Many or perhaps most of our bankers would be much better off, at least happier, if they heeded George Bank’s “Let’s go fly a kite!”

Sir, John Gapper refers to “Two academics who studied investment bankers in London were surprised by their degree of cynicism and noted the absence of ‘meaningfulness, emotions and personal investment in work values’. “Bankers have been alienated from their jobs” July 11.

Call me a romantic if you want but, I know that when bankers who felt proud of being savvy loan officers were, with the introduction of the risk weighted bank capital requirements, pushed aside by equity minimizing and leverage maximizing financial engineers, there had to be a lot of frustrations.

Imagine if you as a loan officer had analyzed in depth the plan an entrepreneur presented in his credit application; and you had gotten to know him well; and you had agreed on a risk adjusted interest rate that made sense for both of you, and then your superiors told you: “No we can only leverage our equity 12.5 times with this loan so you either get him to accept a much higher interest rate, or we’re not interested”… and you knew that higher interest rate doomed the viability of the project? Would you not then feel like our beloved George Banks, that you’d better go and fly a kite?

Sir, most of those who became bankers during the last three decades must have a very hard time understanding what “It's a Wonderful World" is all about.

@PerKurowski

Much needed bank capital reforms are hindered by bank lobbying, and by regulators unwilling to discuss their mistakes.

Sir, Benoît Lallemand, Secretary-General of Finance Watch writes: “European bank supervisors last year found ‘unjustified underestimations’ of risk in nearly half of the 105 banks they investigated” “Banks should submit to logic of reform on capital allocation”, March 6.

For those regulators who assigned a risk weight of 150% for what is so innocuous for our bank systems as what is rated below BB-, is not assigning a meager 20% for what could really endanger our bank systems, precisely because it is ex ante rated a very safe AAA to AA, a much worse ‘unjustified underestimations’ of risk?

Surprisingly Lallemand opines that “Risk-based capital measures could still serve their original purpose: as an internal instrument to guide banks’ capital allocation processes.

What? Where in all Basel I or II regulations has he seen stated their purpose was of being “an internal instrument to guide banks’ capital allocation processes”?

It is only the complete elimination of risk weighting that could “encourage banks to lend more productively because it would lessen the regulatory skew towards seemingly safe assets, which has done so much to deprive the real economy of capital, inflate housing and land prices, and feed financial instability.”

Because, even with a 5% leverage ratio, something Lallemand favors, keeping risk weighting would keep on distorting the allocation of bank credit on the margin, there where it matters the most.

Lallemand ends arguing, “that such reforms have still not happened is testament to the power of the banking lobby”. No, much more than that, it has been the refusal by bank regulators to admit their mistakes.

Would there have been any type 2008 crisis if European and American investment banks had not been allowed to leverage a mind-blowing 62.5 times with assets rated AAA to AA, or with assets for which an AAA rated entity like AIG had sold a default guarantee? The answer to that is, an absolute definitive, NO!

@PerKurowski

A governance code that forces regulators to clearly define the purpose of banks is much needed.

Sir you write, “From January 1, a revised corporate governance code will apply to UK-listed companies, for instance. It now states that the board’s duty is to ‘establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned’”. “Taking the measure of good corporate culture” December 27.

Sir, if only such code had existed and been applied by bank regulators.

As is the risk weighted capital requirements for banks which so dangerously distorts the allocation of credit to the real economy, were developed without any consideration to what is the purpose of banks, that is unless you think that being a safe mattress into which to stash away cash, is all that banking is about.

If “What are banks for?” had been asked, the Basel Committee would not have allowed banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs, those who could perhaps help to create more of the jobs needed in order to be able to service the mortgage and pay utilities.

You also write: “The Banking Standards Board, set up in 2015 to help the UK sector regain trust, runs an annual assessment of members, monitoring areas from honesty to accountability with a staff survey, focus groups and interviews.”

Sir, with respect to accountability, has that Board ever asked regulators why they think that what bankers perceive risky is more dangerous to our bank systems than what they perceive as save?

@PerKurowski

A world obsessed with Best Practices may calcify its structure and break with any small wind.

Sir, Nicholas Dorn in his letter “Drive for global banking conformity increases systemic risk” of September 18, refers to your leader article, “Waning co-operation will make the next financial crisis worse”, and MEP Molly Scott Cato’s letter “Global finance can work if rulemakers co-operate”, September 14. Dorn writes:

“Converging international financial regulation encourages similar business models and greater homogeneity of finance, raising systemic risk”.

“No one knows where the next crisis is going to come from. The more useful question is how the propagation of crises through the system can be minimised”

“The plain implication is the need for greater variation in finance, so that such risks as do arise cannot so easily ripple through the global ensemble. What is desperately needed, therefore, is not bland global conformity but more variation between important regulatory regimes.”

I could not agree more. In April 2003, as an Executive Director of the World Bank, I made the following formal statements at the Board, which relate directly to those fundamental points Dorn raises.

"A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

“Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.”

What else can I say? Well perhaps that that statement also included:

“Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth”

Sadly Sir, as I have written to you umpteenth times, a different purpose for banks than just being a safe place where to stash away cash (and implicit to help fund the sovereign) is nowhere to be found in all the voluminous official writings about bank regulation.

Was I able to get my message thru? No! I guess the attraction of that with risk weighted capital requirements the regulators would be able to make our banks safer, was such that not even FT was (is) able to resist the songs of Basel Committee’s sirens. 

@PerKurowski

If you really want banks to make green investments, allow bank to hold less capital against these than for instance against residential mortgages.

Sir, Suleika Reiners, Senior Policy Officer for Financial Reform, Institute for Financial Services, Germany writes: “banks need more equity, not less, in order to fulfil their key responsibility — namely to cushion risk, including for green investment. Lending for long-term endeavours such as large-scale renewable energy projects particularly deserves high-risk weightings” “Banks need more equity to boost green investment”, January 4.

Boy, has she got it all upside down. I have nothing against higher capital requirements for banks, unless these are imposed so irresponsibly so that the while bank credit machinery freezes. But, in order for banks to really boost green investment, they should be allowed to hold less capital against these investments than against other assets, so that they can earn a higher risk adjusted return on it.

Just look at how much they are financing residential housing, only because that’s perceived safe by regulator safe, and who therefore allow banks to hold little capital against the mortgages.

Reitners refers to “a study by the University of Cambridge in association with the United Nations Environment Programme Finance Initiative [that] has proved that stricter equity requirements are an insignificant factor in influencing the bank’s pricing of the loan or its willingness to lend.”

I have not read that study but, if those are the results, I am sure it contains major design flaws.

Sir, you refusal to discuss the distortions produced by risk weighted capital requirements, perhaps so as not to disfavour your bank friends, is partly to blame for the continuation of misconceptions as those expressed here by Suleika Reiners.

I don’t like the idea of distorting the allocation of bank credit to the real economy but, if we have to do it, let that at least be in pursuit of higher objectives than a simple risk avoidance, which will anyhow not isolate us from bank crises.

God make us daring!

@PerKurowski

To apply the Socratic method successfully requires students to be somewhat interested in the questions.

Sir, with respect to Lucy Kellaway’s "End of Term Diary” (December 23), David Parker writes: “It’s the teacher’s job to facilitate and motivate. Show students the beauty of things. And, teach by the Socratic method. Ask a question. If the student doesn’t understand, ask another question. Keeping asking. When they understand, they’ve learned” “Teach by the Socratic method — keep asking” December 30.

I have tried to apply the Socratic method during years trying to make Financial Times understand the mistakes of risk weighted capital requirements for banks. Among the questions:

Why do regulators require banks to hold more capital against what has been made innocous by being perceived as risky, than against what has become dangerous by being perceived as very safe?

Why did regulators not define the purpose of banks before regulating these?

Why did bankers use as input for their risk weighted capital requirements for banks the intrinsic risks of bank assets and not the risk of those assets for the banks?

Why do regulators not understand that allowing banks to leverage differently with different assets will distort the allocation of bank credit? And, if they understood that, who gave them the right to distort? Etc. 

But FT shows no interest in these questions… so I have to find another method… any idea Lucy Kellaway?

@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

The Basel Committee’s bank regulators being replaced by an algorithm could be the best that could happen.

Sir, I refer to Gillian Tett’s “Self-driving finance could turn into a runaway train”, December 8.

Well human-driven banks are now not doing so well either. 

Any algorithm currently making credit decisions for a bank would do so based on maximizing risk-adjusted returns on equity, based on perceived risks of assets and on regulatory bank capital requirements regulations.

Where would it get the risk perceptions? Currently credit ratings… Who knows if in the future algorithms would also take over the credit rating functions… if these have not already done so?

Where would it get the capital requirements? Currently it get those from the Basel Committee’s standardized risk weights, or if the algorithm works for a sophisticated bank, from its own risk models.

So, if the algorithm does its job well, and works for a sophisticated banks, it would seem that in order to obtain the highest risk adjusted return on equity, its priority has to be creating the risk model that minimizes the capital requirement.

And if it works for a bank that uses the standardized risk weights, then it is clear it would not waste its time with what carries a 100% risk weight, like an entrepreneur, but concentrate entirely on those with much lower risk weights, sovereign 0%, AAA rated 20%, residential mortgages 35%.

So, with the risk weighted capital requirements it is clear that whether the banker is a human or an algorithm, we can forget about savvy loan officers… they will all be equity minimizers.

Of course, an entrepreneur can always offer to pay sufficiently high interest rates to overcome the regulatory handicap. But, would doing so not make him even more risky? With current regulatory risk aversion we should cry for the future real economy of our children.

Sir, in 2003, at the World Bank’s Executive Board (before Nassim Nicholas Taleb had appeared on the scene to discuss fragility) I stated: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

So, I guess you can you imagine how much I fret us humans falling into the hands of a final conquering algorithm.

Or having to suffer the consequences of the systemic risks resulting from banks using fewer and fewer human bankers… with probably higher bonuses to the remainders.

By the way since the replaced bankers used to pay taxes, will we at least be able to tax those algorithms?

But, come to think of it, if an algorithm substituted for bank regulators that could be great news. I mean any half-decent algorithm would be able to figure out that what is really risky for our bank system is not what is perceived as risky but what is perceived as safe.

And any half-decent algorithm would also require an answer to the question of “What is the purpose of banks?” And I suppose no regulator would dare tell it, “Only to make the maximum risk adjusted returns on equity” 

@PerKurowski

What if banks could earn their highest expected risk adjusted returns on equity where they are most needed, like in Blackpool?

Sir, I just read Sarah O’Connor’s harrowing description of what is going on in Blackpool “Left behind: can anyone save the towns the economy forgot? FT Magazine, November 16.

It all sounds like Blackpool belonging to what we read more and more about, that termed as scrap land or junk land.

Sir, can we really afford to abandon those places to who knows who or to what knows what? If we do so what truly bad (or good) things could brew there? We might have some unexplored tools to help stop that or at least not to worsen it.

For instance, our banks, by means of the risk weighted capital requirements for banks are currently allowed to leverage more their equity when lending to what is perceived as safe than when lending to what is perceived as risky; and so banks earn higher expected risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky; so banks, naturally, lend much more to what is perceived as safe than to what is perceived as risky.

That is doubly stupid. First because why would you like to help those who are perceived as safe and that because of that already have more access to credit to have even more access to bank credit? Likewise why would you like to cause those who are perceived as risky and who because of that already have less access to credit to have even less access to bank credit? In other words “safe” London earns banks higher ROEs than “risky” Blackpool.

And secondly because from a bank stability point of view you are acting against what history proves, namely that those perceived as safe are a hundred times more dangerous to bank systems than those perceived as risky. In other words London is riskier to the bank system than Blackpool.

So let us suppose we instead based those risk weighted capital requirements, and the distortion they produce, on where we think bank credit could most be needed or most productive. Then we could perhaps arrange it in such a way that a bank lending to an entrepreneur in Blackpool would be allowed to leverage more than when lending to an entrepreneur in London. And then Blackpool could have a better chance to regain some of its former luster or at least not lose it all.

@PerKurowski

Just wait until the music stops playing the low interest rate tango building up corporate balance sheet leverage

Sir, John Plender, when discussing IMF’s latest Global Financial Stability Report writes: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.” “Beware the curse of buybacks that destroy shareholder value” October 31

Clearly this is another music that keeps bankers dancing, even when they know they shouldn’t, not for their own or for the economy’s sake.

In July 2014, commenting on an article by Camilla Hall on this subject I wrote: “Ask any old retired banker what was his first question to a prospective borrower and you would most probably hear him say: “What do you intend to do with the money if I lend it to you?” The banker would not have liked to hear “To pay a dividend or buy back some shares”.

Not any longer. Now his first priority is to think about how he can construe the operation in such a way as to minimize the capital needed, so that he could max out leverage too… and pay dividends and buy-back shares too.

But why should we assume only bankers are to behave responsibly? It takes two to tango. The regulators, with their risk weighted capital requirements clearly indicate they do not care one iota about the purpose of banks, and the central bankers, they just keep on kicking the crisis can down the road with QEs and low interest rates.

https://teawithft.blogspot.com/2017/05/low-interest-rates-cause-buy-backs.html

@PerKurowski

For the complexity of banks, regulating demagogues gave us the simple solution of risk weighted capital requirements

Sir, Martin Wolf writes that current “upheavals [2007-08 Crisis, Great Recession] have, as so often before, opened the way to demagogues, promising simple solutions to complex problems… Brexit… Trump…Catalonia”, “A political shadow looms over the world economy” October 14.

Indeed, but much of the upheavals were caused directly by the members of an exclusive mutual admiration club of populist regulators, who sold the world that monumental piece of demagoguery of risk-weighted capital requirements for banks. “You all relax… we have weighted the risks.”

And though they never defined explicitly the purpose of banks, because seemingly they do not care about that, implicitly, de facto, their risk-weights indicate what the banks should do, and what not. That is so because less capital, means higher leverage, which means higher risk adjusted returns on equity.

So now we have: thou shall lend to sovereigns, to members of the AAArisktocracy and to finance residential houses; and thou shall not lend to risky SMEs and entrepreneurs.

And when the first results of those regulations, the excessive exposures to AAA rated securities, and to sovereigns like Greece appeared and caused crises, they did not rectify, they kept their risk weighting, and their central bank brothers kicked the cans down the road with QEs and ultralow interest rates.

So look at the stock market going up while becoming riskier because of the de-capitalization that results from taking up loans to pay for dividends and buybacks.

So look at house prices being overinflated, as evidenced by the lagging of rental values; while central bankers turn a blind eye to house prices not being in the consumer price index, but that rentals are.

So look at how sovereign debt levels are growing almost everywhere.

The monstrous silence about the distortions produced by bank regulations, like by influential opiners like Martin Wolf, is only helping to generate even more nutrient ingredients to all too many populists in waiting. God help us!

@PerKurowski

PS. My 2019 letter to the Financial Stability Board (FSB)

Could not artificial intelligence, AI, sometimes prove more intelligent and socially concerned than humans?

Sir, John Thornhill writes: “Mireille Hildebrandt, professor of law and technology at the Free University of Brussels, says one of the dangers of AI is that we become overly reliant on “mindless minds” that we do not fully comprehend. She argues that the purpose and effect of these algorithms must therefore be testable and contestable in a courtroom. “If you cannot meaningfully explain your system’s decisions then you cannot make them,” she says.” “Only human intelligence can solve the AI challenge” April 18.

Indeed, but that should go for humans too! For instance bank regulators should be hauled in front of a courtroom, in order to answer some very basic questions about their risk weighted capital requirements for banks.

I ask this because I am absolutely sure that, if AI regulated our banks, then at least the following two questions would have been asked:

What is the purpose of banks? And something like John A Shedd’s “A ship in harbor is safe, but that is not what ships are for” would have been considered.

What causes big bank crises? And something like Voltaire’s “May God defend me from my friends, I can defend myself from my enemies” would have been considered.

As a consequence we would not be having our banks being regulated to avoid the risk taking the future of our grandchildren need, for no real bank stability purpose at all.

Here follows some of the questions that I would like to ask the current bank regulators in front of a court, since they do not even acknowledge hearing these.

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

@PerKurowski

Why has the Financial Times, and other, kept silence for so long about some obvious mistakes in bank regulations?

Sir, Wolfgang Münchau now finally writes: “We should start making a distinction between the interests of the financial sector and the economy at large”, “Reform the economic system now or the populists will do it” December 19.

Of course we must. I have soon written 2.500 letters to FT, many to Wolfgang Münchau, pointing out the fact that our loony bank regulators did not find it necessary to define the purpose of the banks before regulating these. Their risk weighted capital requirements allow banks to earn higher expected risk adjusted returns on what is perceived as safe, than on what is perceived as risky. That might help bankers’ wet dreams come true, but does clearly not serve the interests of the real economy or even the long-term stability of the banks.

Münchau also writes: “We should not be surprised that people have become sceptical about experts who peddle theories that result in comically wrong predictions and that do not square with the reality they perceive.”

Indeed, why should we trust regulators who “comically” believe that what causes bank crises is what is ex ante perceived as risky?

But Sir, since lack of contestability has allowed these ludicrous regulations to survive for way too long, even after a huge crisis made its mistakes evident, we also need to understand how a qualified media like the Financial Times, and other, can be blinded, or silenced for so long on this issue.

@PerKurowski

How do politicians stand such failed technocrats as those in the Basel Committee and Financial Stability Board?

Sir, you quote BoE’s Mark Carney saying: “The objectives are what are set by the politicians. The policies are done by technocrats,” “Carney’s gentle reminder about BoE independence” October 17.

So let us assume that having banks perform the allocation of bank credit to the real economy as efficiently as possible, while at the same time ascertaining the stability of the banking sector, would be a reasonable objective set by the politicians. In fact I challenge you to find a politician who would dare to disagree with that objective.

But now let’s see what policies the technocrats, like Mark Carney, the current chairman of the G20s Financial Stability Board, and his colleagues on the Basel Committee have come up with.

They have imposed risk weighted capital requirements for banks that, allowing banks to leverage their equity and the implicit support these receive from society differently, based on ex ante perceived risks already cleared for, utterly distort the allocation of bank credit to the real economy.

And they designed that regulation based on the premise that what is ex ante perceived as risky is risky for the bank system, thereby completely ignoring all empirical evidences that clearly show that what’s really dangerous to the bank systems, is unexpected events and excessive exposures to what was ex ante perceived as safe but that ex post turned out to be very risky.

So the real question Sir would be: How do politician stand for such lousy technocrats?

@PerKurowski ©

Do we also need the possibility of clawbacks or prison to concentrate the minds of bank regulators?

Sir, Harvey Clark Greisman, when discussing Gillian Tett’s “Clawbacks emerge as a vital weapon in finance”, September 30, argues: “The only penalty that will concentrate bankers’ minds is prison”, October 10.

And what about regulators? If ever submitted to public shaming, could that suffice? 

How do we keep them from doing such insane things as regulating banks before clearly defining the purpose of the banks? 

How do we keep them from imposing capital requirements in order to make banks safe without one single empirical study on what has caused major bank crises in the past?

How do we keep them foremost concerned with doing no harm?

How do we keep them from committing the list of horrendous mistakes contained in the following aide memoire?

@PerKurowski ©

How much should we claw-back from inept bank regulators who neglected their fiduciary responsibilities?G

Sir, Gillian Tett writes: “If bankers are going to defend their craft, let alone their high pay, they have to start truly sharing risks with shareholders and taxpayers…If clawbacks had been in place a decade ago, those scandals at Deutsche and Wells might never have erupted in the first place.” “Clawbacks emerge as a vital weapon in finance” September 30.

That applies to regulators too.

The Basel Committee neglected to define the purpose of the banks before regulating these and so came up with the risk weighted capital requirements for banks that have so distorted the allocation of bank credit to the real economy.

The Basel Committee also neglected to do the empirical studies to determine what cause bank crises and so placed much higher risk weights on what was perceived as safe, when actually all crises have resulted from unexpected events like natural disasters, illegal behavior like lending to affiliates, or excessive exposures to what was erroneously perceived as very safe.

The results? A banking crisis because of excessive exposures against too little capital to what was perceived, decreed or concocted as safe; and economic stagnation resulting from too little financing to the “risky” SMEs and entrepreneurs.

Is that not an amazing fiduciary negligence that merits, as a minimum minimorum. some claw-backs?

PS. And all those journalists and famed columnists that so blithely ignored the regulatory faults when denounced over and over again, should they go scot-free?

@PerKurowski ©

US, when will senators, like Elizabeth Warren, grill bank regulators with the same gusto they grill ban​k​sters?

Sir, I refer to Barney Jopson and Alistair Grays report on how John Stumpf was grilled in the Congress Wells Fargo clear misbehavior “Wells chief savaged in Congress over fake accounts” September 21.

Democratic senator Elizabeth Warren told Mr Stumpf: “Your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds.”

Is senator Warren wrong? Absolutely not, but the grilling, if it does not also include a serious grilling of the bank regulators, is just another pushing all the blame on banks, in order to score cheap populist victories attacking “banksters”.

Here follows just few of the questions the US Senate's Banking Commission should pose regulators.

With your risk weighted capital requirements you allow banks to leverage more their equity, and the support we the society give them, with what is perceived as safe than with what is perceived as risky.

Do you not understand that favoring in this way The Sovereign, The Safe, The Past, The Rich, The Houses and The AAArisktocracy, impedes the fair access to bank credit of We the People, The Risky, The Future, The Poor, The Jobs and The Unrated? Who gave you the right to distort the allocation of bank credit to the real economy this way? Don't you understand with that you have de facto decreed inequality?

In all your regulations where have you defined the purpose of our banks? Does not John A Shedd saying: “A ship in harbor is safe, but that is not what ships are for” also apply to banks? Or is it really that you felt you did not need to do that in order to regulate banks?

Finally, for this first round of questions: Where did you get that funny idea behind all this that what is ex ante perceived as risky, is riskier to the banking system than what is perceived as safe, and that is therefore much likely to cause dangerous excessive bank exposures? Have you never heard of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”?

Don’t you see how these regulations helped to cause the crisis? Don’t you see how making it harder than usual for SMEs and entrepreneurs to access bank credit dooms us to stagnation?

By the way, before you go, where do you think we would we be if the credit rating agencies had, so luckily, not fouled up so fast?

@PerKurowski ©

How can expectations be high when you discriminate against the future, on account of it being riskier than the past?

Sir, John Kay writes: “It is not because interest rates are too high that eurozone consumption is sluggish but rather because expectations are so low. Fiscal austerity and the aftermath of the global crisis have dimmed the employment prospects of a generation of young Europeans. Low interest rates have as intended pushed up the prices of long-dated bonds and houses” “The twisted logic of paying for the privilege of lending”, September 10.

Frankly, how can expectations not be low, when we have regulators that order banks to hold more capital against what’s perceived as risky, the future, a job to be created; than against what is perceived as safe, the past, a house that has already been built?

And Kay writes: “There are obvious requirements for investment in the eurozone — to provide power through cleaner energy plants, to improve roads and relieve overcrowding on trains, to build houses, to accommodate tens of thousands of recent refugees and above all to fund the new businesses that will promote innovation on the continent.”

Yes, but, if so, why do we not have capital requirements for banks based on those purposes?

Mr. Kay, I tell you, it is not “dysfunctional capital markets, rather than any excessively high interest rates, that are behind an investment shortfall across Europe”. It is totally dysfunctional bank regulations.

Mr. Kay also reminds us of the “aphorism that people will lend you money so long as you can prove you do not need it”. But Sir, that is what Mark Twain told us long ago: “The banker lend us the umbrella when the sun shines and wants it back when it looks like it could rain”; and which is precisely why the Basel Committees’ risk weighted capital requirements for banks don’t make sense.

Mr. John Kay, wake up!... and you too Sir.

@PerKurowski ©

When will the Basel Committee define the purpose of our banks, and regulate accordingly?

Sir, Jim Brunsden writes of a “letter from the banking associations [that] calls on the Basel Committee on Banking Supervision to scrap plans for a floor limiting how far a bank can decrease its capital requirements by using internal risk models. “Lenders step up their fight against global capital reform.” September 2.

My immediate reaction could be to ask the bankers: When will you return to earning your returns on equity by doing banking and not by minimizing equity?

The current confusions about bank regulations all begin with that mindboggling fact that the regulator has not defined the purpose of banks. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

When will the regulator understand that banks must finance the “riskier” future and not just refinance the “safer” past?

When will the regulator understand that what’s rated AAA is more dangerous to banks than what’s rated below BB-?

When will the regulator understand Voltaire’s “May God defend me from my friends. I can defend myself from my enemies”

When will the regulator understand that risk weighted capital requirements distorts the allocation of credit?

When will the regulator understand the full monstrosity of its risk weighted capital requirements for banks?

PS. Sir, from your steadfast silence on these issues I can only deduct your “Without fear and without favour” is pure BS. You are clearly beholden to banks and their regulators, caring very little for the real economy on Main Street.

@PerKurowski ©

If only regulators had had one of those “what-to-do” algorithms Tim Harford mentions before regulating banks.

Sir, Tim Harford refers to Brian Christian’s and Tom Griffiths’ “Algorithms to Live By” in order to ask: “Can computer scientists –– help us to solve human problems such as having too many things to do, and not enough time in which to do them? He concludes “It’s an appealing idea to any economist”, among others because “Computers practise ‘interrupt coalescing’, or lumping little tasks together. A shopping list helps to prevent unnecessary return trips to the shop.” “An algorithm for getting through your to-do list” August 6.

How I wish the bank regulators had had access to such algorithms and to the lumping together of all their, not that small, but huge necessary tasks.

If so, they would have been remembered to define the purpose of the banks, among which is the need to allocate credit efficiently to the real economy stands out, and so they would have stayed away from their distortive risk weighted capital requirements.

If so, they would have remembered to read some books on past crises, or looked into some empirical data, and thereby have understood that bank crises are never ever caused by excessive exposures to something perceived as risky, but always from excessive exposures to something perceived as very safe when put on the balance sheet, and so they would have know their risk-weighted capital requirements were 180 degrees off target.

@PerKurowski ©