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

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

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 ©

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 ©

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 ©

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