Compared to more than three decades ago, what is the current leverage ratio of our banks?

Sir, Martin Wolf, in FT on July 12, 2012, in “Seven ways to clean up our banking ‘cesspit’” opined: “Banks need far more equity: In setting these equity requirements, it is essential to recognize that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters. It needs to be far lower.”Soon a decade since, are bank capital requirements much higher and really sufficient?

No! Though bank capital requirements are mostly needed as a buffer against the certainty of misperceived credit risks & unexpected events, in this uncertain world, these are by far, still mostly based on the certainty of the perceived credit risks.

Consequently, when times are rosy, regulators allow banks: to lend dangerously much to what’s perceived as very safe; to hold much less capital; to do more stock buybacks and to pay more dividends & bonuses. Therefore, banks will stand there naked, when most needed. 

The leverage ratio is also important because it includes as assets, loans to governments at face value, and thereby makes it harder for excessive public bank borrowers to hide behind Basel I’s risk weights of 0% government, 100% citizens. No matter how safe the government might be, those weights de facto imply bureaucrats know better what to do with credit they’re not personally responsible for than e.g., small businesses and entrepreneurs.

November 19, 2004, in a letter you published I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?” That this factor, in the face of huge government indebtedness, is not even discussed, as I see it can only be explained by too much inbred statism.

Before the Basel Committee Accord became operative in 1988, Basel I, banks were generally required to hold about 10 percent of capital against all assets, meaning a leverage ratio of 10.

Where do banks find themselves now? I know well it’s hard, and extremely time consuming, to make tails and heads out of current bank statements, but I’m absolutely sure most financial media, if they only dared and wanted, have the capacity to extract that information.

Should not such basic/vital data be readily available and perhaps even appear on front pages? It’s not! Why? Has media been silenced by capital minimizing/leverage maximizing dangerously creative financial engineers?

Sir, I’m not picking especially on financial journalists, the silence of the Academia, especially the tenured one, is so much worse.

@PerKurowski

Martin Wolf, again, any good economic plan needs, sine qua non, to get rid of bank credit distorting regulations.

Sir, I refer to Martin Wolf’s “Without an economic plan, patriotism is Johnson’s last refuge” FT, October 18, 2021

In Martin Wolf’s Economist Forum of October 2009, FT published an opinion I titled “Please free us from imprudent risk-aversion and give us some prudent risk-taking” (The link is gone, I wonder why)

In that article, commenting partly on the 2008 crisis, I held that getting rid of the risk weighted bank capital requirements, that which distorts the allocation of credit to the real economy, was an absolute must. 

Now, 11 years later, I must still insist in that, without doing so, there’s no economic plan that can deliver sustainable results.

The history I’ll tell my grandchildren has little to do with Philip Stephens’ history.

Sir, Philip Stephens writes: “Twenty-five years ago… the world belonged to liberalism. Soviet communism had collapsed. Historians will record the 2008 global financial crash as… the moment western democracies suffered a potentially lethal blow. The failure of laissez-faire economics was visible before the collapse of Lehman Brothers.” “The west is the author of its own weakness” Financial Times, October 1, 2021.

The history I will be telling my grandchildren is quite different.

Thirty-three years ago, the world belonged to liberalism and Soviet communism was collapsing. Historians will record how in 1988, one year before the Berlin Wall fell, the western world’s bank regulators introduced risk weighted bank capital requirements that distorted the allocation of credit. That put an end to any laissez-faire economics. With risk weights of 0% the government and 100% citizens, as if bureaucrats know better what to do with credit than e.g., entrepreneurs, communism took over. 

The 2008 global financial crash resulted from banks being allowed to leverage their capital/equity/skin-in-the game a mind-boggling 62.5 times, with assets that human fallible credit rating agencies had assigned a AAA to AA rating.

Yes, the west is the author of its own weakness… it much renounced to the willingness to take risks that had made it great. 

Sadly though, there are way too many interested in not disclosing what really happened… and therefore our banks are still in hand of insane risk aversion. “Insane”? Yes, because those excessive exposures that could become dangerous to our bank systems, are always built-up with assets perceived as safe, never ever with assets perceived as risky.

PS. My 2019 letter to the Financial Stability Board

Do we know of a display of hubris greater than “risk weighted bank capital requirements”?

Sir, Gillian Tett in “Economists can’t predict the future — policy should reflect that” July 1 wrote: “Robert Rubin, Peter Orszag and Joseph Stiglitz called on economists to embrace ‘copious amounts of humility’ when projecting the future.”

One of the magnificent displays of hubris, the antonym of humility, came into being when bank regulators imposed, risk weighted bank capital requirements, as if they, from their desks, have any real bankable notion, of what the future really entails.

And on that, this trio, as the rest of the Academia, as Gillian Tett, as FT too, have all kept total silence.

Spurn bank regulators' false promises.

Sir, Martin Wolf makes a good case for “We should not throw liberal trade away for the wrong reasons and in the wrong way”, “Spurn the false promise of protectionism” FT June 16.

Yet, when regulators, decades ago, decided to throw liberal access to bank credit, by imposing credit risk weighted bank capital requirements, something which completely distorted the access to bank credit, Wolf and 99.99 percent of those who should have spoken up, kept mum.

Though I’ve no idea whether they read it, in a 2019 letter I wrote to the Executive Directors and Staff of the International Monetary Fund, I argued that these risk weights are to access to credit, precisely what tariffs are to trade, adding “only more pernicious” 

Wolf writes that “the US economy has suffered from high and rising inequality and a poor labour force performance” and includes among other explanations the “rent-extracting behaviour throughout the economy”

But anyone who reads “Keeping at it” 2018 in which Paul Volcker’s 2018 valiantly confessed: “The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”, should be able to understand that rent-extraction also occurs by means of cheaper and more abundant access to credit.

And boy did regulators throw away unencumbered access to credit in “the wrong way”

Here follows four examples: 

To establish their risk weights, they used the perceived credit risks, what’s seen “under the street light” while, of course, they should have used the risks for banks conditioned on how credit risks were perceived. 

By allowing banks, when the outlook was rosy, to hold little capital, meaning paying high dividends, lots of share buy backs, and huge bonuses, they placed business cycles on steroids.

Very little of their capital requirements cover misperceived credit risks or unexpected events. Therefore, just as in 2008 with the collapse of AAA rated mortgage back securities, and now with a pandemic, banks were doomed to stand there with their pants down.

With risk weights of 0% the sovereign and 100% the citizens, which de facto imply bureaucrats know better what to do with credit they’re not personally responsible for than e.g., entrepreneurs, they smuggled communism/statism/fascism into our banking system.

“We will make your bank systems safe with our credit risk weighted bank capital requirements” Sir, what amount of wishful thinking must have existed for the world, its Academia included, to so naively have fallen for the hubristic promises of some technocrats.

@PerKurowski

Bank regulators never considered the unexpected, like a pandemic

Sir, Angela Merkel, Justin Trudeau and Erna Solberg opine: “The Covid-19 pandemic has taught us that the costs of prevention and early response are small compared with the consequences of under-investment.” “G7 should pay lion’s share of costs to help end the pandemic” FT June 10.

That’s correct but it should not have taken a pandemic to understand that banks need also to have sufficient capital so as to be able to respond to unexpected events. Unfortunately, instead of basing their bank capital requirements on such possibilities, or on that of misperceived credit risks e.g., 2008’s AAA rated mortgage-backed securities, bank regulators, the Basel Committee, doubled down on perceived credit risks, those which were already being cleared for by banks. 

The result? Though so many don’t want the innocent child to be heard, the banks now stand there naked.

Sir, again, if what’s perceived as safe is safe, and what’s perceived as risky is risky, would banks need capital. Not much. 

Bank regulations need a complete overhaul, meaning going back to the humbling reality of risks being hard to measure; instead of digging us down even deeper in the hole with Basel IV, Basel V and so on.

PS. July 12, 2012 Martin Wolf wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk.” Martin Wolf clearly heard me, but he did not listen.

@PerKurowski

It’s sad when we need to remind regulators to prepare for the unexpected

“The time to prepare for the next threat is now”, that’s how Bill Emmott ends his “How to build global resilience after the pandemic” FT, May 25.

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

Today, if alive, with respect to Basel Committee’s risk weighted bank capital requirements, Mark Twain would have opined: “A bank regulator is a fellow who allows banks to hold little capital when the sun shines, so these can pay lots of bonuses and dividends and buy back lots of stock, but wants banks to hold much more capital, the moment the rain starts”

PS. Emmott writes “But there must be an international accord on debt restructuring, akin to the Brady Plan in the early 1990s.” I lived through that restructuring. It was made feasible by developing countries being able, because US$ interest rates were high, to very inexpensively purchase US$ 30 years zero coupon bonds issued by the US, in order to guarantee the repayment of the principal of their debts. In a world of ultra-low, even negative interest rates, what’s the price of such bonds?

@PerKurowski

The “Parable of talents” is currently quite inapplicable to any wealth tax.

Sir, I refer to “Why the toughest capitalists should root for a wealth tax” Martin Sandbu, FT, May 10.

Much of the current wealth is the direct result of huge liquidity injections, and which are distorted by risk weighted bank capital requirements that, among other, so much favors the debts of the government over debts to the citizens… all as if bureaucrats/politicians know better what to do with credit for which repayment they are not personally responsible for, than e.g., small businesses and entrepreneurs.

To favor such wealth tax, besides removing such distortions, I would also like to know what assets, and to whom, the wealthy should sell in order to raise the money to pay such taxes… and what would be the resulting overall productivity of such resource transfer. I believe a full review of the current productivity of all government spending is long overdue.

So, in this respect, taxing wealth with its revenues seemingly not being sufficiently productive, an understatement, sort of reminds me of a Harry Belafonte & Odetta song titled A hole in the Bucket

Sandbu also writes that “a net wealth tax…is the tax version of the New Testament’s parable of the talents” I’m not at all sure that’s currently really so.

I extract the following from Matthew 25: 24-27: 24 “Master,’ 25 I was afraid and went out and hid your gold in the ground. 26 “His master replied, ‘You wicked, lazy servant! So, you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned, I would have received it back with interest.”

First, we now have regulators who, with bank capital requirements, tell banks that when they scatter and sow, they should be risk averse, guarding it all in safe gold, e.g., loans to governments and residential mortgages; staying away from what’s risky, e.g., entrepreneurs and small businesses.

Second, to top that up, with QEs central banks are injecting money thereby keeping interest rates ultra-low.

So, are we allowing bankers to exploit their talents? No! 

Will that produce good interest rates for the depositors? No! 

And if inflation takes off, will they receive their real money back? No!

Sir, with respect to risk taking, and even though I am a protestant, let me finally quote Pope John Paul II: Our hearts ring out with the words of Jesus when one day, after speaking to the crowds from Simon's boat, he invited the Apostle to "put out into the deep" for a catch: "Duc in altum" (Lk 5:4). Peter and his first companions trusted Christ's words, and cast the nets. "When they had done this, they caught a great number of fish" (Lk 5:6).

Will this tweet be ignored by FT?

How much hubris is needed for regulators to impose risk weighted bank capital requirements, as if they know what the risks are?

How much wishful hoping is needed when even Nobel Prize winners in Economic Sciences believe that the regulators do know?

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

About Italy, there are serious questions that FT, and others, should not silence.

Sir, I refer to “Draghi plots €221bn rebuilding of Italy’s recession ravaged economy” Miles Johnson and Sam Fleming, and to “Europe’s future hinges on Italy’s recovery fund reforms”, Andrea Lorenzo Capusella, FT April 22, and to so many other articles that touch upon the issue of Italy’s future, in order to ask some direct questions.

Do you think Italy’s chances of a bright future lies more in the hands of Italy’s government and its bureaucrats, than in hands of e.g., Italian small businesses and entrepreneurs?

I ask this because, with current risk weighted bank capital requirements, regulators, like Mario Draghi a former chairman of the Financial Stability Board, arguably arguing Italy’s government represents less credit risk, do de facto also state it is more worthy of credit. I firmly reject such a notion.

Yes, Italy clearly shows a stagnant productivity, but could that be improved by in any way increasing its government revenues?

Italy, before Covid-19, showed figures around 150% of public debt to GDP and government spending of close to 50% of GDP. I am among the last to condone tax evasion… but if Italian had paid all their taxes… would its government represent a lower share of GDP spending, and do you believe its debt to GDP would be lower?

One final question: Sir, given how Italy is governed, excluding from it any illegal activities such as drug trafficking, where do you think it would be without its shadow eeconomy, its economia sommersa? A lot better? Hmm!

PS. As you know (but seemingly turn a blind eye to), Italy’s debt, even though it cannot print euros on its own, has, independent of credit ratings, been assigned by EU regulators, a 0% risk weight.

A new monetary order requires the old regulatory order.

I refer to Chris Watling’s “Now is the time to devise a new monetary order” March 19.

Sir, it is hard for me to understand how Watling, correctly pointing out so many distortions in the allocation credit and liquidity, can do so without specifically referencing the role of the risk weighted bank capital requirements.

For “the world economy [to] move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation is based on perceived fundamentals”, getting rid of Basel Committee’s regulations is a must.

For such thing to happen, discussing and understanding how distorted these are, is where it must start.

E.g., Paul Volcker, in his 2018 “Keeping at it” penned together with Christine Harper valiantly confessed: “The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”.

Sir, why is that opinion of Volcker rarely or perhaps even never quoted? Could it be because in a mutual admiration club it’s not comme-il-faut for a member to remark “We’re not wearing any clothes?

Volcker mentions “The US practice had been to assess capital adequacy by using a simple ‘leverage ratio’- capital available to absorb losses on the bank’s total assets”

Going back there, would return banks to loan officers; and send all those dangerously capital minimizing/leverage maximizing creative financial engineers packing.

My 2019 letter to the Financial Stability Board

My 2019 letter to the IMF

@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

Before aiming at any target, central banks must cure their shortsightedness

Sir, I refer to Martin Wolf’s “What central banks ought to target” FT, March 3.

With risk weighted bank capital requirements, the regulators are targeting what’s perceived as risky, thereby de facto fostering the creation of the excessive exposures to what’s perceived as safe, but that could end up being risky, which is precisely what all major bank crises are made off. In other words, they are putting future Minsky moments on steroids.

And if to the distortions in the allocation of credit to the economy that produces, you add the QEs, then you end up with such a mish-mash of monetary policy that no one, not even Mr. Wolf, should be able to make heads and tails out of it.

Wolf writes, “Central banking is art, not science… it must be coupled to deep awareness of uncertainty”. Sir, I ask, can you think of anything that evidences such lack of awareness of uncertainty than the risk weighted bank capital requirements?

So, before discussing what else to target, it is essential that central banks and regulators get their shortsightedness corrected.

Of course, “the central bank [should] set a rate that is consistent with a macroeconomic equilibrium” but, what would those rates be if banks needed to hold as much money when lending to the sovereign (the King) than when lending to citizens?

And when Wolf reports that “the New Zealand government has told its central bank to target house prices”, that makes me ask: Is anyone aware of the implications of having a central banks placed in the middle of that real, though not named, class war between those who have houses as investment assets and those who just want affordable homes?

Finally, as so many do, Wolf also signs up on that: “If people want less wealth inequality, they should argue for wealth and inheritance taxes”. But just as most do, he does so without explaining what assets, and to whom, the wealthy should sell, in order to reacquire that cash/purchase power needed to pay the tax that they handed over to the economy when they bought these. Not doing so, leaves one quite often a sort of populist aftertaste.

PS. Inflation? Just the same old confusion

@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. 

Basel Committee’s risk weighted bank capital requirements is fodder for our wishful thinking hopes.

I refer to Tim Harford’s “From forgeries to Covid-denial" On how we fool ourselves: Whether believing implausible statistics or falling for frauds, humans are addicted to wishful thinking” FT, January 30, 2021.

Sir, I ask, the Basel Committee’s risk weighted bank capital requirements, could that just be a forgery made to satisfy our deep wishes of our banks always being safe?

Now why so little objections? Edward Dolnick explained it with: “Experts have little choice but to put enormous faith in their own opinions. Inevitably, that opens the way to error, sometimes to spectacular error.”

By the way. Where has Academia been on all the regulatory distortion of the allocation of bank credit?

Macroeconomic theory stands no chance while autocratic regulators distort the allocation of bank credit.

Sir, in reference to Martin Sandbu’s “The revolutions under way in macroeconomics”, January 28, I must ask: What macroeconomic theory stands a chance against the Basel Committee’s risk weighted bank capital requirements? 

Lower bank capital requirements when lending onto the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs. 

Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.

Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.

Lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

https://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

What America (and much of the rest of the world) needs is to free itself from the clutches of statist/communist bank regulators.

Sir, Martin Wolf, opines that “Joe Biden may be a last chance for US democracy” “Competency is Biden’s best strategy” January 27. 

Oh, if only all was that easy and in Biden’s hands. When compared to what some dark hands through bank regulations are doing to America (and to much of the world), both Donald Trump and Joe Biden are small fry.

Paul Volcker in his 2018 autography “Keeping at it” wrote: “The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”. Volcker continued with “Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011”. That compared to all other that has been said about and quoted from Paul Volcker, has been totally ignored, or outright censored. 

But what does it really mean?

Lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs. 

Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.

Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.

Lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

Sir, I just ask, would America have even remotely become the great land it is, if that kind of risk adverse bank regulations had welcomed the immigrants when arriving at Ellis Island / Liberty Island... to the Home of the Brave?

Wolf also uses new-confirmed Treasury secretary, Janet Yellen, to endorse what he himself have argued so many times namely: “With interest rates at historic lows, the smartest thing we can do is act big” Again, where would those historic low rated be without the Fed’s QEs and without the regulatory favors mentioned? Really? Historic lows or historical communist subsidies?

PS. Not the first time (nor probably the last) I've written to Martin Wolf on this.

@PerKurowski

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.Sir, Martin Wolf writes: “we are missing a profound transformation in how macroeconomic stabilisation will have to be conducted. Whether we like it or not, we must rely on active fiscal policy.” “Restoring growth is more urgent than cutting public debt” December 14.

Of course, we need active fiscal policy, but what about the private sector? E.g. we must be able to rely on effective allocation of bank credit. And that, because of the risk weighted bank capital requirements, is simply not happening. Two examples: 

Much lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats/politicians know better what to do with credit they are not personally responsible for than e.g. entrepreneurs. And unless we are communist, or in love with taking decisions with other people’s money, we know that’s not true.

Banks are also allowed to leverage their equity much more with residential mortgages than with loans to small businesses/entrepreneurs, those who create the jobs that helps service mortgages and pay utilities. That favors the increase of house prices and weakens the economy. Insane!

Wolf argues: “It is essential to lock in low interest rates. The maturity of UK public debt has always been relatively long. The aim now should be to make it as long as possible, by taking advantage of exceptional borrowing conditions.”

But, those “exceptional borrowing conditions” are artificial. What would the free market rate on UK public debt in absence of QEs and the low bank capital requirements mentioned? And is not the difference between that rate and current ultra-low interests, de facto, not a well camouflaged tax, retained before the holders of those debts could earn it?

We all, Martin Wolf included, should be able to have confidence in that our banks are regulated by sensible and competent people. For a starter that requires regulators understanding that those excessive exposures that could be dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

Sir, July 12 2012, Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." 

Seemingly he still does not ​really ​understand what I meant.

My 2019 letter to the Financial Stability Board

@PerKurowski

What would the Milton Friedman of 50 years ago, have thought of the Martin Wolf of today?

Sir, I refer to Martin Wolf ‘s “Friedman was wrong on the corporation” December 9.

Wolf writes that among his contributions to the ebook Milton Friedman 50 Years Later, and in relation to what a “good game” would look like, that this is “one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; [and] one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises”.

Really? Would Friedman have promoted “addiction to opiates”?

Really? What is parked in tax havens? Profits, or titles to assets that are for the most, 99.99%, not parked in these tax havens?

But yes, the financial sector certainly lobbied for a low capitalization, but why should this sector be more blamed than those regulators who, based on the nonsense that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, allowed it?

Wolf quoted Friedman with “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Yes, that’s true. But what should not be allowed though are for instance regulators setting much lower bank capital requirements when lending to the government than when lending to citizens, something which de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs.

Wolf writes about "unbridled corporate power has been a factor behind the rise of populism, especially rightwing populism". For me worse is much more unbridled technocracy power. What's more populists than a Basel Committee telling the world: "We know all there is to know about what's to our bank systems, so we have decreed credit risk weighted bank capital requirements".

Sir, Wolf says he used to believe Friedman, but that he was wrong. I just wonder what Milton Friedman would have thought of the Martin Wolf of today

A final question, Martin Wolf, what if corporations taking upon themselves to act in a “corporate socially responsible way” generated less employment and had less profits, and therefore paid less taxes?

@PerKurowski

Could the Basel Committee learn enough from puzzles and poker so as to correct their misinformation?

Sir, I refer to Tim Harford’s “What puzzles and poker can teach us about misinformation” FT Weekend December 5.

When deciding on what’s more dangerous to banks the regulators in the Basel Committee, with “expert intuition” and great emotion shouted out the “below BB-” and, for their risk weighted bank capital requirements, assigned these a 150% risk weight, and a very smallish 20% to what’s rated AAA.

But, with what type of assets can those excessive exposures that could really be dangerous to our bank systems built-up, with assets rated below BB- or with assets rated AAA?

Never ever with assets perceived as risky, always with assets perceived as safe.

Sadly, the regulators had missed their lectures on conditional probabilities.

And their “expert intuitions” are so strong that they were not able to understand the clear message sent by the 2008 AAA rated MBS. 

What does Tim Harford think regulators could learn from puzzles and poker to correct their misinformation?

PS. Trying to understand the how come of the so loony bank regulations, by reading Daniel Kahneman’s “Thinking, Fast and Slow” 2011.

@PerKurowski