Even the best central bankers can mess it up, royally

Sir, Tim Harford writes: “A flint-hearted technocrat can at times deliver better results for everyone. In the early 1980s, Fed chair Paul Volcker demonstrated the basic idea that inflation could be crushed by a sufficiently badass central banker.” “Stop sniping at central banks and set clear targets” December 16.

Indeed, and Paul Volcker was a hero of mine too, that is until I realized his role as the facilitator of the risk weighted capital requirements for banks.

In his book “Keeping at it”, penned together with Christine Harper, Paul Volcker writes: “The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be…. At the end of a European tour in September in 1986, at an informal dinner with the Bank of England’s then governor Robin Leigh-Pemberton… without a lot of forethought, I suggested to him that if it was necessary to reach agreement, I’d try to sell the risk-based approach to my US colleagues.”

And that was that! In that moment, accepting the European nonsense that what bankers perceive as risky is more dangerous to our bank systems than what banker perceive as safe, Paul Volcker, a central banker, helped condemn us to suffer especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital. I thank him not!

Harford opines “The health of our democracies demands that our politicians start taking responsibility again”

Absolutely! And with respect to bank regulations that requires the politicians to ask for explanations like: Why do you risk weigh the assets based on their perceived risk and not on their risk based on how bankers perceive their risk? Have you never heard about conditional probabilities?

PS. The Basel Committee document that provides an explanation on the portfolio invariant risk weighted capital requirements does not make any sense to me, but perhaps Tim Harford understands it. If so could you please ask him to explain it to us? 

@PerKurowski

Why is it good for all to allocate their risk premiums adjusted investments according to the needs of their portfolio… except for banks?

Sir, Jonathan Wheatley writes:“Here’s a mystery: if emerging market debt as an asset class has had such a torrid time this year, why has it not suffered more outflows?” And to answer it he quotes Paul Greer, portfolio manager at Fidelity International: “People will look at what they are getting in the rest of the world, and they’ll say you know what? We’re getting paid for the risks.” “EM bonds resilient as investors are well rewarded for risks” November 2.

That which sounds so perfectly logical, is not what the banks can do, since the risk weighted capital requirements take no consideration whatsoever of the risk premiums banks can obtain. 

To top it up, these weights are formally portfolio invariant. Since you might think that because I am obsessively against that regulation I will give a biased version of it, let me extract verbatim the following from the horse's mouth, “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” 

“The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the reason given for that mindboggling simplification is: “This characteristic has been deemed vital in order to make the new IRB framework applicable to a wider range of countries and institutions. Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Besides the disastrous effect in our economy the distortion in the allocation of credit, credit risk-weighted capital requirements produce, is to guarantee especially large exposures, to what’s perceived as especially safe, against especially little capital, which dooms or bank system to especially severe crises, like that in 2008.

And this has been going on during 30 years and no one is allowed to ask regulators: Why do you believe that what’s perceived as risky is more dangerous to our bank system than what’s perceived as safe?

Clearly that is seemingly one of those questions that shall not be asked.

@PerKurowski

What if Artificial Intelligence helps predict decently correct Portfolio Variant Bank Capital Requirements?

Sir, Tim Harford refers to “Prediction Machines by Ajay Agrawal, Joshua Gans and Avi Goldfarb [which] argues that we’re starting to enjoy the benefits of a new, low-cost service: predictions. Much of what we call artificial intelligence is best understood as a dirt-cheap prediction. “Cheap innovations often beat magical ones” May 5.

If a credit to a risky borrower is not excessively large, and carries a correct risk premium, it can provide more safety to a bank’s portfolio, than a credit to a borrower perceived as safe.

Unfortunately, and as was stated in “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions”,“Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

And so to make up for that difficulty the regulator decided: “In the context of regulatory capital allocation, portfolio invariant allocation schemes are also called ratings-based. This notion stems from the fact that, by portfolio invariance, obligor specific attributes like probability of default, loss given default and exposure at default suffice to determine the capital charges of credit instruments.”

And to justify it they argued that: “essentially only so-called Asymptotic Single Risk Factor (ASRF) models are portfolio invariant (Gordy, 2003).”

How anyone could have understood that and further explanations given, is beyond me.

But, what if Artificial Intelligence had then allowed bank regulators to make their capital requirements portfolio variant? Many other bad things could of course have happened, but surely AI would have warned against too much exposure being built up with assets perceived (residential mortgages), decreed (sovereigns like Greece) or concocted (AAA rated securities) as safe. And also about too little exposures to what is perceived risky, like loans to entrepreneurs.

The danger is though that since we are clearly not capable to duly question human regulators’ expertize, we could end up questioning even less any Artificial Intelligence’s also quite possible mumbo jumbo. 

@PerKurowski

Current risk weighted capital requirements for banks are a stand out example of “garbage in garbage out”

Sir, when discussing artificial intelligence and “how much power should be ceded to the machines” you mention: First. “the need to overcome limitations in machine learning techniques”; Second. “garbage in, garbage out…the need for better quality control”; and Third. “the need to develop a clear and transparent governance structure for AI”, “The paradox in ceding powers of decision to AI” December 30.

Sir, human intelligence is quite often in need of all that too.

When bank regulators used intrinsic risks of bank assets as inputs for developing their risk weighted capital requirement, they could not produce anything but garbage out. What they should have used is unexpected events or the risk those assets could pose to our bank system, namely the risk that bankers would not be able to adequately manage perceived risks.

And little evidences the need for a transparent governance structure for human intelligence too, as current regulators refusal to answer the very basic questions: “Why do you require banks to hold more capital against assets made innocous by being perceived as risky than against assets becoming dangerous by being perceived as safe?”.

Humans must also also overcome some technical limitations: An Explanatory Note by the Basel Committee on the Basel II IRB (internal ratings-based) Risk Weight Functions” expresses: “The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the explicit reason for that mindboggling simplification is: “This characteristic has been deemed vital in order to make the new IRB framework applicable to a wider range of countries and institutions. Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Sir, finally, I would add a fourth requirement, namely to make sure artificial intelligence is kept free from that excessive hubris and besserwisserism that too often affect humans. Like that which kept regulators from even having to define the purpose or banks before regulating these,

@PerKurowski

When being rightly suspicious about making algorithms powerful let us not ignore that powerful humans could be very dangerous too.

Sir, Tim Harford, agreeing with Hayek holds “Market forces remain a more powerful computer than anything made of silicon.” “Algorithms of the world, do not unite!” December 2.

But when regulators decided to replace the risk assessments of thousands of individual and diverse bankers, with those produced by some few human fallible credit rating agencies; and then allowed banks to increase their bets on these ratings being correct, for instance with Basel II allowing banks to leverage a mindboggling 62.5 times if only an AAA or an AA rating was present, we would have benefitted immensely from having some algorithms indicate them this was pure folly.

Because, in the development of such algorithms, it would not been acceptable to look solely at the risks of bank assets as such, but would have required to consider the risk those assets posed for the banks.

And as a result the algorithms would not have allowed banks to leverage more with safe assets than with risky, that because only assets perceived as very safe can lead to the build up of such excessive exposures that they could endanger the whole bank system, were the credit ratings to turn out wrong.

“An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” expresses: “The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the explicit reason given for that inexplicable simplification was: “Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Sir, algorithms are precisely designed to combat such complexities.

Yes, “Facebook and Google have too much power” but so did the regulators; and with their risk weighting of the sovereign with 0% and citizens with 100%, Stalin would have been very proud of them.

@PerKurowski

BoE’ Sam Woods, like all current Basel Committee bank regulators, is in serious breach of the do-no-harm fiduciary rule.

Sam Woods, deputy governor for prudential regulation at the Bank of England discusses the differences in calculating the capital requirements for banks in which “Larger firms typically use internal models” and “Smaller or younger groups typically use standardised weights” and “there can be large disparities between the two calculations” “Our financial standards benefit everyone” February 26.

Sir, did you see that Venezuelan amateur showing off his total absence of cross-country skiing skills in an international setting? One Venezuelan who confessed to similar difficulties told me that he at long last completely identified with a Venezuelan sportsman. I replied “Indeed, but with his difficulties of understanding how deep his amateurism is, he also reminds me of the current Basel Committee inspired bank regulators”. 

Sir, anyone who has some capital to invest, needs to assess the individual risks of assets, from the perspective of how well it fits into his portfolio. Any adviser who would tell an investor to only look at the individual risks, like current bank regulators do with their risk weighted capital requirements, would be in serious breach of any sort of fiduciary rule. 

Here are some of their “standardized” risk weights extracted from Basel II. Sovereigns 0%, AAA rated 20%, not rated (the usual SME) 100% and below BB- 150%.

As a result banks, because when doing so they are allowed to leverage more and so obtain higher risk adjusted returns on equity, are de facto being instructed to lend to what is perceived, decreed (or concocted) as safe; and to abstain from lending to what is perceived risky, without any consideration to their portfolio… and without any consideration to the credit needs of the real economy.

In case you doubt me, I invite you to read “An Explanatory Note on the Basel II IRB Risk Weight Functions”. It specifically states that the risk weights are portfolio invariant, since it otherwise “would have been a too complex task for most banks and supervisors alike.” 

Sam Woods writes: “The first job of the Prudential Regulation Authority is to keep the UK banking system safe and sound.”

“Safe and sound” Hah! The regulators, with their foolish and so unwise credit risk aversion, only cause our banks to no longer financing the riskier future but only refinance the safer past; while guaranteeing that some “safe-haven” (like AAA rated securities and Greece), sooner or later will become dangerously overpopulated, and it will all crash, again and again.

Now, Woods inform us “the PRA will look at capital requirements in the round rather than assuming that a simple “sum of the parts” approach will necessarily deliver the right answer.”

Sir, should these failed regulators be given a chance to dig our banks further into a hole, by now doing what they previously told us was too complex for them? I don’t think so. They have clearly breached their do-no-harm fiduciary duty to society way too much! Better get rid of them all and take refuge in something simple, like a 10 percent capital requirement against all assets. 

But, when doing so, remember that taking our banks from here to there is also fraught with great dangers, especially if guided by those who cannot understand, or do not want not to admit to where these banks come from.

PS. Current bank regulators know so dangerously little about risks

@PerKurowski

When will supposedly sophisticated papers like Financial Times wake up to the horrors of current bank regulations?

Sir, Ray Soifer writes: “No wonder banks’ shares generally trade at a discount to their stated book value. No one really knows what their true net asset value is — too often, not even the management.” “Picture of risks in banks’ portfolios is still fuzzy” January 17.

Of course! How could it be otherwise? Banks are currently most certainly paying more for consultants to understand their regulator’s risk/required capital management, than what they pay for the risk management of their own portfolio. Because, how is one to understand risks in banks’ portfolios when the risk weights used by regulators are, to top it up, portfolio invariant, since to do these portfolio variant would be, as they confess, too difficult for them to do?

Could it be because when something is too out of line, it is sort of easier to attribute an intelligent motive to it? Sir, again it all reminds me so much of Chance gardener a.k.a. Chauncy Gardiner

@PerKurowski

IIF confesses the distortions in the allocation of bank credit caused by Basel’s risk weighted capital requirements

Sir, Laura Noonan writes “The Institute of International Finance has denounced regulators’ proposals to give banks less freedom to use their own models to decide how much capital they need to support their loan books.”, “Risk warning over change to lenders’ safety measures”, June 7. It contains the following fascinating information.

“A low quality borrower with a risky BB- credit rating. Right now…generates a return on capital of just 7.7 per cent today. At the other end of the credit spectrum, a bank’s return on equity for an A+ rated borrower could fall from 13.9 percent today”.

So here IIF confesses that because of the risk weighted capital requirements, an A+ rated borrower (50% risk weight) currently generates about twice the return on equity for the bank than a BB- rated one (100% risk weight). Sir, do you think banks in such a case would lend to those BB- rated? Of course not! But are there not many BB- rated who should have access to bank credit, even if in small amounts? Of course there are. Can’t they get credit? Of course they can, but only if they pay much higher interest rates, so as to overcome the regulatory discrimination against them. 

Sir, that bankers, those who are supposed to be able to evaluate credit risks, should now earn a higher risk-adjusted return on equity on what is perceived as safe than on what is perceived as risky, sounds to me like the regulators have made bankers’ wet dreams come true.

And IFF then states that “a bank using the new rules could earn a return on capital of 11.4 percent on a low quality borrower with a risky BB- credit rating [but], a bank’s return on equity for an A+ rated borrower could fall to 4.6 percent under the new regime.”

Does that mean the A+ rated borrowers would not have access to bank credit any more? Of course not! It is only that they would have to pay slightly higher interest rates since they would not count with as much regulatory subsidies.

Sir, I have soon written a thousand of letters to you all in FT on how the risk weighted capital requirements dangerously distort the allocation of bank credit to the real economy. You have ignored all of these. Now here you are getting a clear and loud confirmation of that distortion from the horse’s mouth, will you still ignore it?

How should it be? Those rated A+ and those rated BB-, and all other, should compete on equal footing for bank credit, by means of offering different risk premiums, and the bank should assign the credit in an appropriate amount to whom has offered to provide it with the highest risk adjusted return on equity. And that can only happen if the capital required for lending to an A+ or to a BB- is exactly the same.

PS. An “appropriate amount” is that which guarantees a good diversification of the banks’ portfolios. The current risk weighted capital requirements are, to top it up, portfolio invariant.

@PerKurowski ©

Basel Committee’s desktop Don Quixotes with Basel III, keep fighting banking windmills, with ever-greater complexity

Sir, John Authers quotes Robert Shiller “You would think that when interest rates are higher people would just sell stocks, but the financial world just isn’t that simple”, “Fears mount over US stocks bubble” September 14.

Had bank regulators understood that “The financial world just isn’t that simple” it would have saved us many tears. As is, with much hubris they proceeded to design their risk weighted capital requirements, and for which they congratulated each other effusively and then went to bed, thinking they got it solved. Most of them even thought that “risk” included more than credit risks; very few if any knew the risk weights were portfolio invariant, the higher up in the regulatory echelons you were the less you apparently needed to concern yourself with such nitty-gritty; and nobody cared one iota about what that regulatory risk aversion could do to the allocation of credit to the real economy.

It should seem logical that the more complex something is, the simpler are the relations you should maintain with it. But no, the desktop Don Quixotes of the Basel Committee, with Basel III, keep on fighting banking windmills, with ever-greater complexity.

@PerKurowski

The regulators odious discrimination against the fair access to bank credit of the risky is unacceptably abnormal

Sir, Martin Wolf refers to: “A more sophisticated view…of the Bank for International Settlements. It believes that… one should be prepared to tolerate prolonged cyclical unemployment over the medium term, in order to prevent a build-up of damaging financial excesses over the longer term” “Keep rates low — the world is still abnormal” September 9.

Clearly Wolf does not subscribe to that sick priority as he writes: “central banks should continue to focus on stabilizing the real economy, though more needs to be done to curb financial excesses”

But if I were allowed to question the Bank of International Settlements I would ask:

Do you really think that tolerating prolonged cyclical unemployment over the medium term will prevent a build-up of damaging financial excesses over the long term? Could it not be the other way round, as fewer and fewer asset types would then be perceived as safe, and, as a consequence, be turned into damaging financial excesses?

Wolf concludes: “Our world is not normal. Get used to it.”

Absolutely, our world is clearly not normal when regulators are allowed to come up with something so idiotic like the portfolio-invariant-credit risk weighted capital requirements for banks, and which so odiously discriminates against the fair access to bank credit of those perceived as risky… like SMEs and entrepreneurs. But NO! I do not accept I have to get used to it.

Again Mr. Wolf, though you have admitted I have told you so, you still do not get it. Financial excesses are built with assets perceived as safe, ex post turned risky… not with ex ante risky assets.

@PerKurowski

To save Greece (and the Western World) we must call the Basel Accord a major historic mistake, and proceed accordingly.

Sir I refer to Willem Buiter’s “There is a way past the insanity over Greece” June 22.

Buiter’s proposal contains two elements that I have been arguing as essential for quite some time. First, making sure no more money is lent to the Greek government: “The ECB would bar Greek banks from making ne loans to the state”; and second, to recapitalize Greek banks so they can attend to the needs of the real Greek economy.

And that means throwing overboard all those Basel Committee’s portfolio-invariant-credit-risk-weighted capital requirements that have so distorted the allocation of bank credit. Not a second too soon for Greece… and not a second too soon for the Western World at large.

The Basel Accord principle of zero risk weight for the sovereign and 100 percent risk weight for the citizens and for instance their SMEs, pompously and odiously implied that government bureaucrats could use bank credit more efficiently than SMEs and entrepreneurs. Have you ever heard more self-serving communistic nonsense than that?

@PerKurowski

Before managing other systemic risks, bank regulators should dare confront their own large systemic distortions.

Sir, David Oakley and Barney Jopson report that the Financial Stability Board, wants to go after big asset managers, “Asset managers’ bonds push prompts scrutiny” June 3.

Its reason is the following: “Since the financial crisis, the amount of bonds asset managers have on their books has grown dramatically, filling a void created by big dealer banks that have cut their exposure to fixed income. This shift has triggered worries among regulators about what will happen if a rise in US interest rates sparks a rush for the exit in bond markets — and that prospect has fuelled debate on tougher regulation.

Since a loss is a loss, no matter who has to bear it, huge asset managers, no matter what they say, can produce systemic economic shockwaves, and so of course everyone should be concerned with their risks.

But that said the first thing bank regulators need to do, is to understand how their own regulations have impacted the whole financial sector… in many shapes or forms.

I dare them to organize a seminar on: “What distortions do the portfolio invariant credit-risk-only-weighted capital (equity) requirements for banks cause?”

@PerKurowski

Current bank regulators not only do not know what they are doing, they even double down on their ignorance

Sir, Robert Lenzner writes “Seven years after the worst crash since 1929, the alarming fact is that financial regulators still know next to nothing about the true level of risk that big banks are exposed to”, “Hidden dangers that banking regulators cannot understand”, April 21.

Of course they don’t, and I have been telling you so in more than 1.800 letters over the last decade. Any regulator who sets the equity requirements for banks based on the risk of their assets, and not based on the risks that have always caused the banks to fail, has no idea about what he is doing.

And any regulator who allows banks to leverage differently for different assets, and thereby distorts the allocation of bank credit to the real economy, is only doubling down on his ignorance.

@PerKurowski

When the products of groupthink do not stay in Vegas, and are applied elsewhere, that can be truly sinister.

Sir, Janan Ganesh writes: People that work in the same field develop their own codes and slang. They sleep and socialize with each other. Without intending it, they seal off the world from uncomprehending outsiders. It is a byproduct of specialization and there is nothing sinister about it”. “The average voter is immune to romance and fevered rhetoric” April 7.

Hold it! That depends on whether what the specialists do in their intimacy stays in Vegas or not. For instance, when bank regulators got cozy in their little Basel Committee mutual admiration club, and through an incestuous groupthink came up with their portfolio invariant credit-risk equity requirements for banks, well that turned into something extremely sinister that completely distorts the allocation of bank credit worldwide.

@PerKurowski

Here’s another reminder of how scary our current bank regulators really are.

Sir, the Lex Column writes about “Nigerian banks: wrong concentrations” March 27.

I just thought it would be a good opportunity to remind everyone that we have put our banks into the hands of regulators who, on their own, have decided to impose “portfolio invariant” equity requirements for banks. And that means the regulators do not consider the benefits of diversification, nor the dangers of concentration.

By their own admittance, to do otherwise, would be too hard work for them.

Scary eh?

@PerKurowski

We’ve fallen into the dangerous and spooky hands of an inept bunch of amateurish masters of the universe.

Sir, I refer to Andrew Sentance’s “We expect too much of the new masters of the universe [central bankers]” February 28.

Sentence asks “Are we now too optimistic about the abilities of the financial system’s new overlords?” I would answer: Absolutely! We have landed in the hands of some very inept masters of the universe. And one very clear example of that is how they try to regulate banks by means of their credit-risk-weighted equity requirements and which, to top it up, are even portfolio invariant.

I just ask: What on earth has a regulator to do with the perceived risks of banks’ assets, when what he should be exclusively concerned with is with how bankers perceive those risks and manage these.

Our banks are currently like in a car with two steering wheels; the first one controlled by bankers, and the second by regulators who are responding, simultaneously, to basically the same risks the banker sees. And so of course we must crash either because banks embrace excessively what seems safe, or because of an excessive aversion to what seems risky.

And yes, to have central bankers inducing negative interest rates, and announcing inflation targets, and not realizing that this is a haircut like any other haircut, is something quite spooky to say the least.

@PerKurowski

But our besserwisser bank regulators express no doubts about what banks should do.

Sir, Henny Sender asks: “Which is better - to invest in the debt of lower-rated issuers because they offer more attractive absolute yields; or, to invest in the debt of higher-quality companies but do so with leverage in order to generate acceptable returns?”, “When investing is all about second-guessing the Federal Reserve” February 15.

I don’t know the answer… but bank regulators, with their portfolio invariant credit risk weighted equity requirements, imply they know that very well. They have definitely instructed the banks to go for high-quality-very-high-leverage... like for AAA-rated-securities and sovereigns. 

By the way Sir, with respect to second guessing the Fed: If I now bought a10-year US government bond which pays 1.97%, and the Fed’s declares its inflation target to be 2%, would that imply I am buying a preannounced haircut?

The Basel Committee for Banking Supervision needs artificial intelligence, the human one does seemingly not suffice.

Sir, it was with much interest, and hope, that I read Richard Waters’ report “Investor rush to artificial intelligence is the real deal” January 5. We sure need it, urgently, at least in the Basel Committee for Banking Supervision.

First any reasonably good AI would most certainly not give in to emotions or sole intuitions as the Basel Committee did when for their risk-weighted capital requirements they decided that “risky” was risky and “safe” was safe. AI would see that in fact it is what is perceived as “safe” by bankers that which creates the biggest exposures and as a consequence the biggest dangers, if the ex ante perception turned out ex post to be wrong.

And AI would also be able to impose portfolio variant capital requirements instead of settling for Basel Committee’s “portfolio invariant” because as they admit when in “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” they explain: “Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

And AI would also of course have asked about the purpose of the banks before regulating the banks… and therefore we would probably have saved us from the credit risk weightings that so distort the allocation of bank credit to the real economy.

That said we have to be careful though so that AI does not Frankenstein on us and imposes its own preferences (ideologies); like what the Basel Committee did when they decided that their bosses, the governments of the sovereigns, were infallible… and therefore banks did not need to hold any capital (equity) when lending to these.

PS. Perhaps we can have a competition between different AIs to see who comes up with the best proposal for how to regulate banks.

Gauging the level of understanding of Fed statements assumes, kindly, Fed understands what it writes. Does it?

Sir, Tracy Alloway tackles the issue of “Why Fed statements have become literally harder to read” November 29, which generously assumes that the Fed understands what it writes. Can we be so sure of that?

One of the most important documents of our time is the Explanatory Note on the Basel II IRB Risk-Weight Functions issued by the Basel Committee; as with it the regulators try to explain what they are betting all of our banking system on. And, that document is such a mumbo jumbo, that the only thing I can conclude is that none of the experts and not-experts who read it understood one iota of it, and therefore did not dare to question it.

And so seemingly the rule is that the more complicated a document is, the less the chances it will be questioned. And the add-on to that would be, the more expert an expert think he is, the less likely he will confess not understanding something.

Therefore friends, given that FOMC statements currently “require reading grade levels of 18 to 19 to understand” hold on to your hats, someone might want to hide something, and we might soon be in to suffer the Chinese curse, I refer of course to that of “May you live in interesting times!”

Basel Committee and Financial Stability Board: “Beware, beware, walk with care, care for what you do, or Mumbo-Jumbo is going to hoo-doo you, or Mumbo-Jumbo is going to hoo-doo you, boom le boom le boom le boom!”… and hoo-doo our banks, and hoo-doo us. Please, we are NOT expendable!

Simon Samuels, bank regulators’ own ‘risk culture’ is as bad as it gets

Sir, Simon Samuel’s holds that “the driver of bank failure is not insufficient capital but rather a bad ‘risk culture’”, “A culture ratio is more important than a capital ratio”, November 25.

Absolutely, just like it is not the risk of the assets that a bank has on its books that matters, but how the bank manages those risks.

And in this respect no ‘risk culture’ has been as bad and damaging than that of bank regulators who came up with portfolio invariant ex ante perceived credit risk weighted equity requirements for banks.

With it they gave incentives for banks to accumulate dangerous high exposures against little equity in assets like loans to Greece or AAA rated securities.

And with it, by making it easier and cheaper for the “infallible” sovereigns and the AAAristocracy to access bank credit, and thereby much harder to do so for the peasants, our small businesses and entrepreneurs, they also imposed destructive financial feudalism 

Simon Samuels would do good looking at what he himself and his colleagues are up to in the Financial Stability Board, and in the Basel Committee, since only excessive hubris could explain them thinking themselves able to play risk managers for the banks of the world.