#AI ChatGPT - OpenAI: A question on behalf of FT and Martin Wolf.

 In "Britain needs a growth strategy" Martin Wolf mentions the UK has for too long settled for managing stagnation.

On behalf of FT and Martin Wolf I decided to ask ChatGPT:

"Could bank capital requirements that favors “safe” government debt and residential mortgages over “risky” loans to small businesses and entrepreneurs, doom a nation to stagnation?"

ChatGPT answered:

"The impact of bank capital requirements on economic growth is a complex and debated topic among economists. Capital requirements are regulations set by financial authorities that determine the amount of capital a bank must hold in relation to its assets. These requirements are designed to ensure the stability of the financial system by reducing the risk of bank failures.

If capital requirements heavily favor "safe" assets such as government debt and residential mortgages over "risky" loans to small businesses and entrepreneurs, it can potentially have both positive and negative effects on the economy.

Potential Positive Effects:

Financial Stability: By incentivizing banks to invest in safer assets, capital requirements can contribute to financial stability. This reduces the likelihood of bank failures, which could have broader systemic consequences.

Investor Confidence: Investors and depositors may feel more secure knowing that banks are holding assets that are considered safer, leading to increased confidence in the financial system.

Potential Negative Effects:

Stifling Innovation and Growth: If banks are discouraged from lending to small businesses and entrepreneurs, it could hinder innovation and economic growth. Small and medium-sized enterprises (SMEs) are often drivers of job creation and economic dynamism.

Inequality: Focusing on "safe" assets may exacerbate economic inequality. Small businesses, startups, and entrepreneurs, which are crucial for innovation and job creation, might face difficulty accessing the necessary funding.

Reduced Economic Diversity: A banking system overly concentrated on certain types of assets may lead to reduced economic diversity. This can make the economy more vulnerable to shocks in specific sectors.

Long-Term Stagnation: Overemphasis on "safe" assets might lead to a lack of risk-taking and investment in new ventures, potentially resulting in long-term economic stagnation.

Balancing Act:

It's crucial for financial regulators to strike a balance between stability and promoting economic growth. Prudent capital requirements that consider the riskiness of assets, while still allowing banks to support economic development, can be important. Striking the right balance often involves ongoing adjustments to regulations based on economic conditions and lessons learned from past experiences.

In conclusion, while capital requirements that favor "safe" assets can contribute to financial stability, an excessive focus on them at the expense of riskier but potentially innovative investments could indeed have negative consequences for a nation's economic dynamism and growth. The challenge lies in finding a regulatory framework that mitigates risk without stifling entrepreneurial activity and economic progress."

Thanks!

ChatGPT answered: You're welcome! If you have any more questions or if there's anything else I can help you with, feel free to ask. Happy to assist!

Note: The answers are copied exactly from those given to me by OpenAI

Here my many other questions to ChatGPT – OpenAI on bank regulations

Comment: Way back, 2009, Martin Wolf was kind to publish in his Economic Forum an articled I titled "Please free us from imprudent risk aversion and give us some prudent risk-taking." I stand by it more than ever.

Britannia, to have a chance to become its former self, needs to free its financial systems from its mis-regulators.

Sir, Martin Wolf asks: “Britannia is not ‘unchained’. It is instead sailing in perilous waters. Can the new captain and first mate even see the rocks that lie ahead?” “The economic consequences of Truss” FT September 21.

Wolf writes: “Thatcher and those who followed her allowed the search for safety in corporate pensions to shift portfolios away from the supply of risk capital to business to ownership of government bonds. This in effect turned the plans into state-backed pay-as-you-go schemes.”. 

Sir, more than three decades late Martin Wolf seems to notice that huge rock of Basel I that, for its risk weighted bank capital requirements, decreed weights of 0% government, 30% residential mortgages and 100% citizens. Better late than never… but really?

These bank capital requirements are based on that what’s perceived as risky, e.g., loans to small businesses and entrepreneurs are more dangerous to bank systems than what’s perceived as safe, e.g., government debt and residential mortgages.

That de facto translates into it being much more important for banks to hold government debt and residential mortgages than loans to small businesses and entrepreneurs. Something which, with Solvency II, applies to its insurance companies too. Really, is that how Britannia got to be strong?

Sir, the Western world’s banks were taken from the hands of savvy loan officers who knew their first duty was to know their clients and understand what their loans were going to be used for and placed into the hands bank own capital minimizing/leverage maximizing dangerously creative financial engineers.

“UK has a deregulated economy… in which the successful are well rewarded, but those who do less well are penalised. Such Thatcherite aims then are now a reality” No! Bank regulators reward those ex-antes perceived or decreed as safe over those perceived as risky. That has zero to do with their ex-post success. Has the UK's public debt been well employed?

Let’s hope someone like Liz Truss dares to set aside whatever mandates she might have, no matter how worthy these might be, in order to tackle a real financial regulatory reform.

Sir, what would Edmund Burke with his intergenerational social contract have opined about prioritizing the refinancing of the “safer” present over the financing of the riskier future?   

 

The main ingredient of any safe pension system is a healthy and sturdy economy.

Sir, I refer to Martin Wolf’s “It is folly to make pensions safe by making them unaffordable” FT, June 28.

Wolf writes: “We also need true risk-sharing within and across generations, which is absent from today’s defined-contribution schemes”

But current risk weighted bank capital requirements, with lower risk weights for financing the “safer” present, e.g., loans to governments and residential mortgages, than when financing the riskier future, e.g., small businesses and entrepreneurs, is a clear example of how that intergenerational holy bond Edmund Burke wrote about has been violated.

John Kay and Mervyn King.“Radical uncertainty”? Please, give us a more stupid "radical certainty", than credit risk weighted bank capital requirements.

And way back, when observing how many Social Security System Reforms were based on the underlying assumption that they will be growing 5 to 7 percent in real terms, I also warned, time and time again, that it was not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. In this respect the 'chickens are only coming home to roost'.

PS. Historically, through all economic cycles, there is nothing that has proven so valuable in terms of personal social security as having many well-educated loving children to take care of you, and that, in real terms, you can't beat with any social security reform.

A letter to Martin Wolf in 2015. An essential component of an Edmund Burke intergenerational holy bond, must be the willingness to take risks.

Another letter on this subject sent to Martin Wolf in in 2017

And another letter on the Covid response intergenerational conflict of monstrous proportions, also published by the Washington Post in 2020

How much lower fertility, less children, is caused by “habitual well-being”?

@PerKurowski

Has Thatcherism run its course, or has Thatcherism been run off its course?

Sir, Martin Wolf asks “once we accept that Thatcherism has run its course, what follows?” “Sunak takes an axe to Thatcher’s low-tax ideology” FT, March 8.

Sir, to keep it brief, let me just ask three questions:

What would Margaret Thatcher have said about risk weighted bank capital requirements that de facto imply Britain’s bureaucrats/politicians know better what to do with credit for which repayment they’re not personally responsible for, than e.g. Britain’s small businesses and entrepreneurs?

What would Margaret Thatcher have said about risk weighted bank capital requirements that de facto imply the financing of residential mortgages is more important to Britain’s economy than the financing of its small businesses and entrepreneurs?

What would Margaret Thatcher have said about risk weighted bank capital requirements that de facto imply that what’s correctly perceived as risky, is more dangerous to Britain’s bank systems than what’s perceived as safe?

Sir, can you dare your Mr. Wolf to answer those questions?

PS. My 2019 letter to the Financial Stability Board

@PerKurowski

Bank capital requirements or bank leverage allowances?

Martin Wolf referring to Windows of Opportunity by David Sainsbury writes that growth is “exploiting new opportunities that generate enduring advantages in high-productivity sectors and so high wages… developing something fundamentally new is often costly and risky” “Why once successful countries get left behind” February 22.

Indeed, but as Pope John Paul II, in his Apostolic Letter "Novo Millennio Ineunte" reminded us of the words of Jesus when one day, he invited the Apostles to "put out into the deep" for a catch: "Duc in altum" [and] "When they had done this, they caught a great number of fish".

Sir, “risk weighted bank capital requirements” reads like a very sophisticated tool that, when it comes to keeping our bank systems safe, is expected to assure great prudence. For instance, a 20% risk weight assigned to AAA rated asset and 100% to loans to unrated entrepreneurs and using Basel Committee’s basic 8% capital requirement, translates into 1.6% in capital for AAA rated assets and 8% for loans to unrated entrepreneurs. At first sight, that seems quite reasonable, because of course AAA rated could be five times riskier than what’s not rated.

But there is another side of that coin, that of a very costly risk-taking avoidance. It becomes much clearer if we label the former as “risk weighted bank leverage allowances”. 

Doing so we observe banks are allowed to leverage 62.5 times to one with assets rated AAA, but only 12.5 times with loans to unrated entrepreneurs. The question then is: if banks are allowed to leverage 50 times more their capital with AAA rated assets, why would any bank lend to unrated entrepreneurs, that is unless these pay much more in interest rates would in order to make up for that regulatory discrimination?

Sir, John A. Shedd wrote “A ship in harbor is safe, but that is not what ships are for” and I am sure FT agrees that applies to banks too. Unfortunately, current regulations have banks dangerously overpopulating “safe” harbors, e.g. residential mortgages, while leaving those deep waters that need to be explored in order for once successful countries not ending up left behind.

PS. Much as I already wrote 2009 in Martin Wolf's Economic Forum. 

If Brexit goes hand in hand with a Baselexit, Britain will at least do better than now.

Sir, Martin Wolf titles, [and I add], “Irresponsible promises will hit brutal economic reality" November 15.

Just like the irresponsible and populist promise of “We will make bank systems safer with our risk weighted bank capital requirements" and that is based on that what bankers perceive as risky is more dangerous than what they perceive as safe, brutally hits our real economies.

Wolf quotes the Institute for Fiscal Studies with, “over the last 11 years [before any Brexit], productivity — as measured by output per hour worked — has grown by just 2.9 per cent. That is about as much as it grew on average every 15 months in the preceding 40 years.”

And I ask, could that have something to do with that Basel II that introduced capital requirements that allowed banks to leverage their equity much more with the “safer” present than with the “riskier” future, for instance 62.5 times with what has an AAA to AA rating while only 12.5 times with a loan to an unrated entrepreneur? Of course it has. With it regulators gave banks the incentives to dangerously overpopulate safe havens, and to abandon their most vital social purpose, which is to allocate credit efficiently to the real economy.

So compared to the damage done by the Basel Committee for Banking Supervision any foreseen negative consequences of Brexit seem minuscule.

And with respect to obtaining financial resources for financing the investments in infrastructure that Wolf so much desires, and which would cause larger fiscal deficits he argues “a necessary condition would be the confidence of the world’s savers and investors in the good sense, self-discipline and realism of British policymakers.”

Indeed, what if British policymakers stated. “We abandon the Basel Committee’s regulations. Not only are these with their 0% risk weight to the sovereign and 100% the citizens outright communistic, but these also introduced a risk aversion that truly shames all those British bankers who in past times daringly took risks and with it bettered Britain’s future”. 

Sir, I hold that would be a much-needed example for the whole world of good sense, self-discipline and realism. “A ship in harbor is safe, but that is not what ships are for.” John A. Shedd.

Sir, Wolf seemingly thinks that remaining in a EU in which its authorities assigned a 0% risk weight to all Eurozone’s sovereign debts, even though none of these can print Euros is better for Britain. As I see it, that is a reason for running away from it even more speedily.

PS. Should not bank supervisors be mostly concerned with bankers not perceiving the risks correctly? Of course! So, with the risk weighted capital requirements, what are they doing betting our bank system on that the bankers will perceive credit risks correctly?

@PerKurowski

If China abandons the risk weighted bank capital requirements, and the West does not, the West is lost.

Sir, Martin Wolf with respect to China quotes premier Li Keqiang stating: “We will reform and refine monetary and credit supply mechanisms, and employ . . . a combination of quantitative and pricing approaches . . . to guide financial institutions in increasing credit supply and bringing down the cost of borrowing”… [and that he] stressed the need to “ease funding shortages faced by private enterprises”, “encourage private actors to engage in innovation” and “attract more private capital into projects in key areas”. “The Chinese economy is stabilising” April 3.

In his book Money: Whence it came, where it went” (1975), John Kenneth Galbraith speculates on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. He wrote, “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

And that hits the nail. Risk taking is the oxygen of any development.

The current risk adverse risk weighted capital requirements for banks that assigns a risk weight of 0% to the Sovereign, 20% to any AAA rated corporation, 35% to residential mortgages and 100% to the unrated citizens, like those entrepreneurs on whom a nation’s strength depends on, is the perfect recipe for a secular stagnation.

God make us daring!

@PerKurowski

Our bank regulators, just like "Sulley" Sullivan and Mike Wazowski, fear the wrong thing.

Sir, Martin Wolf, discussing US-China relation ends with, “Our enemy is not China. Have confidence in our values of freedom and democracy. Understand that it is on the creation of new ideas that we depend, not the protection of old ones. That in turn depends on freedom of inquiry and openness to the best talent from around the world. If western countries lose these, they will lose the future. As the greatest US president of the 20th century declared: “The only thing we have to fear is fear itself.” “America must reset its rhetoric on China’s rise” October 31.

Absolutely! But why then it is so hard to get Mr. Wolf to understand that current risk weighted capital requirements for banks, which so dangerously distorts the allocation of credit to the real economy, is nothing but an expression of fear… and to top it up a completely unfounded one. 

Just as "Sulley" Sullivan and Mike Wazowski in Monsters Inc. thought that children were toxic to them, the regulators are convinced that what’s perceived as risky is what’s dangerous to our bank system. Of course it is what’s perceived as safe that poses the real dangers.

Wolf asks, “What has been the most important event of 2018 so far?” He answers “arguably, it was the speech on US-China relations by Mike Pence, US vice-president, on October 4.”

I would hold that the most disastrous important event during the last three decades was the introduction, in 1988, with the Basel Accord, of these so utterly silly and naïve risk adverse regulations. That year the Western world said no ti the risk-taking that has been the oxygen of its development.

Sir, again, let me remind you that just for a starter, had no banks been allowed to leverage with assets over 60 times only because these were AAA rated, or limitless with loans to sovereigns like Greece and Italy, we would all be in a much different and surely better world.

When is Martin Wolf going to stop protecting old senseless fears?

God make us daring!

IMF, what are tariffs on billions of trade, when compared to tariffs and subsidies on trillions of bank credit?

Sir, Chris Giles, James Politi and Stefania Palma write about concerns during recent IMF meetings in Bali, “With the world’s two largest economies slapping tariffs on $360bn of goods so far this year, and possibly more to come” “Geopolitical tension casts pall over annual IMF meeting” October 15.

Last year I read somewhere that the just world’s 10 largest banks combined had over $25 trillion in assets. So when I think on how much the allocation of those assets might be dangerously distorted by the risk weighted capital requirements, I find it hard to understand that “the world’s two largest economies slapping tariffs on $360bn of goods so far this year”, was of so much concern during the recent IMF meetings

Sir, get it, the risk weighting of banks’ capital requirements, for bank protection purposes, translates de facto into tariffs and subsidies that will steer the allocation of bank credit.

The damage, by promoting banks way too much to be into banks “safe” AAA rated securities, residential mortgages and loans to sovereigns, while de-incentivizing loans to “risky” entrepreneurs and SMEs, is immensely worse than what the current trade-wars, sort of Lilliputian vs. Blefuscu in comparison, could produce.

Sir, again, for the umpteenth time, what the risk weighted capital requirements for banks guarantee is: 

Especially large exposures to what’s perceived as especially safe, against especially little capital, which dooms or bank system to especially severe crises. 

Especially low exposures to what is perceived as risky, like loans to entrepreneurs and SMEs, which dooms our economies to weakness and to not being able to reach their potential.

@PerKurowski

Instead of working on a Brexit, Britain should do all Europeans a favor and negotiate a very tough EU Remainer

Sir, Simon Kuper, in a back and forth discussion on Brexit, ends upcontemplating “a soft Brexit or Brino, in which Britain becomes a poorer Norway, accepting all European rules including freedom of movement to keep trade and travel flowing.” “Why there won’t be a no-deal Brexit” October 4.

As a reason for that Kuper opines “Few European officials want the UK back now, anyway”. Indeed I can understand that EU’s Brussels bureaucrats feeling rejected and questioned want to spank the Brits for Brexit, but do Europeans want that too? I don’t think so.

Sir, as I see it, and as I have been writing to you for some time, the best way out is a tough Remainder offer in which Britain lays clear what it wants the EU to do, in order to want to remain a member of it.

I am not a Brit, and I do not live in Europe, but my list of request would include:

1. EU needs to solve the challenges that the euro poses to it and about which they have done little to nothing in the twenty years since its inception. If they do not do that, the EU has no future. And don’t let them tell you those challenges were not known.

2. EU must make sure never again treat one of its members like it treated Greece, which for the risk weighted capital requirement it assigned a risk weight of 0%, and thereby doomed it to tragic excessive indebtedness, only to later put the whole blame, and costs of that, mistake on Greece.

3. Understand that Europe has no future with risk adverse risk weighted capital requirements for banks that distort the allocation of credit to the real economy, and sets it up to a financial crisis of monstrous proportions, by means of incentivizing dangerous excessive bank exposures to something considered especially safe, against especially little capital. 

4. That EU stops behaving like a Banana Union getting involved into such issues as regulating the entry fees to Romanian monasteries.

Sir, if those requests would come to fruition, many Europeans would be immensely thankful to Britain… again.

@PerKurowski

Risk weighted capital requirements expelled many traditional bank risks into the shadows

Sir, Patrick Jenkins, when discussing regulator’s growing concerns for the growth of shadow banking”, lists some reasons for why policymakers bear some of the blame, among these the “regulatory crackdown on banks in the aftermath of 2008 may well have derisked those institutions by boosting equity, thus cutting leverage. But it displaced many of the risks to non-banks”, “Why policymakers are to blame for the shadow bank boom”, October 2.

Did they really “derisk” banks, cutting leverage as a result of “boosting equity”, or was it not a continuations of banks expelling that what perceived as risky required them to hold more capital, all because of the permanence of a portion of risk weighted capital requirements? My opinion is that it is much more the second option that is at play.

The moment risk weighted capital requirements were introduced then the risk adjusted return on bank equity no longer depended on managing a portfolio of risk intelligently, with help of savvy loan officers, but financial engineering came into place, because then much of the bank returns on equity would depend on having as little equity as possible.

And of course bankers loved it. The less equity there needs to be, the more is left over for their bonuses.

And where would that “risky” business then go? To the shadows of course!

Jenkins writes, “The relatively loose regulation of many non-banks means data on areas of risk, such as leverage, are scant.” Indeed but it is very hard to believe that in the shadows they would allow remotely as generous leverages as regulators allowed the banks in the sunlight… like 62.5 times to 1 if only an AAA to AA credit rating was present.

@PerKurowski

The direction into which banks go remains the same as the one before the crisis.

Martin Arnold, discussing the weakening of European banks when compared to the American quotes John Vickers, the former Chair of the UK's Independent Commission on Banking (ICB)with, “You had in effect a huge taxpayer-backed subsidy for risk-taking and that ended in tears. So pulling back from that is directionally a good thing” "How US banks took over the financial world", September 16.

Sir, do you see how little the world has learnt? The huge taxpayer-backed subsidy was not at all for risk-taking but for the excessive build up of exposures to what was perceived as safe, and against which regulators therefore allowed them to hold especially little capital.

“So pulling back from that is directionally a good thing” No! There has unfortunately not been any change in directions. By keeping the risk weighted capital requirements, the banks are still pushed towards what is perceived, decreed or can be concocted as safe, and away from what is perceived as risky.

The reason for it? The fact that the real causes of the bank crisis have been classified by those responsible for these, as something that shall not be named. And Sir, FT, sadly, is complicit in such cover up. In doing so FT, sadly, is absolutely not living up to its motto.

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

The priority of those who committed the mistakes that caused the financial crisis has been the cover up, not the corrections

Sir, Gillian Tett, similarly to like Martin Wolf wrote a couple of days ago, expresses surprise and concerns for the fact that so many things that were supposed to be corrected or at least bettered after the financial crisis seem worse today. She lists the level of debt and leverage, the market share of TBTF banks, the size of the shadow banks, and that no few bankers directly related to the crisis have been jailed. “Surprising outcomes of the financial crash”, September 7.

But how can one be surprised by so few corrections and betterments when those supposed to correct and better it remain being those who committed the mistakes, and have not been held accountable one iota for their mistakes? 

But how can one be surprised by so few corrections and betterments when in the aftermath of the crisis so many truths were classified as those that shall not be named, and consequently arduously silenced, like for instance:

Lack of regulations: Wrong! Total missregulation. Regulators for their risk weighted capital requirements for banks used the perceived risk of banks assets, those that bankers were already clearing for, and not the risk that bankers would perceive and manage the risks wrongly. They seemingly never heard of conditional probabilities.

Excessive risk taking: Wrong! It was the regulators excessive risk aversion that gave banks incentive to build up excessive exposure to what was perceived safe. Like allowing banks to leverage assets a mind-blowing 62.5 times only because some human fallible credit rating agencies had assigned it an AAA to AA rating.

Greece did it: Wrong! EU authorities did Greece in, when assigning a 0% risk weight to its debt. Is the statism implied in assigning a 0% risk weigh to the sovereign and one of 100% to the citizens discussed? No! There are too many interested in benefitting from crony statism for that.

Sir, Ms. Tett ends with “predictions are best presented with a dash of humility — and the knowledge that what does not happen can sometimes be even more significant than what actually does.”

Indeed but since “that what does not happen” could be much a result from a lack of questioning, to understand it could also require loads of humility from journalists. Capisce FT? 

@PerKurowski

Myths, and truths that shall not be told, is why so little has changed since the financial crash

Sir, Martin Wolf writes: “The financial crisis was a devastating failure of the free market… The persistent fealty to so much of the pre-crisis conventional wisdom is astonishing.” “Why so little has changed since the financial crash” September 4.

Myths and truths that shall not be told, so that regulators shall not be held accountable, is the cause of that, not the failure of markets that were not free by a long shot. Here follows some of the more important of these.

Lack of regulations: Wrong! Total missregulation. Regulators for their risk weighted capital requirements for banks used the perceived risk of banks assets, those that bankers were already clearing for, and not the risk that bankers would perceive and manage the risks wrongly. They seemingly never heard of conditional probabilities.

Excessive risk taking: Wrong! It was the regulators excessive risk aversion that gave banks incentive to build up excessive exposure to what was perceived safe.

Greece did it: Wrong! EU authorities did Greece in, when assigning a 0% risk weight to its debt.

But Wolf is correct when arguing, “Today’s rent-extracting economy, masquerading as a free market, is, after all, hugely rewarding to politically influential insiders”

Because yes, crony statism is all around us, beginning with the “We governments guarantee you banks, and then assign ourselves a 0% risk-weight so you need not to hold any capital when lending to us, and so then you can return the favor by lending to us. 

Sir, Wolf concludes: “If those who believe in the market economy and liberal democracy do not come up with superior policies, demagogues will sweep them away”. That is right! But let us not ignore that “We will make your bank systems safe with our risk weighted capital requirements” was and is pure unabridged besserwisser demagoguery.

PS. Of course journalists who refuse to ask regulators the right questions since they are scared that if they do they will never be invited to Davos and Jackson Hole gatherings are also part of the explanation.

PS. Here is an aide memoire on some of the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Even after the crisis there has been no change in who are represented when deciding on bank regulations.

Sir, Sarah O’Connor writes: “If we want groups to make fair decisions, our best shot is to make the groups representative of the people who are subject to those decisions.” Hear hear!, “Diversity coaching from the Olympic dressage event” August 22.

In the matter of bank regulations, where were all those who perceived as risky by the banks, like entrepreneurs, suffered the Mark Twain realities of bankers lending you the umbrella when the sun shines and wanting it back if it looks like it could rain?

Had they been present perhaps regulators would have understood the concept of conditional probabilities, and therefore had realized that assets perceived by bankers as risky become safer, not riskier; while assets perceived by bankers as safe become riskier, not safer.

Can you imagine how much tears, sufferings and lost opportunities that would have saved the world, primarily our young?

The saddest part of the story is that even after the crisis should have evidenced to all the regulators had no idea of what they were doing, there has been no changes at all in who are being represented when analysis and decisions are taken, so they still keep seeing and considering the risks in the same or quite similar way, the bankers are perceiving the risks. 

How good it would have in the Basel Committee some representation of the young who know that risk taking is the oxygen for the development they need, and that the older do not have the right to “safely” extract all equity from the current economies.

@PerKurowski

If only the Basel Committee of Banking Supervision ‘Swallowed the brave pill’

Sir, I refer to Emma Jacobs "‘Swallow the brave pill,’ advises the tech executive turned entrepreneur" July 23

Currently regulators, by means of lower capital requirements, give banks incentives to build up large exposures on what is perceived, decreed or concocted as safe, like house financing, sovereigns like Greece and AAA rated securities. That is like feeding our banks carbs only, something which makes our bank system obese.

As a result those perceived as risky, like SMEs and entrepreneurs, and who are so important for the future of the economy, are also kept on an anorexic credit diet. 

That is all because regulators, even if banks with size of exposure and risk premiums already clear credit risk, are, quite infantile I would say, more concerned with the risks perceived ex ante than with what could happen ex post. Had they not been so, they would have long time ago realized that what puts our bank system in danger of major crisis, is never what is perceived ex ante as risky, but always what has been wrongly perceived as safe.

Wouldn’t it be nice Thomas Davies helped those regulators to “swallow a brave pill” in order to get over their affliction that so much hurts us? Then our bank system would be safer and our economies stronger.

@PerKurowski

The risk weighted capital requirements doomed our banks to impotence, and our economies to obesity.

Sir, I would like to make some of my own observations on two terms of those exposed by Robert Shrimsley in “Menopause, impotence and other useful economic terms” May 18.

Shrimsley writes: “Impotence: An underperforming economy is distressing for all parties. This kind of dysfunction can be either structural or cyclical or psychological”. 

Indeed but it can also be physiological. When the Basel Committee introduced risk weighted capital requirements for banks they impeded banks from feeling any attraction to what’s perceived as risky, like the entrepreneurs. That has our banks only masturbating by lending to what’s “safe”, like houses and sovereigns… and all the Viagra in the world won’t help. Our only salvation lies in a delicate intervention that removes this regulatory object that causes this ED; so that banks can, little by little, throwing out the equity minimizers and reincorporating some savvy loan officers, learn again to perform their societal duties.

Shrimsley writes: “Obesity: This is an economy…which has given up going to the gym and is too heavily dependent on house price inflation and junk commodities like lightly regulated financial products” 

When regulators told banks that if they only stayed away from what is perceived as risky, what bankers don’t like, like risky entrepreneurs and broccoli; and went for what’s safe, what bankers love, like residential mortgages and ice cream, then they would be rewarded with the chocolate cake of higher expected risk adjusted returns on equity…they guaranteed the economy to become obese.

@PerKurowski

In terms of estrogen and testosterone, are there differences between bank exposures to what is perceived risky, and risky excessive exposures to what is perceived as safe?

“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” Mark Twain

Sir, Cordelia Fine writes: “Risk management in financial institutions is too important to be guided by scientific ideas well beyond their sell-by date. Blaming financial misadventures on a testosterone-fuelled male drive distracts us from what’s more likely to make a difference: regulation and culture. The best in-house antidote for bankers selling junk products and regulators bending to conflicts of interest isn’t women; it’s a dismissal slip”, “The Testosterone Rex delusion” March 3.

Absolutely! But with reference to the risks taken on by the banks that caused the 2007/08 crisis, that dismissal slip should foremost be given to regulators for having the ex ante perceived risks of banks assets substitute for the ex post dangers to our banking system.

And with reference to the absurd low response of the economy to the extremely high stimulates provided, the regulators should also be given that dismissal slip, for ignoring the purpose of banks, something that includes the efficient allocation of credit to the real economy.

Fine references Swedish journalist Katrine Marçal with whether “an investment bank named Lehman Sisters could handle its over-exposure to an overheated American housing market.” That is an ex post description that has little to do with the ex ante perception of the risks, and clearly less to do with bankers wanting to lend when it rained.

If some testosterone is needed to understand that risk-taking is the oxygen of development, and so the need for banks to also lend to those perceived as risky, like to entrepreneurs, then the regulators showed a fatal lack of it.

Their risk weighted capital requirements, more ex ante perceived risk more capital – less risk less capital is as dangerously nonsensical as can be. These only guarantee that when the true risks for our banking system happens, namely the dangerous overpopulation of safe havens, banks will stand there with especially little capital.

By allowing banks to leverage much more with assets perceived, decreed or concocted as safe, like AAA rated securities, like residential mortgages, like sovereigns (Greece) they allowed banks to earn the highest expected risk adjusted returns on equity on what was perceived as safe. Mark Twain could have said that made bankers wet dreams come true; and that was, while playing, the music to which Citigroup’s Chuck Prince held bankers had to dance.

And so, since what the members of the Basel Committee and the Financial Stability Board and most of their colleagues have really proven, is to be suffering from an excessive risk aversion, what would then Cordelia Fine opine, in terms of testosterone and estrogens?

God make us daring!

Here is an aide memoire on the major mistakes with the risk weighted capital requirements

@PerKurowski

The risk weighted capital requirements for banks close way too many development doors.

Sir, Martin Wolf referring to the World Bank’s latest Global Economic Prospects writes: “A slowdown in the potential rate of growth is affecting many developing countries. This is not only the result of demographic change, but also of a weakening in productivity growth. They need to tackle this urgently.” “Recovery is a chance for the emerging world” January 17.

Sir, during my two years as an Executive Director of the World Bank, and with respect to the Basel Committees’ bank regulations, I continuously argued for the need to maintain “an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth.”

At the High level Dialogue on Financing for developing I presented a document titled “Are Basel bank regulations good for development?” which I answered with a clear NO!

In 2009 Martin Wolf, in his Economic Forum allowed me to publish “Free us from the imprudent risk aversion and give us some prudent risk-taking”.

And in hundreds sites more, among other with over 2600 letters to FT, I have argued about the horrible mistakes of the risk weighted capital requirements for banks present, not just for developing countries but also for developed ones.

The distortion these produce in the allocation of bank credit in favor or what is perceived or decreed as safe, sovereigns, AAA rated and mortgages, has impeded millions of “risky” entrepreneurs around the world to gain access to bank credit, thereby hindering much new productivity.

And those regulations will not bring us stability, much the contrary.

So the first thing to do to allow what Wolf wants, “greater entrepreneurial effort, more competition, higher investment and faster improvements in productivity”, is the elimination of risk weighted capital requirements for banks.” But Martin Wolf will most probably not agree, because how could he?

Sir, and as I have told you umpteenth times those regulations will not bring us stability, much the contrary.

PS. Look for instance at houses. What would the price of a house be if there was no financing available to purchase these? Of the current price of houses how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish.

@PerKurowski

The financial-elite’s reluctance to ask bank regulators for clear explanations, seriously threatens the west’s liberal democracy and global order

Sir, Martin Wolf asks and answers: “What has created sharp (and usually unexpected) slowdowns? The answers have been financial crises, inflation shocks and wars” “The world economy hums as politics sour” January 10.

Indeed, but currently our economies are also suffering a slow but steady state slowdown as a consequence of the insane risk weighted capital requirements for banks, which were created in the name of making banks more stable. It all boils down to the following:

If a “safe” AAA rated offered a correct risk adjusted net interest margin to a bank, a loan to it could, according to the Basel Committee’s Basel II of 2002, be leveraged 62.5 times but, if that correct risk adjusted net interest margin was offered by a “risky” unrated entrepreneur or an SME, then a loan to these could only be leveraged 12.5 times.

As a direct result bank credit has been used to finance “safer” present consumption; to inflate values of mostly existing assets; and way too little to finance “riskier” future production.

In summary it amounts to having placed a reverse mortgage on our past and present economy, in order to extract all of its value now, not caring one iota about tomorrow, and much less about that holy social intergenerational contract Edmund Burke spoke about.

But Wolf could argue that this is evidently not true because: “Yet the world economy is humming, at least by the standards of the past decade. According to consensus forecasts, optimism about prospects for this year’s growth has improved substantially for the US, eurozone, Japan and Russia”

Sir, it’s all a debt financed economic growth. Like a family having a great Christmas by racking up debt on their credit cards. How much of the enormous recent growth of debt everywhere has gone to finance future builders like entrepreneurs and SMEs? The answer is surely a totally insignificant fraction.

Wolf here anew identifies threats: “The election of Donald Trump, a bellicose nationalist with limited commitment to the norms of liberal democracy, threatens to shatter the coherence of the west. Authoritarianism is resurgent and confidence in democratic institutions in decline almost everywhere.”

Sir, sincerely, what is all that compared to the fact that the world’s financial elites, either because it is not in their interests, or because lacking self confidence they are afraid they might have overlooked something, do not have the gut to firmly ask regulators: “Why do you want banks to hold more capital against what has been made innocous by being perceived risky, than against what is dangerous because it is perceived safe?”, and not accepting any flimsy nonsensical answer veiled in sophisticated voodoo technicalities.

Martin Wolf has moderated numerous important conferences on financial regulations, but not one has he dared to ask that simple question. Could it just be because he is scared he would then not be invited again as a moderator? Or is it that he just doesn’t get it.

And Sir, you have really not been living up to your motto either. Shame on you!

PS. And all that risk adverse regulations for nothing, since, as I have told Wolf and FT time after time, major bank crisis, like that of 2007/08, never ever result from excessive exposures to what is ex ante perceived as risky.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski