How can we get rid of really bad ideas, e.g., risk weighted bank capital/equity requirements?

Sir, reading “African Union-backed ini­ti­at­ive aims to chal­lenge ‘big three’ rat­ing agencies” by Simon Mundy I was reminded of when in an Op-Ed in Venezuela, concerned with that when markets expressed too much trust it doomed my nation to have too large capital/debt inflows setting it up to later be judged as too much distrustful.

I ended that Op-Ed with: The day our governments pay more attention to the opinions of us, their humble subjects, than to those of the glamorous international credit rating agencies, we will finally stand a chance of making it out of our standard “poor and moody” situation. 

When reading “Why bad ideas are always with us” by Janan Ganesh I cannot help to remind you of awful ideas that still remain with us, most certainly because it is in the interest of some few.

January 2003, over two decades ago, you published a letter in which I wrote: 

“Except for regulations relative to money-laundering, the developing countries have been told to keep their capital markets open and to give free access to all investors, no matter what their intentions are and no matter for how long they intend to stay. Simultaneously, the developed countries have, through the use of credit-rating agencies, imposed restrictions as to which developing countries are allowed to be visited.

This Janus syndrome – ‘you must trust the market while we must distrust it’ – has created serious problems, not the least by leveraging the rate differentials between those liked and those rejected by our modern-day financial censors. Today, whenever a country loses its investment grade rating, many investors are prohibited from investing in its debt, effectively curtailing the demand for it just when that country might need it the most.

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. Friends, please consider that the world is tough enough as it is.”

Today, Basel’s risk weighted bank capital requirements’ procyclicality is still fully alive and well. Precisely as Mark Twain (supposedly) said: “A banker is a fellow who wants to lend you the umbrella when the sun shines and wants it back when it rains”.

Should we not expect the wider society to get some help eliminating truly bad ideas by e.g., the Academia… and the Financial Times?

Why does the world ignore regulations that totally disrupt the allocation of bank credit?

Sir, I refer to Martin Wolf’s “Shocks from war in Ukraine are many-sided. - The conflict is a multiplier of disruption in an already disrupted world” FT April 27.

The concentration of human fallible regulatory power in the Basel Committee has, since 1988, resulted in bank capital requirements mostly based on that what’s perceived as risky e.g., loans to small businesses and entrepreneurs, is more dangerous to our bank systems than what’s perceived or decreed as safe e.g., government debt and residential mortgages; and not on misperceived risks or unexpected events, like a pandemic or a war. 

What can go wrong? I tell you Sir.

When times are good and perceived risks low, these pro-cyclical capital requirements allow banks to hold little capital, pay big dividends & bonuses, do stock buybacks; and so, when times get rough, banks stand there naked, just when we need them the most.

And of course, meanwhile, these capital requirements, by much favoring the refinancing of the safer present over the financing of the riskier future, have much disrupted the allocation of credit

Why has the world for decades ignored this amazing regulatory mistake?

Sir, perhaps you could ask Martin Wolf to explain that to us.

PS. Two tweets today on bank regulators’ credit risk weighted bank capital requirements.

What kind of banks do we want?

Banks who allocate credit based on risk adjusted interest rates?

Or banks who allocate credit based on risk adjusted returns on the equity that besserwisser regulators have decreed should be held against that specific asset?

https://subprimeregulations.blogspot.com/2021/01/and-academia-kept-silence.html

Bank events' matrix

What’s perceived risky turns out safe

What’s perceived risky turns out risky

What’s perceived safe turns out safe

What’s perceived safe turns out risky

Which quadrangle is really dangerous?

Covered by current capital requirements?

NO!

https://youtu.be/TUdKhm6_a8Y

IMF, where’s the regulators’ discipline when needed to stop the procyclical risk weighted capital requirements for banks?

Sir, Chris Giles writes that IMF’s Christine Lagarde warning about “70 per cent of the global economy to experience a slowdown in growth… acknowledged that budgetary discipline in good times was difficult for finance ministers to achieve, but necessary to create “fiscal space to act in bad times”. “IMF Lagarde highlights risks to global economy” April 3.

Times are good, lesser the perceived risks; less the capital must banks hold; even though it is a good time to raise bank capital.

Times are bad, higher the perceived risks; higher the capital must banks hold; even though it is a bad time to raise bank capital.

But are regulators doing something to diminish this regulatory pro-cyclicality? No, or absolutely not enough. Why? Because doing so would require to admit that their risk weighted bank capital requirements are based on the nonsense that what is perceived as risky, when place on banks’ balance sheets, is more dangerous to the bank system than what is perceived as safe.

Sir, that slow down Ms. Lagarde speaks of is much the result of the obese growth that results from excessive exposures to what is perceived as safe. Muscular, sustainable growth requires, by definition, a lot of risk taking.

God make us daring!

@PerKurowski

The risk weighted capital requirements for banks, is the most potent steroid ever for having to suffer some truly bad “Minsky moments”.

Sir, John Plender correctly writes: “If Hyman Minsky were alive today, he would regard the current economic cycle as a testing ground for his instability hypothesis. That which holds the financial system has an innate tendency to swing from robustness to fragility because periods of financial stability breed complacency and encourage excessive risk-taking.” “Complacent investors face a Minsky moment as pendulum swings” November 14.

But what Plender does not mention, perhaps because it belongs to that which shall not be mentioned, is the greatest procyclical pro-Minsky-moment steroid ever, namely the risk weighted capital requirements for banks.

When times are good and credit rating outlooks are sunny, that regulation allows banks to leverage immensely with what’s perceived as safe but, when a hard rain seems its going to fall, and credit ratings fall, all recessionary implications are made so much worse by banks then, suddenly, having to hold much more capital… and since such capital might be hard to find during bad times, they take refuge in whatever is still perceived, or decreed as in the case of sovereigns, to be of less risk… just increasing the stakes

In 2004 I sent the first letter to FT on the pro-cyclical/counter-cyclical theme, FT never picked up on it.

Plender writes: “It is historically atypical in that central banks have been encouraging deflationary threat”. Really? At least with respect to banks they have encouraged these to build up ever-larger exposures to what’s perceived as safe, like residential mortgages, or to what’s decreed as safe, like loans to friendly sovereigns. 

https://teawithft.blogspot.com/search/label/pro-cyclical

@PerKurowski

Capital requirements for banks based on how much “distressed debts” hedge funds raise money?

Sir, Joe Rennison’s and Lindsay Fortado’s “Distressed debt tempts investors in anticipation of the next downturn”, June 19, raises the following question:

Could an index that tracks how “US hedge funds specialising in distressed debt are raising money in anticipation [of] the next economic downturn” be useful to base bank capital requirements on? 

At least it should be much better than current regulations, which allow banks to build up dangerous exposures to what is perceived as safe, against especially low capital requirements, especially when a Jason Mudrick, founder of $1.9bn Mudrick Capital can state “This economy is roaring right now”

@PerKurowski

It is the run of banks to what is perceived, decreed or concocted as safe that is scary

Sir, you opine: “If there was ever a moment for bankers to take on too much risk, thereby planting the seeds of a nasty downturn, it is now”, “The unsettling return of bullish investment banks” June 18.

Given current regulation a more exact phrasing of “to take on much risk” would be “to build up risky exposures to assets that are perceived (houses), decreed (sovereigns) or concocted (AAA rated securities) as safe against the least capital possible” 

When you write: “there are other indications of a cyclical top. Assets remain expensive worldwide, and in the US business confidence is at a peak, unemployment is very low and tax cuts have delivered a big fiscal stimulus”… you are describing a world in which the regulators with their risk weighted capital requirements, more than warning the banks are spelling out a go ahead. Their countercyclical capital requirements when leaving in place the distortions of risk weighing are a joke. 

Bank crisis never result from exposures to what is ex ante perceived as risky but only from exposures to something perceived as safe. By allowing those risky sized exposures to build up against especially little capital, the regulators have set bank crises on steroids.

The regulator’s tiny countercyclical capital requirements are, when leaving in place the distortions of risk weighing, just a joke. 

If only banks went for much more of the truly “risky”, like loans to entrepreneurs or SMEs. Those exposures would of course also be hurt in a crisis but, meanwhile, they could at least help our economies to move forward in a more dynamic way. Risk-taking is the oxygen of development. God make us daring!

@PerKurowski

IBM, Watson could have a role in regulations that accept the need of the real economy for banks to take credit risks

Sir, I refer to Richard Waters report on the difficulties IBM faces in expanding the application of its Jeopardy champion Watson, “FT Big Read: Artificial Intelligence: Can Watson save IBM” January 6.

In it quotes Lynda Chin mentioning the challenge that “On Jeopardy! there’s a right answer to the question, but, in the medical world, [in the real world] there are often just well-informed opinions… [So how to know] how much trust to put in the answers the system produces. Its probabilistic approach makes it very human-like… [Watson] Having been trained by experts, it tends to make the kind of judgments that a human would, with the biases that implies.”

Indeed how much trust is just another way of stating how much risk is one willing to take.

For instance if one wants driverless cars to provide absolutely security, then traffic will probably become very slow, or even come to a standstill. And one of the difficulties these cars will encounter will be based on defining the acceptable amount of risk taking.

Likewise, if one wants our banks to be absolutely secure, then one would be better off with hiding money under mattresses in bank vaults… but the real economy would be languishing because of the lack of credit.

So there might be a big role for Watson in bank regulations. First of all it could help me convince the Basel Committee of that their credit risk weighted capital requirements are based on a very faulty human bias against risk; something which at the end of the day only endangers banks, since it causes excessive exposures to what is perceived as safe, precisely that which has caused all major bank crisis.

And, if fed with continuous information on bank credit and the state of the real economy, Watson could also be used to automatically send out countercyclical adjustments. Too much growth in credit… increase capital requirements somewhat… too little growth in credit reduce capital requirements somewhat. The most important thing needed for that would be to make Watson immune to lobbying pressures of all sorts.

What I would not allow Watson to do though is to display that kind of human arrogance of thinking itself capable of setting different capital requirements for different assets, so as to distort the allocation of bank credit as it thinks fit to distort.

To do that, I would still want a human to be behind that kind of risk taking… of course a human who understand what he is doing and is willing to be held very much accountable, if taking the next generations down the wrong path.

@PerKurowski ©

Dare ask bank regulators: Why do you think that what is perceived as risky is riskier than what is perceived as safe?

Sir, Philip Stephen writes: “The crash and the subsequent depression broke the confidence of a generation of political leaders. All the guff they had learnt about a new financial capitalism, self-equilibrating markets and the end of boom and bust was shown to be, well, guff… bankers by and large got off scot free. Not so politicians who believed their own propaganda and embraced the laissez faire Washington Consensus as the end of history. Capitalism survived the crash, but at the expense of a collapse of trust in ruling elites” “Politicians are paying the bill for the crash” December 18.

What “laissez faire Washington Consensus”? That which with the Basel Accord prescribed a risk weight of zero percent for sovereigns and 100% for the private sector? That which with the risk-weighted capital requirements for banks completely distorted the allocation of bank credit?

The problem is that the trust of politicians in the ruling regulating technocrats did not collapse. As I have said many times, neither Hollywood nor Bollywood would have been so dumb as to allow the producers of a box office flop like Basel II to proceed, with the same scriptwriters, to produce Basel III.

I have a feeling politicians, Fed’s policy makers and perhaps even some FT journalists start to suspect that something is making the Fed and the ECB stimulus fail; and would therefore want to ask regulators: Why do you think that what is perceived as risky is riskier for the banking system than what is perceived as safe?

Why don’t they ask? Perhaps the explanation is one that John Kenneth Galbraith gave in “Money: Whence it came where it went” 1975, namely that “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

PS. Sir, now when the credit quality of EM markets is deteriorating, banks holding such debt are required to put up more capital against positions taken up during sunnier days, putting a squeeze on bank lending, and so everything will become darker yet. Vive la procyclicité!

@PerKurowski ©

Bank regulators’ magnificent pro-cyclical machine is fueled by credit rating downgrades

Sir, Eric Platt writes: “US corporate downgrades soar past $1tn as defaults gain pace” December 5.

He discusses several of its implications but forgets one of the most important, namely its impact in the capital requirements for banks. As is, because of the risk weighted capital requirements for banks, these will be required to hold more capital, meaning they will be able to lend less, or even have to dispose of assets, meaning everything will get worse, all the courtesy of dumb and useless pro-cyclical regulations.

The moment a bank puts an asset on its books, that is the moment when it needs to have sufficient capital, and that sufficiency should obviously include the possibility of a future downgrading.

How is it bank regulators cannot understand that the safer something is perceived the larger the potential for bad news?

@PerKurowski ©

Bank regulators make sophisticated remarks about the need of countercyclical regulations and design pro-cyclical ones.

Sir, I refer to Joe Leahy’s “Rating agency pressure on BTG Pactual” November 27.

Downgrading… depending on whether it crosses some regulatory thresholds, could mean banks are required to hold more capital against loans assets so affected. Were it to happen, this could, in a pro-cyclical fashion, only help to increase the resulting problems.

And what would usually trigger such a credit degrading? Mostly some unexpected events, like in this case the arrest of BTG Pactual’s chief executive, André Esteves.

And this evidences, for the umpteenth time, the dangers with using ex ante perceived expected credit risks to define the capital banks should hold against unexpected losses.

When the outlook is rosy and so many could be perceived as safe then the capital requirements go down, so bank can leverage even more, so bank can give even more credit, and everything will look even rosier.

When the outlook is darker and many could be perceived as risky, then the capital requirements go up, so bank can leverage less, so banks have to contract the credit they have awarded, and so everything will look even darker yet.

Regulators fill their mouths with sophisticated remarks about the need of countercyclical regulations but manage somehow, with a little help from silent FT, to avoid being held accountable when they design pro-cyclical nonsense.

@PerKurowski ©

After banks have placed assets on their balance sheets, they are de-facto “after the curve”

Sir, Gillian Tett with respect to the difficulties posed by a possible drop in the oil price write that “now [regulators] are keen to show they have learnt the right lessons from last decade’s crisis — by getting ahead of the curve and forcing banks to be tough”, “The tangle of loose lending to tight oil” October 16.

Getting ahead of what curve? In the case of bankers after they have placed the asset on their book they are already de facto after any curve that is going to be thrown at them.

What is it with these statists? They abhor fiscal austerity and they love lots of QEs and minimal interest rates, but they do instruct banks to be austere… and regulators have many adoring fans cheering them on.

Why do regulators require banks to act be pro-cyclical and not counter-cyclical? If when oil were over $100 per barrel, banks would have stopped putting oil related loans on their balance sheets… that would have meant, quite correctly, “getting ahead of the curve”.

When will regulators learn… or it is just so that they just refuse to learn? 

PS. How long will we have to live with dumb regulators who make banks clear for ex ante perceived credit risk in their capital... when that is about the only risk banks have already cleared for, with interest rates and amounts of exposures? 

@PerKurowski ©

Bank fines should be paid with bank equity, not with cash, unless we are masochists and want to be cruel to the economy.

Increasing the capital requirements for banks in the midst of a slow economy, while at the same time eroding bank capital with fines, is sheer economic cruelty… pure masochism. And especially so against those who for which cruel regulators decided, for no other reason that they think that to be a great idea to keep banks safe, that banks need to hold especially much capital when lending to them, like the SMEs and the entrepreneurs.

Sir, with respect to the reimbursement of claims for mis-sold insurance, you write that “As of this year, banks have already paid out about £20bn” and at long last take notice of that “The consequent erosion of banking equity can hinder credit provision in ways that damage the economy as much as the stimulus has helped” “UK banking’s sorry tale draws slowly to a close” October 3.

At long last FT! £20bn times a prudent level of 12 to 1 leverage gives you £240bn less lending capacity… at current imprudent sort of 30 to 1 leverage that would signify £600bn less lending capacity.

I hold “At long last FT!” because I have written you several letters on this problem but that, as usual, for your own internal reasons decided to ignore.

But I repeat. We must find a new way of imposing fines on banks. I have suggested that instead of cash banks pay in new shares issued at current market value. These shares if paid to the State could be non-voting and if paid to persons, like in this case, could include preferred dividends for some years.

PS. Having those mistreated by banks become their shareholders, seems like a innovative way of educating banks  J 

PS. Allowing authorities decide at each moment in what proportion of cash or equity these fines should be paid, would give them a new countercyclical tool  J

PS. The payment in bank shares should apply, of course, to all legal fees too J

PS. How come so many that loudly complain about government austerity loudly support bank credit austerity… do they all carry the virus of statism in their hearts? L

@PerKurowski

It seems experts guilty of totally absurd bank regulations, have managed to enact a powerful Maxwellisation process

Sir, in reference to what could be "The policy choices of high-income countries” taken in order to weather a slowdown, Martin Wolf writes: “politics has almost universally ruled out fiscal expansion; the intervention rates of central banks are near zero; and, in many high-income economies, private leverage is still quite high. If the slowdown were modest, nothing much might be done. The best response to a big slowdown might be “helicopter money”, created by the central bank to stimulate spending”, “A new Chinese export — recession risk” September 15.

Wolf shies away from commenting on how banks are doing and if they are prepared to help out… or even allowed doing so. Many are screaming for higher capital requirements, which, if imposed, would constrain overall lending, especially the kind of risky lending that is most needed when the going gets tough.

Just look at what happens if a company looses a good credit rating. Then immediately banks are required to hold more capital against loans to that company, which reduces their capacity to lend to others, or even forces them to offload other assets.

Today, next to Wolf’s article, John Kay refers to “Maxwellisation… a process by which the … powerful obstruct criticism of their actions” “The tale of the crook and his obstructive legal legacy”.

Clearly current bank regulations issued by the Basel Committee, not only distort the allocation of bank credit in good times but being extremely pro-cyclical are also unhelpful in slowdowns. The lack of possibilities to question these regulations, which includes FT’s silence… makes us therefore wonder whether we are facing a Maxwellisation process enacted for their benefit by bank and ex bank regulators, and other supposed experts on the subject.

PS. Or is it more like what John Kenneth Galbraith wrote: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”?

@PerKurowski

The standardized risk-weights of Basel II, provided the coverage banks needed to hold minimum capital

Sir, your “In praise of bank leverage ratios”, July 11, though I agree with its title, just shows how little you have understood about the underlying causes of the North Atlantic banking crisis.

You write “rather than imposing standardized risk weight, regulators have let banks use their own model. This undermines the credibility of the exercise.”

The standardized weight in Basel II, for holding for instance the AAA rated securities backed with mortgages to the subprime sector in the USA, or loans to Greece, was only 20 percent; which signified that banks could hold these assets against only 1.6 percent in capital; which meant banks could leverage their equity 62.5 to 1 with these assets.

In fact, without the guidance of these standardized weights, the banks would not even have dared to convince their regulators that so little capital could be needed.

Since you also hold that the leverage ratios needs to be combined with effective risk-weighted capital ratios, you also show not having understood how these distort when it comes to banks allocating credit to the real economy.

But, with respect to that macroprudential policy should be counter-cyclical, on that we agree completely, as I indicated in a letter to you in 2004.

Nonetheless most of this discussion will be a moot point in January 2015. The Basel Committee has instructed the banks to report their leverage ratio from that day on. And after all recent signs of “bank creditors, caveat emptor, you won’t be bailed out like before”, like in Cyprus, banks have to be truly insane not knowing they have to substantially raise their capital, in order to survive the coming stampede from banks leveraged over 30 to 1 to those leveraged 10 to 1, no matter the riskiness of the underlying assets.

And the USA, thanks to FDIC, is taking the lead lowering those ratios. Europe, beware!

The banks are made to jump from one huge pro-cyclicality to another.

Sir, Ben McLannahan reports, “IMF sounds alarm on Japanese lenders”, October 11, and this as a result of “domestic bank holdings of government bonds in the country could rise to a third of their total assets within five years now”.

I do not get it! Is it not what they wanted? They must obviously have understood that this would be only the natural consequence of allowing the banks to hold basically no capital at all against exposures to “The Infallible”, while at the same time requiring them to hold around 8 percent in capital when lending to “The Risky”, like the small businesses and entrepreneurs.

But, I am indeed worried, because it means that precisely at the moment the public sector might be hit by higher borrowing cost, will be precisely the moment they will need to bail out the banks because of their losses on public bonds. 

The article also states “Japan’s interest rates have been kept low in recent years by strong support from the banks”, but that must be a typo. I guess they meant “strong support from the bank regulators”. 

Indeed it would seem like the regulators are intent on having our banks jumping from one huge pro-cyclicality to another.

The pro-cyclical tsunami machinery

Sir, Sir Samuel Brittan starts his “An ancient Greek approach to modern economics” July 20, taking about cycles and ends it with the need for “removing distortions at the micro level”. He might be interested in the following macro micro distortion that is taking economic cyclicality to unimaginable levels. 

A European bank was authorized to lend to Greece holding only 1.6 percent in capital, which meant being able to leverage Greece’s risk-adjusted margins 62.5 times, and so it did, but, unfortunately, so did too many other banks, and Greece went bust. 

And now, when the bank has lost all its capital, it is required to hold many times more capital if lending to Greece, and so the European bank has no other choice but to lend to Germany, as so must all other banks do, something which does not require it to hold any capital. In fact, if lending only to the infallibles, then the bank would not even need shareholders, and could retain all bank profits for bankers’ bonuses. 

If this bank regulation is not a machine for creating a tsunami of pro-cyclicality, what is?

Who placed and keep the banks on a eurozone knife-edge?

Sir, part of the problems with banks is that those same regulators who should have required equity from the banks when these placed sovereign loans on their books, but did not, because the regulators wished to consider these sovereigns as infallible, are now dumb enough to require the banks to immediately adjust to the fact that the sovereigns might not be so infallible after all. In other words, the banks are forced to deleverage, which hits of course the most those who require the most of bank equity, namely the officially decreed as risky, namely the small businesses and entrepreneurs, namely those least responsible for this crisis. 

In a period where countercyclical action is required, new bank equity should be raised to support new lending and not to cover capital requirements for old bad lending. But, even though Martin Wolf now begins to admit the need “to break the adverse loop between subpar growth, deteriorating fiscal positions, increasing recapitalization needs, and deleveraging”, he still refuses to do a full Monty disclosing the regulatory stupidity, probably because he does not want hurt his buddies, “Banks are on a eurozone knife-edge” April 25. 

Of course, it also reflects the fact that Martin Wolf, the chief economics commentator at FT, from an ideological point of view, much rather prefers government bureaucrats to run the Keynesian deficit spending he favors, than allowing the banks to allocate those resources without the interference of regulating bureaucrats. 

Yes banks are indeed on a eurozone knife-edge, but we surely need to look more into who placed them there and who keeps them there?

And where are the smart principles for regulating regulations?

Sir, John Kay directs his “A smart business is dressed in principles not rules” January 12, to the people in Basel dealing with the regulations of banks. To that I would indeed add the following:

Bankers, as a principle or as rule, should believe they can master quite adequately default risks. Who wants to deal with a banker who does not?

The regulators, as a principle, and as a rule, should always answer the bankers “No you can’t… and besides there are so many other risks to be considered than just avoiding defaults”

It is bad enough when regulators fall for the sales pitch of bankers, but so much worse when regulators arrogantly decide what is the risk that should be regulated and try themselves to be the masters of that risk, with or without the help of credit rating agencies.

Currently the regulators who failed conquering simple risks of defaults are now tackling more God-like events like pro-cyclicality. God help us! Where are the smart principles for regulating regulations?

Should we not have a serious man to man conversation with our bank regulating chaps at the Basel Committee?

Sir, if you and I were going to design some capital requirements for banks based on the risk of default of borrowers as measured by the credit rating agencies, would we use the default rates those credit ratings generally imply, or would we use the default rates suffered by the banks after the bankers received that credit rating information? I am sure you and I would agree on using the second alternative, since the first really makes no sense as it would imply that bankers do not take notice of the credit ratings, something that with the capital requirements based on these ratings, we are really making sure they do.

If we so then use the default risk for banks after credit rating information, would we also adjust our risk-weights to the fact that those perceived as riskier are charged much higher interest by the banks than those perceived as less risky? I am sure we would definitely consider that important risk mitigation factor and do so, since otherwise we would be perceived as foolishly assuming that all borrowers paid the bank the same interest rate.

But since we now know that our bank regulating chaps at the Basel Committee did nothing of the sort, they just used gross default rates unfiltered by the bankers applying their own credit analysis criteria, and they completely ignored the mitigation of a higher default risk provided by higher interest rates, isn´t it time we call them home so as to have a serious man to man conversation about what they are up to? I mean before they go on to tackle even much bigger problems like counter-cyclicality and systemic risk. I mean so as to inform them about the fact that they, in their own right, are becoming our greatest source of systemic risk.

 

I believe we should. Just consider the mess they did by making the banks stampede after some lousy securities just because these were rated triple-A; and all the small businesses and entrepreneurs who have seen their access to bank credit curtailed or made more expensive just because their odious regulatory discrimination against perceived risk.

A verse of a Swedish Psalm reads: “God, from your house, our refuge, you call us out to a world where many risks await us. As one with your world, you want us to live. God make us daring!”

“God make us daring!” That is indeed a prayer that the members of the Basel Committee do not even begin to understand the need for.

Psalm 288 Text: F Kaan 1968 B G Hallqvist 1970, Music Chartres1784

Yes we need regulatory dynamism... in the right direction of course

Sir I much appreciate Tony Jackson’s call “Let’s get some dynamism into dynamic provisioning” March 22. He is absolutely right, as I have been arguing for more than two years, now is the time to lower the capital requirements for banks, at least for those small businesses and entrepreneurs and though they caused the largest regulatory capital needs had nothing to do with causing this crisis.

What two years? I have been on this much longer

http://teawithft.blogspot.com/2004/08/towards-counter-cyclical-basel.html