the Financial Stability Board, and Bertrand Badré, the chief financial officer of the World Bank Group write: “The financial abandonment of whole groups of customers — or even countries — is not something that can be ignored by the members of the G20. The FSB and the World Bank are playing our part in co-ordinating efforts to prevent the loss of basic banking services needed to finance investment in some of the most vulnerable areas in the world… if legitimate institutions cannot channel funds between countries through a well-regulated financial system, money will instead circumvent the official channels.” "Do not shut out vulnerable from banking" June 3.

They refer mostly to anti-money-laundering regulations but the truth is that the moment regulators confused bank assets perceived as risky with banks assets being risky, and concocted credit-risk weighted capital requirements for banks, then they abandoned all vulnerable “risky” borrowers, who could then no longer count with fair access to bank credit.

The World Bank’s Global Development Report 2003 (GDR-2003), commenting on Basel II, had the following to say: “The new method of assessing the minimum- capital requirement is expected to have important implications for emerging-market economies, principally because capital charges for credit risk will be explicitly linked to indicators of credit quality, assessed either externally under the standardized approach or internally under the two ratings-based approaches. The implications include the likelihood of increased costs of capital to emerging-market borrowers, both sovereign and corporate; more limited availability of syndicated project-finance loans to borrowers in infrastructure and related industries; and an “unleveling” of the playing field for domestic banks in favor of international banks active in developing countries…A recent study by the OECD (Weder and Wedow 2002) estimates the cost in spreads for lower-rated emerging borrowers to be possibly 200 basis points.”

As an Executive Director in the World Bank (2002-04) I did what I could to fight this odious regulatory discrimination against those already being discriminated against by the banks, precisely because they are perceived as risky. I found no resonance whatsoever… and whatever little World Bank criticism was present in the GDR-2003, has seemingly been abandoned.

If Mark Carney and Bertrand Badré are really sincere, this is where they should start.

Bank nannies can worry about perceived risks and dirty fingernails. Bank regulators should mostly concern themselves with distortions and illusions of safety. Much more than safe banks we need functional banks.

PS. And, whatever you do, banks are much too important for us to allow these to be exploited as combustible material by interested politicians.

@PerKurowski

Unbelievable that with so much history, Europe, instead of with a “Bang!”, could be going down with a whimper.

Sir, Robert D Kaplan, in “America is growing impatient with Europe’s appeasement”, April 7, states as a matter of fact “Gutsy is not a word one would use to describe Europe’s political class”. Sadly, very sadly, it is very hard to debate that.

And right below, giving credence to such an affirmation, we find Martin Wolf writing in “China will struggle to keep its momentum”, that “The world must pray the Chinese authorities manage this transition successfully. The alternative is not to be contemplated”; which basically reads like an anxious European convinced that his future is all-dependent on China’s.

Really, if Europe thinks it will be better off accommodating to Putin’s Russia; or if it thinks that its economy will be better off depending on China’s; (or if it feels that its bankers should earn their returns on equity solely with what is perceived as safe), then sadly it would seem that Europe is lost before the fight has even begun.

But hidden, somewhere in its gutters, there must be a reserve of European elites who can understand that it is time to stand firm… since it seems unbelievable that with so much history Europe, more than going out with a Bang! could be going down with a whimper.

Aren’t there any Bravehearts or Churchills in Europe anymore?

And, having observed the growing nanny mentality in America, its elite should be careful too. When drones are viewed as more convenient than boots on the ground, many strange things can happen.

@PerKurowski

“Stay indoors where it is safe children, outside is much too risky” Nanny Basel Committee

Sir, Professor Jeff Frank refers to “driving with one foot on the throttle and the other on the brake” when explaining how QE “hasn’t done much for the real economy but has increased stock market prices and the wealth of the 1 per cent”, “‘Bold move’ will be to withdraw the money later” January 27.

I fully agree with Professor Frank’s analysis and conclusions. I would clarify though that “the brake” he refers to, is the “risk-weighed equity requirements for banks”, and which makes it impossible for equity strapped banks to reach out to the real economy.

Think of our banks as children instructed by their nannies to stay indoors all time, because out there it is much too risky.

Again, for the umpteenth time, the silly risk aversion of our bank nannies is bringing our economies down.

Basel Committee and Financial Stability Board… please… Let it go¡

Sir, January 2003 in a letter you published I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds”.

And so one could assume that when Sam Fleming now, December 23, reports that “Banks face sharp restriction on use of rating agencies in loan risk assessment” I should be satisfied.

I am not! Because now the regulators want to impose other criteria to be used by banks for calculating how much capital (equity) they need to hold against an asset.

For instance: “Corporate exposures would no longer be risk-weighted by reference to the external credit rating of the corporate, but they would instead be based on a look-up-table where risk weights range from 60% to 300% on the basis of two risk drivers: revenue and leverage.”

And so all regulators are doing here is introducing new sources of systemic risks; and defining new tools to be used in gaming a system the regulators set up to be gamed.

Why can’t regulators just let it go and let the banks use any method each one of them finds appropriate to measure credit risks; and why can’t they just fix one capital requirement for all assets… no gaming allowed?

Sir, let me explain it to you again, for the umpteenth time.

Do you agree Sir with that a bank will and should decide how much to lend, at what interest rates and on what other terms, based on the credit-risk he perceives the borrower represents?

I assume you answer "yes" Sir, but so then, why on earth should bank regulators also stipulate that the same perceived credit-risk is also to be cleared for in the capital (equity) account of the bank? Is not clearing for the same perceived risk twice overdoing it? 

Does that not mean for instance that, if we instead of allowing two nannies to use their average risk aversion when taking care of our kids, we allow them to apply the sum their risk aversions, then we would run the risk of making real monumental wimps out of our kids?

Sir, it is very clear that our bank regulators are digging themselves and our banks ever deeper in a horrible hole of their own creation. That could be because they do not want to admit their mistakes or, much worse, God help us, because they still do not understand their mistakes.

Prudence is ok. But prudence on top of prudence is very dangerous too!

Sir, William Rhodes holds that “Without prudence as a value we are all at risk” August 8. Absolutely, that is only as long as we are prudent when being prudent. Let me give you the mother of examples about what I mean.

Bankers already looked at credit risks when deciding interest rates, amounts of exposure and other terms of their financial assets. And they did so in a quite risk adverse way; if we remember Mark Twain’s saying “A banker lends you the umbrella when the sun shines and wants it back when it looks like it is going to rain”.

But then came the regulators and, in the name of their prudence, set also the capital requirements for banks based on the same perceived credit risks… something which suddenly allowed banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible” than when lending to “The Risky”… and which of course resulted in distorting the allocation of bank credit in the real economy.

And so if we begin loading prudence on top of prudence, especially on top of the same prudence, that is when we enter into that Roosevelt territory of having nothing to fear as much as fear itself.

These nanny regulators from Basel, who basically force bankers to eat broccoli when they eat spinach and reward them with ice cream when eating chocolate cake, have now turned our economies into obese monsters, with none of the muscles provided by credits to the risky medium and small businesses entrepreneurs and start ups.

Bernanke calls banks “overcautious”. He´s got to be joking, or insulting our intelligence.

Sir, Robin Harding reports “Bernanke says overcautious banks are slowing recovery”, November 16. Frankly, for someone like Bernanke, who belongs to the nanniest and sissiest bank regulatory establishment ever, this is either a bad joke or an insult to our intelligence. 

Our current bank regulators allowed banks to leverage their equity amazingly much when holding assets perceived as absolutely not risky, “The Infallible”, and therefore to shun away completely, from anything officially perceived as “The Risky”, because these could of course not provide the banks with an equal expected risk adjusted return on equity… and now Bernanke is calling the banks overcautious? Come on! 

If Bernanke want banks to return to their normal level of caution, all he has to do is to make the capital requirements for banks the same for all assets… and so clearly the ball is in the regulators hands.

Bank regulations are beset with nanny populism

Sir, Nick Clegg in “Be alive to the risks and rewards of a banking union” June 27, states “We have put in place a bank levy, weighted towards riskier activities”. That is pure unadulterated bank regulatory nanny populism, as it implies that the government, ex ante, knows more than the market and the banks about which are the riskier activities, ex post. 

To know how wrong that is it suffices to see what caused the current crisis, namely excessive pure vanilla investments and loans to what was considered officially as not risky and therefore required minimum capital of the banks. 

Mr. Clegg, and all of you other intellectual prisoners of the current bank regulations paradigm, please do not forget that market and banks already clear for risks and so when a regulator does that too, he only produces dangerous distortions.

Mr. Sir Mervyn King and Mr. George Osborne, here is a much better proposal!

Sir I refer to Martin Wolf’s “We should not pin our hopes on Britain’s plan A-plus” June 16. 

Why should not those not creditworthy who want to borrow not be allowed to compete for access to bank credit on the same regulatory terms than those who are creditworthy but do not want to borrow? That is a question that Martin Wolf should try one day to answer, as currently the banks are required to hold more capital when lending to the risky than when lending to the not risky. 

This issue of discriminatory bank capital requirements is ignored over and over again, by those who feebly believe, even after all current evidence against such nonsense, that the best thing to do is to make sure that already risk adverse bankers avoid taking any ex ante deemed high risks. It is truly sad to see what a brave society can reduce itself to, when it allows its nannies to reign supremely. 

Instead of a temporary banking funding scheme such as is proposed by Mervyn King and or George Osborne I propose that regulators urgently calculate any individual bank´s capital to total assets ratio, and ask for it to apply a capital requirement that increases ever so slightly on any new asset it acquires… until reaching some basic goal. That way they would be able to put the banks on a stronger footing to lend, with much less distortion.

Greece’s infantilization is nothing when compared to that of our banks.

Sir, you write that the eurozone’s approach to help Greece has been to infantilize it, “Let Greece stand on its own feet”, February 11. This is absolutely correct and very worrisome but, why do you in FT insist on ignoring the much more tragic and serious infantilization of our whole banking system? 

In essence by means of the interest rate and the size of the exposure, grown up bankers should be able to act on what they perceive as the risk of default of borrowers without any interference. But, the regulators, in a sublime nanny-like effort to keep the banks out of trouble, imposed capital requirements which allow the banks to hold much less capital when the perceived risk are low than when these are high. 

As a direct result, we now have our banks drowning in dangerous excessive exposures to what was perceived as not-risky, like triple-A rated securities and infallible sovereigns (like Greece); and maintaining equally dangerous underexposure to what is perceived as risky, like in lending to small businesses and entrepreneurs. 

A Western world which has prospered because of its willingness to take risks is now shivering in fright and huddling taking refuge in whatever safe-ports are left… and these safe-ports are of course becoming more and more dangerously overcrowded.

FT wake up!

We are living dangerously in the land of officially declared safeness!

Sir Martin Wolf’s “Yet another year of living dangerously” January 25 would have benefited from the subtitle “in the land of perceived safeness”. The world has in fact been living extremely dangerous, ever since the Basel II rules were approved in June 2004, and which set of a frantic race for whatever assets were officially perceived as not risky and that, just because of that, required the banks to hold extremely little capital. 

Much of the global macroeconomic imbalances that Mr. Wolf obsessively insist on blaming for this crisis, were precisely financed by the fact that banks could lend or invest trillions against only 1.6 percent in capital or even less. 

To save the world from the current dangers, we need to get rid of the nannies in Basel and help our bankers relearn how to take real bank risks and not just regulatory arbitrage risks. 

We did not have a crisis because of a general lack of bank capital!

Sir, Tony Jackson discusses the “Basel struggle to put bank capital into perspective” June 27. In doing so he evidences how he and most others discussants tend to forget that bank crisis does not result from lack of capital but by the banks doing the wrong type of lending. Suppose all the banks in a nation had 100 percent capital and then lost it all lending to some sovereign, like Greece, would that mean that the taxpayer would have no losses? How do you separate the taxpayers´ wellbeing from the citizens´ wellbeing? Let us never forget that at the end of the day, it is the quality of the lending of banks that matters the most, not their capital.

My point has all the time been that whenever regulators act like risk managers and set different risk-weights for different lending, which will effectively mean different capital requirements on different lending, they are effectively interfering in such a way that will guarantee that the quality of the lending will be worsened. We did not have a crisis because of a general lack of capital we had a crisis because for some type of lending the regulators authorized basically no capital at all.

From a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

If only the UK was rated BB+ to B-…

Then a UK small business would be able to compete with the government on equal grounds for bank credit, because only then would the bank have to post the same capital for both.

The nannies in the Basel Committee decided to hand out, through very low capital requirements for banks, generous incentives for these to go and play in “safe” places, even though, as regulators, they should have known that financial and bank crisis only occur where the perceived safety attracts the excessive volumes that pose a risk for the system… swamp land with alligators might now and again eat up a citizen, but never pose a threat to a nation.

But on top of it all, the Basel nannies also turned out to be communists in disguise, as they ordained that if a bank gave loans to a sovereign rated AAA by their risk kommissars then the bank needed no capital at all… and what small business can compete with that?

More than two years after the crisis started we read in a report by Brooke Masters and Patrick Jenkins that Lord Turner is now announcing tougher bank capital regime. But since he, like Basel III, does not mention a review of the arbitrary and regressive risk-weights that were the real causes of the disaster, we can only conclude he is not really fit to be a regulator, at least not in war time.