To prevent the next unpreventable financial crisis, let us at least try better and more accountable bank regulators.

Sir, Axel Weber a co-author of the Group of Thirty report writes: “Following the global financial crisis, we have significantly improved the resilience of the financial system, strengthened the capital and liquidity positions of banks and increased our ability to deal with failing lenders.” “Preventive measures will not stop the next financial crisis” September 18.

I have been arguing, for more than a decade, that what primarily caused the crisis, were the distortions in the allocation of credit produced by the risk weighted capital requirements. AS that distortion has not been eliminated, and given that generally higher capital requirements might on the margins even intensify those distortions, not enough has been done to improve the resilience of the financial system; nor that of the real economy on which so much the real long term financial stability really depends on.

So, to prevent the next crisis we must prevent having regulators who believe that what’s perceived as risky is more dangerous to our bank system than what’s perceived as safe. 

There’s no reference at all to that distortion in the Group of Thirty report that Mr Weber helped to author, though that should perhaps not surprise us. Looking at the members of that mutual admiration club, one could suspect that all have a vested interest in keeping that distortion as one that shall not be named. 

In an Op-ed of 1998 I wrote: “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared. Sometimes it is good faith... sometimes it is only pure faith… History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

But in that Op-ed I also wrote, “I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the opposite, what I propose is that it assumes it correctly”

Sir, the State assuming correctly its regulatory functions must, sine qua non, include holding the regulators accountable for their mistakes, not promoting them, and much less allowing them to keep on regulating, covering up their own mistakes.

By the way, when is FT going to stop having such a prominent role in that cover-up?

@PerKurowski

Whoever thinks banks are now better regulated for sure, must surely be too easily impressed by complexity

Sir, Martin Wolf “argues against premature monetary tightening. Let us establish strong forward momentum first”, “Risks remain amid the global recovery” July 5. 

I would heartily agree, if only all that easy money was flowing more towards investments in the future. It is not! The current risk weighted capital requirements give great incentives for that not to happen.

And when Wolf opines “the core western financial system is far better regulated and capitalised than it was in 2007”, how on earth does he know that?

When regulators regulate based on the same risks bankers perceive, and not based on the possibility that those risk are badly perceived or badly managed, or on unexpected events, we have no firm basis for opining something like that. That is unless we are in awe, like Martin Wolf must be, of any increased regulatory sophistication and complexity; like that reflected in Basel Committee’s “Minimum capital requirements for market risk” of January 2016, and that are now, June 2017, the subject of consultative document titled “Simplified alternative to the standardised approach to market risk capital requirements”.

Sir, the world urgently needs bank regulators who are not solely fixated on avoiding crisis but who also understand the vital importance of good banking between the crises.

As is, the time bankers should allocate to ask that all-important question of “What do you intend to do with the money if we lend it to you?”, will be taken up more and more with trying to understand and fill out regulatory material.

And what has easy money done to equity markets? Corporations engaged in short termism have taken on debt in order to pay out dividends and repurchase shares. Is that something good?

Wolf writes: “The BIS talks, sensibly, of building resilience. A part of this lies in ensuring that growth becomes less dependent on debt.” Yet by treating it only as one task of many, Wolf sort of diminishes its relative importance. Debt finances much anticipation of demand, when that debt hits the wall of having to be repaid, future demand will fall.

Sir, as I see it, never ever has a generation used up so much public and private borrowing capacity for its own short-term benefits. Social security and pension plans, sold by governments on the basis of an expected 7% real return, are by the minute taking on more characteristics of Ponzi schemes, using fresh money from future retirees to pay out benefits of the current.

http://subprimeregulations.blogspot.com/2016/08/statist-baby-boomers-want-us-to-extract.html

@PerKurowski

It is truly incredible how many dare to ascertain things they can have no real idea of. Fake-opinions?

Sir, Chris Giles refers to that Theresa May ended a conversation with a brusque: “You can have all the evidence in the world, but headteachers have told me grammar schools are good for disadvantaged pupils.” But he similarly says: “Regulators have made the global financial system more resilient by major regulatory reforms. Banks now have much bigger capital and liquidity buffers.” “Evidence beats anecdote in politics as well as economics” May 26.

That is also pure anecdote. Giles can really have no real evidence for what he is opining. During the last years banks might very well have accumulated excessive exposures to what ex ante is perceived as very safe, but that equally could ex post turn out to be very risky. Building up that kind of dangerous exposures, against the least required capital, is precisely what regulators’ risk weighted capital requirements for banks do.

“Labour governments favoured ‘light touch’ regulation of the financial sector” “Light-touch? Nonsense! Fake-fact! Sir, I ask, would you call distorting the vital allocation of bank credit to the real economy to be “light touch” regulation?

@PerKurowski

To generate societal and economic resilience, risks need to be intelligently faced and not just brutishly avoided.

Daniela Schwarzer opines: “Democratic leaders have to join the battle of ideas and be audible in defending their ideals. They need to fight nondemocratic, antiliberal and extremist propaganda proactively and show vision and the capacity to recast in adverse circumstances”, “Resilience is important for societies as well as individuals” August 15.

But real leaders are also open to that dangers can come in all shape and forms, and among the most dangerous, is any kind of populist groupthink generated within mutual admiration clubs, like that of the Basel Committee for Banking Supervision and associated regulators.

The regulators, too fearful of banks failing, imposed risk weighted capital requirements. These resulted in that banks earn higher expected risk-adjusted returns on equity when investing in something perceived ex ante as safe than when investing in something “risky”, like loans to SMEs and entrepreneurs. And that distortion of the allocation of bank credit to the real economy did not only cause the 2007-08 bank crisis, but has also decreased the resilience of the economy…“the capacity to recover quickly from disaster.”

And so “democratic leaders”, and the elite in general, must also fight bank regulations that deny the economy what it most needs to stay vibrant, namely lots and lots of prudent risk-taking, prudent meaning risk in not too big doses.

And in doing so they would hopefully also fight against that statism that has been smuggled in through regulations by non-elected technocrats, that which is represented by a 0% risk-weight for the Sovereign and one of 100% for We the People. 

@PerKurowski ©

Embracing some inefficiency and duplication will improve resilience and recovery; and will reduce system fragility.

Sir, Gillian Tett writes “one of the problems of the modern world is that we live in such a tightly interconnected global system that it is a fantasy to think we can ever abolish all [terrorist] threats” and argues “the sooner our leaders can start talking bout resilience and recovery – and embracing some inefficiency and duplication– the better”, “Resilience in a time of crises”, June 25.

In March 2003, as an Executive Director at the World Bank, in a formal written statement 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.

Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. 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.

The Basel Committee 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."

But my warnings were ignored. With Basel II in June 2004, not only were credit rating agencies fully empowered to determine what was risky and what safe, but also the whole issue of the need for bank credit to be allocated efficiently to the real economy, was totally ignored.

Just like my over thousand letters on subprime banking regulations have been ignored by all in FT, probably because you cannot fathom the idea that regulators, experts, could be as dumb as I hold them to be.

Ms. Tett, first I dare you to answer this question: What assets are more likely to generate that kind of excessive exposures that could endanger the banking system, prime AAA rated assets or speculative and worse too below BB- rated assets?

And then reflect on that the risk weights for AAA rated assets was set to 20% while that of the below BB- at 150%.

And also reflect on that allowing bank to leverage equity differently, based on perceived risk, guarantees that the allocation of bank credit to the real economy will be distorted.

So Ms. Tett, when you then conclude that Donald Trump and other western politicians should be educated on issues of resilience and recovery, perhaps you might not have earned the right to throw the first stone.

@PerKurowski ©

Most of our resilience capacity has been spent, for no particularly good or sustainable reason

Sir, I refer to Ludger Schuknecht’s “What bankers can teach stimulus-addicted economists” October 6.

Schuknecht writes: “In too many countries debt and public spending are high, and interest rates close to zero… Yet, after decades of attempts to fine-tune the economic cycle by running fiscal deficits and cutting interest rates at times of weak demand, many economies are fragile”

And I ask…why? Could it have something to do with credit risk weighted capital requirements for banks that stops banks from financing the tough we need to get going when the going gets tough… like “risky” SMEs and entrepreneurs?

Schuknecht writes: What governments save, because debt service costs are low, they often spend. Public debt in many countries is now well above 100 per cent of gross domestic product. This would have been unthinkable a decade ago.

And I ask… could it have something to do with this? In November 2004 in a letter published in FT I wrote: “I wonder how many Basel [bank regulation] propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector.”

Schuknecht writes: In too many countries debt and public spending are high, and interest rates close to zero. This leaves little room for effective policy when the next crisis hits — as it surely will.

And I fully agree: Indeed we have spent up most of our resilience capacity… for no particularly sufficiently good and sustainable purpose. 

@PerKurowski ©  J