Basel Committees’ risk weighted capital requirements for banks attempts against all dreamers’ dreams of opportunities

Sir, Xavier Rolet rightly refers to the pro-debt bias that makes it harder for small business to access the capital they need to grow. “Europe’s debt bias chokes small business and job creation” September 8.

But is so much worse than that. When it comes to bank credit there is also the pro-perceived safety bias that hinders the SMEs’ access to bank credit. That “over-leverage in the banking system” Rolet writes of, does absolutely not include loans to “risky” SMEs and entrepreneurs, those” best positioned to drive economic growth and create new jobs”

Basel II allowed banks to multiply their capital 62.5 times with the net risk adjusted margins obtained from the AAA rated but only 12.5 times if that same margin was obtained from unrated SMEs. Anyone who cannot understand how that must distort, has never left his desk and walked down Main Street.

And on the same page appears Gillian Tett’s “Treasury bill jitters lay bare investor angst”. Even when it relates to “the curse of living in an Alice-in-Wonderland world, a place where it is increasingly hard to price risk and uncertainty because the normal rules are being torn up”, it does not refer to that abnormal rule of bank regulators considering, ever since Basel I of 1988, the (friendly and good) sovereigns to be worthy of a zero risk weight. That weight usually defended with the argument that sovereigns can always repay since they print their own money… blithely ignoring the Weimar Republics, Zimbabwes, Venezuelas and many other experiences.

And does not a below zero interest rate on some public debt by sheer definition state that it cannot be zero risk weighted? Or will the fact that some are willing to lose in order to hold it suggest a minus 20% risk weight? What a loony world!

To allow a bank to leverage more with a sovereign than with an SME signifies, de facto, from the perspective of how the allocation of credit is distorted, believing in that government bureaucrats are more capable to use credit they are not personally liable for, than those entrepreneurs who put themselves on the line. Sir, you’ve got to be a full-fledged fool or a runaway statist to believe nonsense like that.

In November 2004 FT published a letter in which I wrote: “We also wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector… access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Sir, I am all for “dreamers” being allowed to remain in America, but I must remind you that, all around the world, there are many dreaming of an opportunity to access a bank credit in order to realize their dreams… and those dreams have been made unrealizable, thanks to inept regulators… and you Sir are shamefully keeping mum on this.

@PerKurowski

Professor Summers, more than unions representing the have-jobs, we need someone, anyone, representing the have-not!

Sir, Lawrence Summers, acting more like a union lobbyist, writes that "America needs its labour unions more than ever" September 4.

He does so blithely ignoring that “The shrinking of the union movement to the point where today only 6.4 per cent of private sector workers — a decline of nearly two-thirds since the late 1970s” sort of evidences an irrelevance of the unions. Does he want to make them relevant by force?

Also, when Summers writes “Consumers also appear more likely now to have to purchase from monopolies rather than from companies engaged in fierce price competition meaning that pay checks do not go as far” that squares little with the current low inflation.

Years ago, I wrote an Op-Ed titled “We need decent and worthy un-employments”. In it I argued that politicians are giving too much relative importance, and spending too many tax dollars, on creating jobs, and that it is high time to start thinking about what to do with those who will never ever have access to what we now consider is a job.

So in that respect I am certainly not too much keen on having unions fighting for those blessed by jobs, if that hurts in any way shape or form those who would want to have jobs but cannot get jobs.

Universal basic income seems to represent one alternative of how to face the challenge of structural unemployment. Finance professors would be much more useful thinking about smart ways how to fund an UBI than getting teary eyed nostalgic about union power.

Summers also writes: “The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children”

Sir, anyone who keeps mum about how current risk weighted capital requirements give banks incentives to not finance the riskier future, but only to refinance the safer past has, as I see it, no right to speak about our children’s opportunities.

@PerKurowski

Gillian Tett also suffers from "biases in our brains that undermine our capacity to make rational decisions”

Sir, Gillian Tett writes on the issue of “how bad humans are at assessing risk”, and refers to that “academics Daniel Kahneman and Amos Tversky have highlighted all manner of biases in our brains that undermine our capacity to make rational decisions.” “Fear of cultural ‘pollutants’ can be allayed with acceptance”, February 11.

As an example, Tett mentions that in the US “the data suggest that the chance of dying in a terrorist attack by a refugee, of any religion, was just one in 3.64bn in any given year. That is far lower than the risk of being struck by lightning”. Yet Tett writes, there is “irrational” fear of immigrants.

Ms. Tett, should perhaps do well showing more humility because, like all of us, she is just as bound to be afflicted by exactly the same human weakness. 

There is no data that would indicate that any major bank crisis was caused by excessive bank exposures to something perceived as risky when placed on balance sheets; and all data points that the real dangers lies with what is perceived as very safe, yet Ms Tett, her colleagues, and most of the bank regulation community see nothing strange with risk weights of 20% for what is AA to AA rated and 150% for the below BB-.

Ms Tett writes “There is little point in countering people’s “irrational” fear of immigrants by throwing statistics about or dismissing Trump’s supporters as “racist”.

Sir, I am of course not talking about racism, but should I not insist, as I do, day after day, with thousands of letters, in trying to illuminate those that who by favoring the dangerous safe, actually discriminate against the access to bank credit of the innocuous risky?

Over the last decade, around the world, millions of SMEs and entrepreneurs have seen their begging for an opportunity denied by sheer financial regulatory bigotry. And Sir, you are well aware that FT shamefully keeps mum on it.

@PerKurowski

Why are experts like Martin Wolf so silent on the immoral and utterly stupid facets of current bank regulations?

Sir, Martin Wolf questions the UK government’s “moral choices for a country forced to share out losses imposed by a massive financial crisis and weak subsequent growth [because] the government has decided to give greater priority to the old than to the young, to pensioners than families with children and to the better off than to the relatively worse off” “May’s policies make a mockery of her rhetoric” February 10.

But, when I question the intelligence and the morality of current bank regulations, Wolf ignores it. So Sir, here we go again, for the umpteenth time!

The risk weighted capital requirements for banks, caused a massive financial crisis by giving too large incentives for banks to create excessive bank exposures to what was supposed to be safe, like AAA rated securities and Greece; and with incentives that hinder banks from taking sufficient risks on the future, like lending to “risky” SMEs and entrepreneurs, causes weak growth and lack of increased productivity.

That clearly immorally favors the well-off over those poor wanting and needing credit opportunities; just as it immorally favors banks financing the safer past and present, than the riskier future the young need to be financed.

It is also I would say almost immorally stupid; since major bank crises always result from unexpected events, criminal behavior or excessive exposures to what was erroneously perceived or decreed as safe, and never ever from excessive exposures to something perceived as risky when placed on banks’ balance sheets.

Basel I assigned a risk weight of 0% to the Sovereign and one of 100% to us We the People; and it would seem Wolf is unable to grasp the runaway statism of that.

Basel II assigned a risk weight of 20% to what was AAA to AA rated and one of 150% to what is below BB-; and it would seem Wolf is unable to grasp the lunacy of that.

@PerKurowski

To parade badly failed global bank regulators wearing dunce caps, is one right way to silence dangerous nationalism

Sir, I am all for globalization. My father a polish soldier saved from Buchenwald by the Americans; I was born in Venezuela; with high school and university (economist) in Sweden; an MBA in Venezuela, spent over a year as an intern in a British Merchant Bank in London (and LSE and LBS); also a Polish citizen; a financial and strategic consultant in Venezuela; a representative in Caracas for a Chilean bank; having worked for corporations and investors from and in many places; a former Executive Director of the World Bank who wanted migrants to have a seat at its Board so that the world at large would have more representation; since 15 years living in Washington; and now happily with a grandfather of two Canadians, I am, de facto, probably as globalized as you can be.

But, if what’s put on my plate is dumb and dangerous globalism, then I swear I have no problem whatsoever going very local, in order to defend to my very best, my many diverse national interests, of course, primarily, those of my grandchildren.

So now, when I see Martin Wolf, in “The economic perils of nationalism” January 18, writing that those (Davos/Basel Committee) globalizers who created a “financial crisis” have seen “their reputation for probity and competence… devastated” I cannot but say: “My oh my, what a lie!”

There all still there. Those who retired might have written well-reviewed books, or had positive books written about them, and those who have not retired, have actually been promoted.

I am totally for trade, and so I fully agree with Martin Wolf in that “one might gain more from foreigners than fellow citizens”. But that does not have to mean you give foreign citizens the opportunities you deny your own.

When bank regulators introduced their risk weighted capital requirements for banks, they gave banks more incentives to finance “The Safe”, like sovereigns and AAArisktocracy, no matter where these found themselves on the globe, than to finance “The Risky” of their localities, like SMEs and entrepreneurs. And that was wrong, and that did not serve any purpose. If I am going to have to suffer a bank crisis, I prefer a thousand times that to be the result of banks having financed my locals too much, than for instance, in the case of European banks, these having financed the US residential subprime sector too much.

Sir, what’s our real problem? It is that there is more accountability on the local level than on the globalized one, and that of course, opens up the door for any misguided populism.

To for instance start parading bad global bank regulators down our avenues, wearing dunce caps, instead of giving them a red carpet treatment in Davos, would be a good way to begin silencing dangerous nationalism.

PS. That parade would perhaps also have to include all those who have so much favored regulators by keeping so mum about their failures. Mi capisci?

@PerKurowski