No President Obama. No country with bank regulations based on credit risk aversion can speak of having a bold voice

Sir, Barack Obama writes “the US is ready to lead a global effort on behalf of new jobs, stronger growth, and lasting prosperity for all our people well into the 21st century. “America’s bold voice cannot be the only one” November 13.

He mentions: 1. “fiscal policy that supports short-term demand and invests in our future”; 2. “boost demand by putting more money into the pockets of middle-class consumers who drive growth”; 3. “more inclusive growth by lowering barriers to entering the labour force.” 4. “high-standard trade agreements that actually benefit the middle class” 5. “greater public investment… through new private investment in clean energy.”

Nowhere does he make a reference to the need of getting rid of bank regulations that are blocking the risk-taking needed to achieve sustainable economic growth.

The pillar of current bank regulations is the credit-risk weighted capital requirements for banks; more risk, more capital -less risk, less capital. Since banks, when deciding on risk premiums and amounts of exposure, already clears for credit risk, this results in an excessive consideration of credit risk. Any risk, even though perfectly perceived leads to the wrong results if excessively considered.

And therefore, in words attributed to Mark Twain, we now have banks that lend you the umbrella, much faster than usual if the sun is out, and take it away, much faster than usual if it seems like it could rain. In other words our bank’s, by having been given permissions to leverage much more with what is perceived as safe, earn much higher risk-adjusted returns on equity when lending to the safe are, consequentially, behaving more risk-averse than ever.

If one wants banks to be constructively bold, then one should set the capital requirements based, not on pitiful credit risk weights, but on daring purpose weights, like for instance based on “clean energy” and job-creation ratings, and SDGs in general.

And this will not cause the banking sector to become unstable, just the opposite. Never ever are major bank crisis the result of excessive exposures to something perceived as risky when placed on the balance sheets of banks… only of something ex ante perceived as safe that ex post turns out risky.

PS. This is also a civil rights issue. These regulations that double down on credit risk, discriminate against the rights of the risky, like SMEs and entrepreneurs, to have fair access to bank credit.

@PerKurowski ©

Scrap credit risk weighted capital requirements for banks and base it on sustainability and job creation instead.

Sir, I refer to David Pitt-Watson’s “‘Fossilist’ finance is proving a hindrance to the ‘clean trillion’” October 8. Again, for the umpteenth time, I make a suggestion that has steadfastly been ignored by FT. I am sorry, to be repetitive, but if that is what it will take, that is what I will be.

Intro: The pillar of current bank regulations is the credit risk weighted capital requirements. More perceived risk more capital and less perceived risk less capital. That so as to serve as an inducement to stay away from what is risky allows banks to earn much higher risk adjusted returns on “safe” assets than on “risky” assets. And that is one utterly purposeless and dangerous piece of regulation.

Purposeless, because of course the perceived credit risk has not one iota to do with if the credit is going to be used for a good societal purpose. There is not one word that defines the purpose of banks in all current regulations.

Dangerous, because it tempts banks to build up excessive exposures, against little capital, precisely with those assets that can cause major bank crises, that what is perceived as safe. What is perceived as “risky” takes care of itself with high risk premiums and low exposures.

And so Sir, it should be clear that current regulations also constitute a major hindrance to the ‘clean trillion’… just like they for instance by impeding the fair access to bank credit of “The Risky”, like SMEs and entrepreneurs also constitute a major hindrance for job creation. 

And so here again is my proposal:

First, scrap those regulations and set the same capital requirement against all assets, so as not to distort the allocation of bank credit. Initially, considering the sorry state of the economy, what is probably required is diminishing the capital requirements for what is risky, to about the level of capital banks already have against all assets.

Then, and only then, and after having clearly explained why, lower slightly the capital requirements against assets that can obtain very good ratings in terms of how they assist sustainability and how they can help create jobs for the next generation. That would allow banks to earn more, on what we all are glad they can earn more.

God make us daring!

PS. Since David Watson is an executive fellow of finance a London Business School, I want to inform him that from mid 1979 until mid 1980 I took their Corporate Finance Evening Course.

@PerKurowski ©  J

Capital requirements for banks weighted for environmental and job creation concerns, would at least serve a purpose.

Sir, Martin Wolf writes: “The best way of responding to the challenge of climate change is through changed incentives and accelerated innovation aimed at making carbon-free technologies competitive with fossil fuels. Both demand more active public policies.”, “A moonshot to save a warming planet”, June 24. He is correct but one of the active public policies that need to be reviewed is that of bank regulations.

Currently the Basel Committee’s risk weighted capital requirements for banks clears for the only risk that has been previously cleared for by banks, namely credit risk. That is as loony as can be, since it distorts the allocation of bank credit for absolutely no purpose at all. These should be based on the risk that bankers are not capable to manage perceived credit risks… which c'est pas la même chose. In fact it can be shown that it is when the perceived risks are really low, that bankers have encountered the biggest problems.

If bureaucrats absolutely must distort, because that is their modus vivendi, if their capital requirements were based on environmental and job creation concerns, then these would at least align much better with an identifiable worthy social purpose... think of earth sustainability and job creation ratings!

Of course more publicly funded research and development on renewable could help… but let us not ignore the importance of allowing banks to take more risk; to leverage their equity and the support we lend them as taxpayers more; and therefore to earn higher expected risk adjusted returns on equity, when their risk-taking makes much more sense to us.

@PerKurowski

How do we reduce the uncertainty on climate change risk with a higher degree of certainty? By taking risks!

Sir, Martin Wolf writes: “Framing the challenge of climate change as a problem of insurance against disaster is intellectually fruitful. It also provides the right answer to sceptics. The question is not what we know for sure. It is rather how certain we are (or can be) that nothing bad will happen. Given the science, which is well established, it is impossible to argue that we know the risks are small. This being so, taking action is logical. It is the right way to respond to the nature and scale of possible bad outcomes. “Why climate uncertainty justifies action” June 10. 

That is absolutely the right way to analyze it… though it does not necessarily make it easier, like Wolf also describes with: “It is increasingly evident that the answer has to be technological. Humanity is unwilling, possibly simply unable, to overcome the political, economic and social obstacles to collective action. The costs to current generations seem too daunting.”

And so I would retort asking: What uncertainty is riskier with a higher degree of certainty?

That we do not do anything about climate change waiting for new solutions to pop up?

That we do not do anything about climate change but also make it more difficult for new solutions to pop up?

I ask this because making it easier for new solutions to pop up requires risk-taking… and that is precisely that which our regulators have banned the world premier financiers, the banks, to take.

Right now we have purposeless and dumb bank regulations that allow banks to earn higher risk adjusted returns on equity by means of leveraging more by avoiding credit risks.

How much better would it not be to use capital requirements for banks based on weights derived from sustainability ratings (and job creation ratings), let us call these purpose weights, and allow banks to earn more when they serve a useful societal purpose… is that not why we support them so much that we even allow them to become dangerously too big too fail?

Or let me frame it all in the way that Wolf finds intellectually fruitful. Is not risk-taking, for instance by banks, the insurance premiums we must pay when we are striving for a better future for our children looking to avert stalling and falling? The current generation has not been willing to pay these... shame on it.

@PerKurowski

Martin Wolf, absent conflicts of interest, and with perfect information, would there even be financial markets?

Sir, Martin Wolf writes: “It is very costly to police markets riddled with conflicts of interest and asymmetric information. We do not, by and large, police doctors in this way because we trust them. We need to be able to trust financiers in much the same way.” “Why finance is too much of a good thing” May 27.

And of course it is hard, and absolutely politically incorrect to disagree with that… but still there is a question that should nag us:

Would there be financial markets in the absence of conflicts of interest and presence of perfect information? Is it not precisely conflicts of interest and asymmetric information, all dosed with a hefty amount of blissful ignorance, which gets markets out of their bed every morning?

Martin Wolf, the purpose of doctors is very clear and it would be foolhardy for doctor regulators to stand over their shoulders and intervene. But let me ask you, what for you is the real purpose of financial markets, and banks. I ask that because if you just want to go ahead and control for control’s sake, then you are a just a freaking dangerous vigilante.

Here we are, in May 2015… with our banks still being regulated by some nuts, who have not yet clearly told us what they think the purpose of banks is; and then made sure we the society agree… freaking dangerous vigilantes they are!

PS. Now the Basel Committee regulators imposes purposeless credit-risk weights for determining the capital (equity) banks need to have against assets. Why do we not ask them for some purpose weights... to see what they can come up with?

PS. Martin Wolf, besides our bankers, do we not have to trust our bankregulators too? I sure don’t

PS. All finance is great when debtors have a good plan… Force-feeding debtors is worse than feeding geese for foie gras

@PerKurowski

Why are bank regulators obsessed with already used perceived credit risks and totally blind to job creation and Mother Earth?

Sir, Lucy Kellaway asks “Why we are more vocal about loo rolls that our jobs” July 21.

In the same vein I have for soon two decades asked why bank regulators are more than vocal, really obsessed, with credit ratings, and complete ignore such things that society would like to have banks financing, like the generation of new jobs or fighting climate change.

The risk-weighted capital requirements are stupid, because bankers already take into account whatever credit risk information is available when they set interest rates and decide on the size of exposures, and so there is no need to clear for the same information twice.

How much more interesting would be to allow for slightly smaller capital requirements, which means bank can leverage more and earn a higher return on their equity, based on something more useful, like potential-of-job-generating-ratings or Sustainability-of-Mother-Earth ratings.

Default risk-weights and purpose-weights are used to establish capital requirements for banks in Venezuela.

Sir on July 29, in Venezuela, the financial regulator, Sudeban, issued a normative by which the risk weights used to establish the capital requirements of the banks were lowered to 50%, when banks lend to agriculture, micro-credits, manufacturing, tourism and housing. As far as I know this is the first time when these default risk-weights and which resulted from the Basel Committee regulations, are also weighted by the purpose of the loan.

The way it is done Venezuela seems to lack a lot of transparency and it could further confuse the risk allocation mechanism of the markets (though in Venezuela that mechanism has already almost been extinguished) but, clearly, a more direct connection between risk and purpose in lending is urgently needed.

In this respect the Venezuelan regulator is indeed poking a finger in the eye of the Basel regulator who does not care one iota about the purpose of the banks and only worry about default risks and, to top it up, have now little to show for all his concerns.

I can indeed visualize a system where the finance ministry issues “purpose-weights” and the financial regulator “risk-weights” and then the final weight applicable to the capital requirements of the banks are a resultant of the previous two.

Does this all sound like interfering too much? Absolutely, but since this already happens when applying arbitrary “risk weights” you could also look at this as a correction of the current interference.