What’s a rule-based global system worth when the rules are crazy and rulers do not want to discuss these?

How would an ordinary European citizen answer the question: Is Greece a trustworthy borrower? Whatever his answer, what would you think he would say if he was then informed that the European Commission, for the purpose of bank capital requirements assigned Greece, and all other eurozone members, a 0% risk weight? As it is easy to understand that helped to cause the tragic over-indebtedness of Greece and of many other sovereigns, like Italy. 

Sir, you now write, “The Armistice anniversary is a time to reflect that the peace and stability of Europe will require responsible German leadership” “Drawing lessons from the inferno of 1914-1918” November 10.

So let me ask you do you really think The European Commission, the European Central Bank, the European Parliament, all of them, had, responsibly, the lessons of the Versailles Treaty in mind, when they imposed armistice conditions on that capitulating eurozone sovereign debtor of Greece?

Sir, you know that I consider requiring bankers to hold more capital against what they perceive as risky than against what they perceive as safe a total lunacy. Yet, those who imposed the risk weighted bank capital requirements global rule do not even wish to discuss it. Yet, “Without fear and without favour” FT has not dared to ask for an explanation.

The only explanation we have been given about the standardized risk weights imposed on bank by the Basel Committee; those that allow banks to leverage only 8.3 times with assets rated below BB-, and a mind-boggling 62.5 times with assets rated AAA, is “An Explanatory Note on the Basel II IRB Risk Weight Functions” of July 2005.

That document, which totally ignoring conditional probabilities equates ex ante perceived risks with ex post dangers also states, “The model [is] portfolio invariant [because] taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Sir, I must tell you, if that’s the rule-based global system Donald Trump might now be threatening, we should at least be thankful for him shaking up many things that need to be shaken up.

I do not like autocrats in my country, but neither do I like them among the global order rules setter.

PS. In the case of the 0% risk weight of sovereigns in the Eurozone that is made even crazier by the fact that de facto the Euro is not their domestic currency.

PS. Where do I come from? Here is an extract of, “The riskiness of country risk”, September 2002: “What a difficult job to evaluate risk! If they underestimate the risk of a country, the latter will most assuredly be inundated with fresh loans and leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If a country becomes bankrupt due to your mistake, it could drag you kicking and screaming before an International Court, accusing you of violating human rights. If I were to be in the position of evaluating country risk, I would insure that the process is totally transparent, even though this takes away some of the shine of the profession and obligates me to sacrifice some of my personal market value.”

@PerKurowski

Bank regulators, imposing irresponsible insane rules, are prime destroyers of the rational liberal rules-based world order

Sir, Martin Sandbu writes of “opponents of the liberal, rules-based world order built up over 70 years” and that “The anti-liberal front’s undisputed leader, is the US under President Trump”, “The battles of ideology for our age”, December 27.

Sir, forget it, whatever President Trump might have done until now with respect to breaking down a rules-based world order, is nothing when compared to the damage bank regulators have done when trying to impose their own petit committee concocted regulatory rules on the world.

What they did, namely to allow banks to leverage more with assets perceived as safe than with assets perceived as risky; something which allows banks to earn higher risk adjusted returns on equity on assets perceived as safe, is something absolutely irresponsibly insane.

First, because that distorts the allocation of bank credit with serious consequences for the real economy, like favoring “safe” financing of houses over “risky” financing of “risky” entrepreneurs; which results in many basements for the young to live with their parents but few jobs for them to afford their own upstairs.

Second, by decreeing the risk-weight of the sovereign to be 0%, while that of the citizens on which that sovereign depends were weighted 100%, they effectively, 1988, one year before the fall of the Berlin wall, introduced through the backdoor, a mechanism to provide the financing to sustain (for some time) runaway statism.

Third, because since major bank crisis never ever result from excessive exposures to what was ex ante perceived as risky, it all serves absolutely no stability purpose at all.

Sir, if the “liberal internationalist camp working to defend a multilateral system of collaborative rules-based governance for economic openness to mutual advantage” is to go anywhere, that must begin by forcing bank regulators to satisfactorily respond the very straightforward question of: Why do you require banks to hold more capital against what has been made innocous by being perceived as risky than against what’s made dangerous by being perceived as safe?

Sandbu correctly argues: “In a global battle of ideas, liberals must show urgently that the existing order can be made to work for everyone”. But, injecting quantitative easing liquidity and low interest assistance, while such distorting regulations are in place, guarantees these will not be made to work for everyone, but only for those already in possession of safe assets, like the parents’ houses.

@PerKurowski