Before ECB does one iota more, we must get rid of the loony portfolio invariant credit risk weighted bank capital requirements.

Sir, Rick Rieder writes, “A thoughtful consideration of where and how capital is being applied could have a positive influence that lasts decades. The status quo cannot be satisfactory for anyone hoping to see the eurozone continue as a global economic force in the century ahead” “ECB’s conventional tools will not solve eurozone woes” August 9.

Absolutely but, before having ECB by buying equities entering further into crony statism terrain, what should be done, sine qua none, is to get rid of those risk weighted bank capital requirements that so dangerously, both for the bank system and for the economy, distorts the allocation of credit. 

Precisely because banks need to hold more capital when lending to the riskier future than when lending to the sovereign, and safer present “the return on debt is not matching the risk. So potential lenders have retreated, leaving more expensive equity financing as the sole source of funding. That increases the overall cost of project financing. As a result, growth-enhancing projects never get off the ground, exacerbating today’s negative economic velocity.”

Precisely for the same reason, we are not getting enough of “What is needed is to improved productivity, which comes from innovation and technology.”

Sir, if that immense source of distortion is not eliminated then whatever ECB does will only kick the can further down the road from which one day it will roll back with vengeance on all of us.

My letter to the Financial Stability Board

My letter to IMF

@PerKurowski

Low interest rates stimulate laziness in project execution and in revision of investment decisions

Sir, Izabella Kaminska is not going to be much loved today as she bravely points out to many the very uncomfortable possibility that they might have fallen head over heels “for fanciful narratives or investor cults”. Well done! That is going to generate a lot of soul-searching. “Cultish long-termism can hobble investors” September 13.

I would though like to remind Kaminska that much of “investors’ forgiving attitudes” could be explained by current extraordinary low interest rates. Just like these introduce much laziness in the execution of projects these can also provoke fewer revisions of investment strategies. Also, do not the sheer existence of negative interest rates help fuel the “grandeur of the futuristic visions being touted”?

PS. I would not refer to Andrew Haldane as a great champion for long-termism. As a regulator he has supported the extraordinary short-termism imbedded in the risk weighted capital requirements for banks. These keep banks from financing the “riskier” future our grandchildren need to be financed, having them basically just refinancing the “safer” present.

@PerKurowski

Would Britain want to settle to be a nation of marginal improvers, as BoE’s Andy Haldane seems to propose?

Sir, Tim Harford quotes risk Andy Haldane with “As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance” “Sweat the small stuff but always dream big” March 25.

Harford is rightly skeptic and writes “In a data-driven world, it’s easy to fall back on a strategy of looking for marginal gains alone, avoiding the risky, unquantifiable research… I’m not so sure that the long shots will take care of themselves”

Of course, no one can doubt the benefits of any improvements, even if marginal. Using the term already implies that. Nonetheless the winners will still be those that, unafraid of risk-taking, produce the revolutionary steps forward, those which later can have all their juices extracted with marginal improvements.

Harford explains “The marginal gains philosophy tries to turn innovation into a predictable process: tweak your activities, gather data, embrace what works and repeat.” As that would clearly indicate a risk avoiding growth strategy, it could just be Haldane building up a defense of the current risk weighted capital requirements for banks; that which so much promotes refinancing the safer past, over lending to the riskier future.

Sir, would you like your grandchildren dream to become marginal improvers? Not me… that’s clearly insufficient… “aim for the stars even if you don’t reach them” goes a Chinese proverb.

@PerKurowski

Patrick Jenkins, in banking, its current regulators lie out of their teeth’s, or are just incredibly dumb and inept.

Sir, Patrick Jenkins writes: “No sector, though, can compete with banking for the scale, depth, longevity or variety of lying that has infected a whole way of doing business.” “Bank bosses have to ensure that honesty is the best policy” March 14.

Perhaps but if so that lying is shared with its regulators.

Not a week goes by without at least one major financial media referring to Basel ratios that indicate banks are well capitalized. A responsible regulator should be out there answering such affirmations by reminding everyone that these ratios are; first not at all comparable with historic capital ratios based on non-weighted assets; and that they mean nothing if the risk weights are wrong. But the regulators don’t! They just play along. 

And to state that those rated AAA, those who regulators assign a risk weight of 20%, are more dangerous to the bank system than those rated below BB-, those who regulators assigns a 150% risk weight to, is a mindboggling blatant lie, or a stupidity out of this world… have a pick!

Jenkins concludes among other with “More important still is that bank bosses themselves prioritise long-termist decency over short-termist profit-chasing”

Few things are more short-termist, or less long termist, than allowing banks to leverage more their equity, which means earning higher risk adjusted returns, with what is “safe”, usually the past and present, than with what is “risky”, usually the future.

Just think of it, a 35% risk weight on residential mortgages, and one of 100% for SMEs. That would seem to doom our young to have to live without jobs, forever in their parents’ basements… or, if there is a reverse mortgage on it, until the house is repossessed by the bank.

And Sir, if not directly lying, is not keeping mum on it at least sort of withholding the truth?

@PerKurowski

Why are experts like Martin Wolf so silent on the immoral and utterly stupid facets of current bank regulations?

Sir, Martin Wolf questions the UK government’s “moral choices for a country forced to share out losses imposed by a massive financial crisis and weak subsequent growth [because] the government has decided to give greater priority to the old than to the young, to pensioners than families with children and to the better off than to the relatively worse off” “May’s policies make a mockery of her rhetoric” February 10.

But, when I question the intelligence and the morality of current bank regulations, Wolf ignores it. So Sir, here we go again, for the umpteenth time!

The risk weighted capital requirements for banks, caused a massive financial crisis by giving too large incentives for banks to create excessive bank exposures to what was supposed to be safe, like AAA rated securities and Greece; and with incentives that hinder banks from taking sufficient risks on the future, like lending to “risky” SMEs and entrepreneurs, causes weak growth and lack of increased productivity.

That clearly immorally favors the well-off over those poor wanting and needing credit opportunities; just as it immorally favors banks financing the safer past and present, than the riskier future the young need to be financed.

It is also I would say almost immorally stupid; since major bank crises always result from unexpected events, criminal behavior or excessive exposures to what was erroneously perceived or decreed as safe, and never ever from excessive exposures to something perceived as risky when placed on banks’ balance sheets.

Basel I assigned a risk weight of 0% to the Sovereign and one of 100% to us We the People; and it would seem Wolf is unable to grasp the runaway statism of that.

Basel II assigned a risk weight of 20% to what was AAA to AA rated and one of 150% to what is below BB-; and it would seem Wolf is unable to grasp the lunacy of that.

@PerKurowski

All projected interest/pension earnings, always depend on the real economy being able to deliver these down the line.

Sir, Keith Ambachtsheer writes: “If low investment returns are here to stay, those responsible for pension plans have a choice: wring their hands, or fulfill their fiduciary duty by rethinking what it means for the design of their schemes. Doing nothing is not an option.” “Long-term thinking will lead the way to improved returns” August 30.

Absolutely! But the long-term fiduciary duty should also include doing the best to reverse what has gotten us into this low interest rate and low economic growth environment.

That begins by protesting the risk weighted capital requirements, that which allow banks to leverage more, and to therefore obtain higher expected risk adjusted returns on equity, on assets ex ante perceived as safe than on assets perceived as risky.

It has distorted the allocation of credit causing the banks to populate (even dangerously overpopulate) the safe havens were traditionally widows, orphans and pension funds did their business.

Too low interest rates on public debt? How could it not be with risk weights of 100% for We the People and of 0% for the Government?

Let us also remember that if the real economy is in doldrums when the times come to cash in pension assets, whatever seems great now could be totally worthless.

Sir, if we do not rid banks from that regulatory introduced risk aversion that have stopped them from financing the future like lending to “risky” SMEs, and have them only refinance the “safer” past, then that future real economy is doomed to be in the doldrums.

@PerKurowski

Just you wait till the young discover what the Basel Committee for Banking Supervision has been doing to their future

Sir, Anne-Sylvaine Chassany tells us that “Océane, a 21-year-old Nice resident with purple hair, tattooed forearms and stretched earlobes would love to move to London and open a tattoo parlour” “A waitress with tattooed arms opens my eyes to the youth vote” July 27.

Well that would quite likely require Océane to get a bank loan. But what would Océane say if she understood that her chances of getting a loan at reasonable rates, which might never have been that great to begin with, are now much smaller, because of the regulators.

The risk-weighted capital requirements favors the lending to what is perceived, decreed or concocted as safe, that which always have had ample access to bank credit, over the lending to the risky… and by favoring it unfairly discriminates against the access to bank credit of those ex ante perceived as risky. 

One day, some researcher will calculate the number of loan applications by SMEs and entrepreneurs that have been denied, or approved at much higher interest rates, as a direct consequence of these regulations. When those figures are published and the young realize discovers that banks stopped financing their risky future, and are only now refinancing the safer past, like placing a reverse mortgage on the economy, then, as long as the young are able to look up from their iPads, all hell could and should break lose.

Hear the young: “Baby-boomers why did you do that to us? The banks of your parents did take the risks needed for your future!”

And nothing can foster inequality as much as denying opportunities of fair access to credit… with “fair” meaning here, a not-distorted free-market based risk evaluation process.

@PerKurowski ©

Martin Wolf, good risk management begins with knowing what risks one can least afford not to take.

Sir, Martin Wolf writes “The main explanation for the prolonged stagnation in real incomes is the financial crises and subsequent weak recovery…The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives… Our civilisation itself is at stake”, “Populist rage puts global elites on notice” July 20.

And I have in thousands of letters argued that one of the major problems we face, are the current misconstrued risk weighted capital requirements for banks, those which allow their equity, and the societal support received, to be leveraged much more with what is perceived as safe than with what is perceived as risky.

Though these regulations allowed banks to earn very high risk adjusted returns on equity for quite some time, it caused banks to dangerously overpopulate “safe” havens, like AAA rated securities backed with mortgages to the US subprime sector and loans to sovereigns like Greece… thus the 2007-08 crisis.

And as these impede the “risky”, like SMEs and entrepreneurs, to access sufficiently bank credit… thus the weak recovery.

These regulations were the result of putting our banks in the hands of regulators who did not care, and still do not care, one iota about whether banks allocate credit efficiently to the real economy. And that is of course the risk we can least afford our banks to take.

As a result, our banks no longer finance the riskier future, that which feeds the proteins our economies need to remain muscular, but only refinance the safer pasts, that which only provides the proteins that can cause economic obesity.

And Wolf concludes: “Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. Those who reject chauvinist responses must come forward with imaginative and ambitious ideas aimed at re-establishing that balance”

Mr. Wolf, that has to start by recognizing the mistakes, and holding those responsible for these, clearly accountable… “without fear and without favour”.

So dare to speak out! The risk-weighted capital requirements for banks is pure regulatory populism. If allowed to continue it condemns our civilization to that hardship and mediocrity that will surely be exploited by other dangerous populists who thrive on hardship and mediocrity.

PS. On December 31, 2009, wishing all a happy decade, in a letter titled “The monsters that thrive on hardship haunt my dreams” and that was published by FT I wrote: “As to the banking system, there is nothing that could not be solved by asking ourselves the simple question about what our banks are supposed to do for us, because, unfortunately, that is the question our current very poor set of regulators have never asked themselves.” Now, July 2016, that question is still not being asked, much less responded.

@PerKurowski ©

A mindless structural reform of regulations castrated the banks and helped to kill the dynamism of the economy.

Sir, Martin Wolf quotes Robert Gordon with “Ours is an age of disappointing growth because the technological breakthroughs are relatively narrow”, and then dicusses what could be done. Wolf concludes “The tendency to believe that some “structural reforms” will fix this is, similarly, an act of faith. It is essential for policy to promote invention and innovation, so far as it can. But we must not assume an easy return to the long-lost era of dynamism”, “An end to facile optimism about the future” July 13.

But “structural reforms” can kill dynamism too. And as you Sir and Wolf already know, in my opinion, nothing has done more harm to the economy than the risk weighted capital requirements for banks introduced with Basel I in 1988, and applied much more intensely with Basel II in 2004.

By allowing bank to leverage more their equity, and the support they receive from society with “safe” assets, regulators made it harder for those perceived as risky, like the SMEs and the entrepreneurs, to compete for access to bank credit.

Since perceived risks were already cleared for with the size of the exposures and the risk premiums charged, having bank clear again for those same perceptions in the capital, basically castrated our banks.

Now banks no longer help provide the “risky” proteins the economy needs in order to grow new muscles, they just finance the “safer” carbs that only makes the economy more obese.

Sir, when compared to what is needed to give the future a fair chance to deliver something good, it is clear that never ever before has a generation consumed so much borrowing capacity to sustain its own current consumption.

PS. And with their zero risk weight to sovereigns, and 100% of citizens, bank regulators de facto stated that government buracrats make the best use of bank credit. If that is not runaway loony statism what is?

@PerKurowski ©

To bring back broad-based and growing prosperity we must get rid of current blind and dumb bank regulators

Sir, Tim Harford, economist, concludes his discussion of the whys of Brexit, with “Those of us who are committed to openness and prosperity for everyone… now have a long campaign on our hands. We should start by accepting that, if we cannot bring back broad-based and growing prosperity to the advanced economies, Brexit will not be the last political shock we must face”, “We’re all winners or losers now” July 2.

That is the correct attitude. Do the best with what you have.

And so let me once again remind Harford that long before Brexit, in 1988, there was the Basel Accord, something never subjected to a referendum. With its risk weighted capital requirements for banks, it introduced the nutty concept that banks should hence on earn higher risk adjusted returns on equity on assets ex ante perceived as save, than on assets perceived as risky.

And that regulatory risk aversion, when layered on top of bank’s natural risk aversion, guaranteed, especially after Basel II in 2004, that banks would only be refinancing the (for the time being) safer past, and ignore the financing needs of the riskier future.

And so of course our economies stopped moving up and began their descent.

And now, because of that, and assisted by QEs and similar, our safe havens are already becoming dangerously overpopulated… so much that we must even accept negative interests as the price for anchoring there.

To bring back broad-based and growing prosperity requires getting rid of current blind and dumb bank regulators… and have our bank’s help finance the “risky” SMEs and entrepreneurs, in their exploration of the risky bays where a good future for our young could be found. .

Let’s see if committed Harford helps out, or prefers to remain undercover on this issue that makes Brexit signify chicken-shit.

PS. And the regulatory aversion of ex ante perceived credit risk, does not lead to more bank stability, much the contrary. Voltaire prayed “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]” 

@PerKurowski ©

FT, you seem to exploit the needs and wants of the young only when it suits you, like today when fighting Brexit

Sir, you write: “The uplifting notes in this campaign should not be ignored. One of the brightest has come from the younger generation, a majority of whom favour staying in Europe. In a digital age, the young recognise that their future is one of connectedness and participation, not separation and isolation. While older Brexit voters seem to look backwards to an imperial past, the young look forward to a global future. It is their future that is ultimately at stake” “A moment of destiny for Britain and Europe”, June 23.

But you have insisted on keeping mum about the fact that current bank regulations, with its risk-weighted capital requirements, de facto favors the refinancing of your safer past, and impedes so much of those credits to the riskier that are required for the young to have a chance of a decent future.

Sir, to me it seems you bring in the young, only when it suits you, like now when fighting Brexit.

Yes, today’s election is important, and I would have voted to stay in EU, at least if I were sure Britain would raise some hell there. But, a much more important decision than that, is whether Britain wants to go back to being the daring go-get-it nation it once was, or remain the sheepish risk-adverse country that for instance the Basel Committee now wants it to be.

@PerKurowski ©

The limits to productivity growth are also defined by the willingness to take risks.

Sir, John Kay writes “The limits to productivity growth are set only by the limits to human inventiveness” “Prepare for the dawn of a second special century” March 2.

Wrong! Wrong! Wrong! These are also set by the willingness to pursue that human inventiveness no matter how risky it is.

And that is what our society has much stopped to do, primarily because our regulators gave our banks incentives to embrace what is perceived as safe and stay away from what is perceived as risky; and this even when (supposedly) according to Mark Twain “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.”

Risktaking is the oxygen of development and a must for muscular and sustainable economic growth.

As is our banks do not finance any longer the riskier future, they just refinance the safer past.

@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 ©

Europe’ banks are in hand of regulators and central bankers who prefer dreaming about the safer past than a riskier future.

Sir Mark Mazower writes: “I was going to write — “critics and supporters of the European dream”. But there is no dream any longer and that is in some ways the biggest problem of all.” “Fresh ideas and lessons from the past are key to Europe’s survival” January 22.

A dream could be about a better future or about conserving a better past. Europe’s bank regulators, with their credit risk weighted capital requirements, which allow banks to earn much higher risk adjusted returns on equity when refinancing the safer past, than when financing the riskier future, clearly evidence what they dream about… poor Europe’s youth.

Let me refer to four extremely important European central bankers: ECB’s Mario Draghi and BoE’s Mark Carney, former and current chairs of the Financial Stability Board; BIS’ Jaime Caruana and Sveriges Riksbank Stefan Ingves, former and current chairs of the Basel Committee for Banking Supervision

All these gentlemen fully support credit risk weighted capital requirements for banks, which de facto means they believe that ex ante perceived ‘highly speculative’ below BB- rated assets, are far more dangerous to the bank system than ‘prime’ AAA rated assets. Europe, if that’s not scary, what is?

@PerKurowski ©

ECB, the virus of pernicious “seeping pessimism” infected our banks, courtesy of the Basel Committee (and FSB)

Sir, Claire Jones writes: “Mr Peter Praet, ECB’s chief economist, sees evidence of seeping pessimism in a reluctance to invest. While businesses contend that they are operating close to full capacity, the ECB contends that resources are being vastly underused. His worry is that without a pick-up in confidence and productivity-enhancing structural reforms by governments, the region will remain plagued by anaemic growth and high unemployment. A vicious cycle will develop, with economic weakness reinforcing the negativity”, “ECB to confront ‘seeping pessimism’” December 2

Mr Praet should dare to research the pernicious pessimism with which credit risk weighted capital requirements have infected the banks.

Banks are allowed to leverage more their equity with assets perceived as safe, than with assets perceived as risky; and are therefore able to earn higher risk adjusted returns on equity when financing what is ex ante perceived as safe, than when financing what is perceived as risky. That causes banks to avoid financing the always more risky future than the, at least for a while, safer past. And if that is not the sort of pessimism that causes a vicious cycle to develop what is?

Why do I suggest that Mr. Praet needs a dose of courage look at that? His boss, Mario Draghi, as the former chair of the Financial Stability Board, shares much blame for having allowed such regulatory stupidity.

@PerKurowski ©

Mark Carney should not warn other about climate change risks, if he neglects to do what is in his hands to do about it

Sir, you write that BoE is rightly worried about the dangers posed by climate change “Carney’s warning on carbon’s financial risks". October 1.

Of course the consequences of climate change, and of the regulations designed to stymie it, and of the gaming of those regulations, represent a huge potential of unexpected losses. But, if Mark Carney were really concerned about climate change then, as the current Chair of the Financial Stability Board, instead of casting himself as Cassandra in order to warn others, he would see to that bank regulators duly considered that risk.

For instance he could try to convince his colleagues that banks, in relative terms, should be allowed to hold less capital when helping to finance sustainability, so that they earn higher risk adjusted returns on equity when they finance sustainability, and so that banks finance sustainability a lot.

But instead Carney and his colleagues have set their risk based capital requirements for banks solely based on ex ante perceived credit risks, basically the only expected risks that banks already clear for. If that is not dumb what is?

Sir, what we now have is unbelievable. Banks, those who concentrate the most knowledge about evaluating credit risks, and should therefore be the first line of credit-risk takers for the society, by lending to for instance SMEs and entrepreneurs, are being allowed to earn much higher risk adjusted returns on their equity when minimizing credit risks… which leaves the risk-taking soldiering to all us other… widows and orphans included.

And, talking about moral responsibilities, should not Mark Carney have warned all aspiring “risky” entrepreneurs that, because they were usually perceived as risky from a credit point of view, they should forget their plans and dreams as they could no longer count on a fair access to bank credit?

And, talking about moral responsibilities, should not Mark Carney warn all our young that, henceforth, banks would not be financing sufficiently their future, as that requires a lot of risk-taking, but would mostly be dedicated to refinancing a safer past.

And, talking about moral responsibilities, how can bank regulators ignore the fact that it is not what is perceived as risky that poses the major dangers for our banking system, it is always what can be erroneously perceived as absolutely safe.

Sir, as I see it the Basel Committee regulators have and are producing losses of almost a climate change scale… and FT refuses to warn about it.

@PerKurowski

Bank regulators are the most important pushers of shortsighted short-term capitalism

Sir, Sebastian Mallaby writes: “The US presidential frontrunner, the boss of McKinsey, and the chief economist of the Bank of England declare that capitalism is misfiring” and quotes Dominic Barton of McKinsey with: “the continuing pressure on public companies from financial markets to maximise short-term results”, usually at the expense of research and investment”, “Shortsighted complaints about short-term capitalism” August 7.

If companies cannot use investable resources, they should simply return those to the economy… and once there, the banks are the most important agents to recirculate those resources, to those who want to do something with these.

And that is where the real problem starts. Because now, with the current capital requirements for banks that are much higher when lending to what is perceived as risky than when lending to what is perceived as safe, regulators have de facto ordered banks to recirculate those resources to the old and existent economy, which is usually perceived as safer, and stay away from financing the future economy, which is usually perceived as riskier. And, if that is not short-termism, what is?

@PerKurowski

Here are two heartfelt recommendations to India.

Sir, I refer to Henny Sender’s very comprehensive “India’s shadow banks step in to lend where others fear to tread” May 26.

I just want to add the following:

First, India, as a developing country, can certainly not afford bank regulations that favors the allocation of bank credit to the safer past than to the riskier future… and so it urgently needs to get rid of the distortions that the Basel Committee’s credit risk weighted capital (equity) requirements for banks produce.

And second, with respect to its private sector banks, these could also benefit from a major re-capitalization plan, like the one Chile did in the early 80s. The central bank should issue bonds using the proceeds to acquire the banks’ non-performing loans (which will permit the reversal of all provisions) and the banks would commit to repurchase those loans from the Central bank, plus interests, before they can proceed with any dividend payments.

That could turn it around much faster for India.

Of course Europe would also benefit from implementing a similar plan.

@PerKurowski