Indeed, reforming the credit rating market is an urgent necessity. Indeed, shame on the regulators

Sir, Arturo Cifuentes concludes, “Reforming the credit rating market is an urgent necessity. Shame on the regulators” “Few lessons have been heeded 10 years after Lehman collapse” August 23.

Yes shame on the regulators! But also for some other reasons than those Cifuentes mentions.

Just for a starter, the credit rating agencies would never ever have caused so much damage had their opinions not been leveraged immensely by the risk weighted capital requirements for banks. Imagine, Basel II, 2004, allowed banks to leverage 62.5 times if only a human fallible credit rating agency assigned an asset an AAA rating. 

It should have been crystal clear that with that the regulators were introducing a huge systemic risk in the banking sector. That I mentioned for instance in a letter published by FT in January 2003; and I loudly explained and protested it while an Executive Director in the World Bank during those Basel II preparation days.

In Europe, the EU authorities even overrode the credit rating agencies opinions and assigned Greece a 0% risk weight, which of course doomed it to its current tragic condition. 

Then, let us mention the mother of all regulatory mistakes; for their risk weighted bank capital requirements, initiated in 1988 with Basel I, the regulators used the perceived risk of assets instead of the risks of those assets conditioned on how their risks are perceived? How loony, how sad, what a distortion, what a recipe for disaster was not that? And still, 30 years later, they do not even acknowledge their mistake.

By the way, when Cifuentes denounces that Solvency II, with its myopic risk view, will discourage insurance companies, the natural holders of illiquid assets, to hold these investments, and it will therefore increase the systemic risk by making their portfolios less diversified, I could not agree more.

Sir, you know that for over more than a decade I have written to Financial Times 2.787 letters objecting to the “subprime banking regulations”, this one not included. Galileo could indeed be accused for being obsessed with his theories, but, could those doing their utmost to silence his objections, the inquisitors, not be accused of the same?

PS. Cifuentes mentions “Olivier Blanchard’s 2016 admission that incorporating the financial sector in macro models would be a good idea”, I might have had something to do with that.

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

There are those interested in some economic data being classified as “Data that shall not be observed”

Sir, Tim Harford, in view of the continuously increasing availability of data, discusses some tools that could be used by the science of economics. “Data impel economists to leave their armchairs” July 14.

Not a second too late. I have for years wondered in what “laboratory full of bubbling flasks, flashing consoles and glowing orbs” regulators could have come up with their theorem that states that what is ex ante perceived as risky, is more dangerous to bank systems than what is perceived as safe. With that under their arms they went out and imposed their risk weighted capital requirements on banks.

If some real data on that would now appear in a research paper, like on that which caused the 2007-08 crisis, what will all those who have with their silence reinforced that crazy theorem do? Act as any neo-inquisitor, and just burn that paper up?

PS. Here an aide memoire on that regulatory stupidity

@PerKurowski

It is time for America to ask bank regulation’s risk weights of 0% Sovereign and 100% We the People, to take a hike!

Sir, Martin Wolf, in reference to the United States writes: “In the country of the blind, the one-eyed man rules… the next administration will take over a country with mediocre growth of productivity, high inequality, a growing retreat from work and a declining rate of creation of new businesses and jobs… loss of dynamism… business fixed investment has been persistently weak… rise of new regulatory barriers is disturbing.” “An economic in-tray full of problems” November 9.

Of course, as usual, obsessively, Wolf says not a word about the possibility that the risk weights of 0% sovereign, 20% AAA rated, 35% residential housing and 100% SMEs, set for the purpose of defining the capital requirements for banks, are distorting the allocation of bank credit to the real economy, with disastrous consequences.

At least last week, during IMF’s Annual Research Conference, at the very end of the conference, none other than Olivier Blanchard, the former Chief Economist of the IMF, admitted that: indeed more research was needed to better understand the underlying factors for the trend to lower public debt interests that can be observed the last 30 years; and that this trend might very well be explained to a certain extent by current bank regulations.

When the truth about the risk weighted capital requirements for banks unravel, I wonder how Mr. Wolf is going to explain his and FT’s silence on my thousands of letters.

By the way, after yesterdays American election results, is it not high time for the Home of the Free and the Land of the Brave to ask those risk weights of 0% Sovereign and 100% We the People, to take a hike?

PS. What caused the unexpected election results? I really don’t know, I am not American so I did not have to vote (phew what a relief) but the irritating smugness of technocrat and media besserwissers, sure must have played an important role.

PS. I forgot, fairly recent I twitted: “As I see it there's one vote for the next 4 years, and then there’s one for the next 40. The latter could be for Gary Johnson”

@PerKurowski

With so much regulatory distortion, why is FT so fixated about the low nominal real interest rates on public debts?

Sir, you write: “It is a puzzle why the Fed is so keen about raising US interest rates… Central banks should err on the side” “The prevailing case for caution by central banks” November 5.

Sir, may I say you keep on being fixated on the nominal real interest rates, unable to see the real real-nominal interest rates.

Would any serious economist discuss gas prices at the pump ignoring taxes? No!

Would any serious economist discuss milk prices ignoring various subsidies? No!

Then why have almost all serious economists, FT included, only been discussing low real interest rates on public debt ignoring the regulatory subsidies?

In 1988, the Basel Accord, Basel I, for the purpose of setting the capital requirements for banks, decided that the risk weight of the sovereign was 0% and that of We the People 100%.

That would hence mean that banks would be able to leverage much more their equity, and the value of any explicit or implicit government guarantees they received, with loans to the public sector than with loans to the private sector.

That would hence mean banks could obtain higher risk-adjusted returns on equity when lending to the public sector than when lending to the private sector.

That would hence mean that the interest rates of bank loans to the public sector included a regulatory subsidy.

That would hence mean that the subsidies for the access to bank credit by the public sector was to be paid by taxing the private sector with more restricted or more expensive access to bank credit.

And that should hence have meant that in order to know the real real-rate on public debt, to the nominal rates, we would have to add the cost of the regulatory taxes paid by the private sector.

That has not been done! All references to the interest rates of public debt have been limited to using the nominal rates. That has led experts like Lawrence Summers, Lord Adair Turner, FT's own Martin Wolf and many other, to argue that the public sector should take advantage of extraordinary low rates in order to finance public investments, like in infrastructure.

That is so wrong! If we include the economic cost of restricting the access to bank credit over the decade and around the world, for many millions of SMEs and entrepreneurs, the current real real-interests rates on public debt could in fact be the highest ever.

So, if the Fed, ECB or any other central bank, really wants to lower the interests in order to stimulate the real economy, then they should begin by asking bank regulators to take away those so costly subsidies of public debt.

Sir, You if anyone should know I have been raising this issue for a long time; in 2004 in a letter you published I wrote: “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

But sadly my arguments have until now fallen on deaf ears. Perhaps I never managed to explain myself correctly in those thousands of letter I have written to FT over the years about the distortions that are caused by the risk-weighted capital requirements for banks.

But now, at long last, I might have been able to reach through, at least to the IMF. At the very end of the recent 2016 Annual Research Conference, none other than Olivier Blanchard, the former Chief Economist of the IMF, admitted that indeed more research was needed to better understand the underlying factors for the trend to lower public debt interests that can be observed the last 30 years; and that this trend might very well be explained to an important extent by current bank regulations.

I pray that translates, as fast as possible, into many of IMF’s PhDs and other researchers trying to figure it out. It is absolutely vital. Public debt usually serves as a proxy for those risk-free rates that so many of our market and financial decisions are based on.

We have all a responsibility towards our grandchildren to help our economies to navigate towards better waters and, if we are to succeed doing that, we need our compasses or GSPs to be functioning correctly.

@PerKurowski

For credit we now might need shadow-banks. For intellectual capital free from network incest, do we need shadow-universities?

Sir, Martin Wolf writes: “In its origins and still today, a university is a special institution: a community of teachers and scholars. Its purpose is to generate and impart understanding, from generation to generation. The university is a glory of our civilization.” “Running a university is not like selling baked beans”, February 19

Indeed but from this perspective does it really follow that “Four of the 10 top-rated universities in the world, five of the top 20 and 10 of the top 50 are British” makes UK a “superpower” in higher education? Could not the truth be that in much all universities everywhere are failing and need to be rethought?

For instance, how much of our universities is being used not to promote understanding but to self-promote those who understand? Current research clearly seems to suffer from cronyism: “I Reference You and You Reference Me”? And, excessive cross-referencing within small mutual admiration networks cannot produce much good.

Also, what university in the UK, or anywhere else for that matter, have really debated something so fundamentally important as bank regulations that could be fatally distorting the allocation of bank credit to the real economy? And where is the university that has questioned the whole (nutty) concept of a zero risk weight for the sovereign and a 100 percent risk weight for the private sector?

The Department for Business, Innovation and Skills, in a discussion document titled “Fulfilling our Potential”, presents the idea to “open up the [university] sector to greater competition from new high-quality providers”. And Martin Wolf expresses some well-founded concerns about that.

Banks are currently, because of regulatory risk-aversion, kept away from fulfilling adequately their most fundamental role in the economy. In this respect I have often said that our next generations might find among some shadow-banks their best chance to finance the risky future.

And so, in the same vein, who knows if not our best chances “to generate and impart understanding, from generation to generation” could be found among some new formal university competitors, or even among some shadow-universities?

@PerKurowski ©

Mifid 2 could be creating dangerous risks promoting Systemic Important Research Institutions

Sir I refer to Laura Noonan’s “Deadline looms for banks to get their research arms in order” November 17.

We read “European rules, known as Mifid 2, will reshape the way analysts report on companies and how the research can be priced and circulated to investors… going from quantity to quality… banks to become more selective in the sectors they deal within an environment where clients will no longer support the 60-70 research teams that cover each major European industry… number of analysts publishing Emea research for the 12 top banks fell 17 per cent from 2007 to 2014.”

What are these busybody regulators doing? Don’t they understand what systemic risk is all about? And now they are pushing for Systemic Important Research Institutions, SIRIs.

Don’t they understand that going from quantity to quality often just entails going from the open market into even less transparent small mutual admiration clubs? Did they not learn about the systemic risks of giving information power to few like when they gave it to the credit rating agencies?

Quality? Quality is a result of the diversity that includes many “un-qualified” players but who could suddenly bring forward fresh perspectives, or be making those insolent questions required for having a chance at sustainable quality.

Did they not do enough damage to financial research when they subordinated the importance for banks of getting the risk premiums right, to getting the equity required low?

The more I read about what arrogant and hubristic regulators are up to, the more I feel we have to put faith in shadow organizations to be able to help our grandchildren to a livable future.

@PerKurowski ©

Tim Harford, what a great idea! Let see if I can find some Turkers willing to lend me a researching hand, hopefully pro-bono.

Sir, I do of course not have the financial resources of the Basel Committee, the Financial Stability Board, the Fed, FDIC, IMF, ECB, BoE, World Bank or other institutions that are interested in research applicable to bank regulations.

And since none of those previous listed have shown any interest in my concerns about current regulations, it was with great interest that I read Tim Harford’s “Can we trust young Turkers?" October 11.

I will immediately try to enlist their help, hopefully even pro-bono, on trying to research the following issue:

Bankers always use perceived credit risk to set their interest rates and amount of exposures; and currently the regulators use the same perceived credit risk to set their capital requirements for banks.

That means that perceived credit risks get a 200% weighting.

And it is my firm opinion that a banking system that weighs perceived credit risk that much, dooms itself to: a) lend dangerously much to The Safe, like to the infallible sovereigns and the AAArisktocracy, and b) to lend way too little to The Risky, like to SMEs and entrepreneurs, which is of course fatal for the real economy and therefore also to the banks.

That kind of distortion seems clearly to be happening, we have seen how banks got excessively exposed to AAA rated securities and Greece; and we hear of the increasing difficulties of The Risky to obtain a fair access to bank credit.

I sure hope that since for instance even FT has been unwilling to voice my concerns, I do not know why, I can enlist some Turkers to lend me a hand in helping me to accumulate the evidence that I know exists, that would prove me right.

If the Turkers are “young”, so much the better, since it is the young who most will suffer from the basically too sissy risk adverse bank regulations. 

Of course, meanwhile I will keep on doing my best efforts to establish a direct contact with those who decide. This week I did so by means of a public letter to Mr. Stefan Ingves, the current chair of The Basel Committee.

@PerKurowski © J

I’ll sue Facebook if it makes me sad

From Mr Per Kurowski.

Sir, I refer to John Gapper’s article “We are the product that Facebook has been testing” (July 2), about the research Facebook has been carrying out on whether our feelings can be influenced. I find that research to be absolutely great news!

Now Facebook, without us having to spend one penny on it, has with its own money conducted the research that proves conclusively that it needs to be controlled. And, to top it all off, it already confessed the motives and intentions of what it was up to. And what’s more, it did so, as Mr Gapper says, without really seeking anyone’s consent. Had it done so, its confessions would not have been half as useful.

But since that research might also open a window in how Facebook could branch out in the future by offering one Happy-Facebook, one Sad-Facebook and one Slightly-dull-neutral-Facebook, let me hereby formally notify Facebook that I want to be happy, and if it makes me sad I will sue it into oblivion!

By the way, at what point could Facebook be labelled a stalker?

Published in FT

http://perkurowski.blogspot.com/2012/06/we-might-need-global-web-constitution.html

What if by lottery some patents are yearly declared null, in order to keep the pharma industry on its toes?

Sir, David Shaywitz writes: “If the pharmaceuticals industry is to remain in the vanguard of science it will have to embrace a far leaner approach, with less bloated bureaucracy”, “Addiction to deals reveals the depth of pharma’s ill” May 2.

Is that really possible in an industry accustomed to working in the protective environment provided by patents? Is it not high time we see to that all that extra money we are asked to pay in order to reward inventions and stimulate new inventions go to that, and not to some other purpose, like the further enrichment of a 0.01% plutocracy?

Perhaps a yearly lottery, by which 5 percent of their patents are declared null, no reasons given, could give these companies more incentives to be on their toes.

Call it a dividend to humanity if you want… in payment for how humanity helped the inventors run the last mile for a patent.

The World Bank is needed more and more

The World Bank is less and less relevant writes Armeane M. Choksi, May 14, while the truth is that a true World Bank is more and more needed in times where there are not only billions of poor that seem more left behind than ever and everything gets, or at least is discovered to be, more and more intertwined. Of course there is a lot of intellectual capacity in the individual countries but they all need a forum where they can come together and discuss economic development from a global perspective and not only from their own local needs and the World Bank is the ideal venue for that.

Clearly the World Bank needs to undergo some deep reforms in order to face up to all the new challenges, and not only with respect to its governance. Just as example they need to reduce the research that is based only on the availability of data and scale up the research that gives us better current data, like they are managing to do with their “Doing Business” reports. I have also frequently begged the World Bank to become that really carbon-solutions neutral agency we all need so as to make sense between all the green magical solutions to global warming that are currently peddled, as well as to provide the world with some good temporary-migration-program blue prints, that make sense to all parties.

That Choksi, who presents himself as a former Vice President of Human Capital Development & Operations Policy at the World Bank can even start to think that selling their prized real estate and distributing the capital gains to their shareholders has anything to do with what the word needs, is such a shame and only comes to show that even people who have been in the Bank, never understood what it was all about. The World Bank’s current loan portfolio after 40 years stands at approximately $103 bn. The USA’s total share (16.38%) of the World Bank’s total reported net worth comes only to about $5.5bn, or less than a tenth of what the Bill and Melinda Gates Foundation have received in endowments.