We most need to seek local solu­tions to local issues

Sir, I refer to Dani Rodrik’s “We should seek local solu­tions to global issues” FT October 16, 2025. He favors “Instead of top-down reg­u­la­tion and con­ven­tional sub­sidies, rely on open-ended col­lab­or­a­tion between pub­lic agen­cies and private act­ors.”

I fully agree with what's first mentioned, but I’m not so convinced about the what-to-do part; the documented track record of such collaborations is, except for some interested private actors, not that marvelous. Much more needed is to allow local non-governmental market solu­tions to local issues.

I had studied high school and university in Sweden so, after getting my MBA at IESA in 1974, I decided to travel around Venezuela for a full year, harvesting rice, sorghum and sunflowers. That in order to get to know my country better and, truth be told, to try to salvage an investment going sour.

That year left many indelible impressions and, among these, of the importance of banks in small cities and communities e.g., Calabozo. The presence of a local bank or of a branch loan officer from one of the larger banks, allowed local bankers to identify and respond directly to the needs of local farmers, small businesses and entrepreneurs.

Over the years little by little that all started to disappear before my eyes when many local banks, much to please the status seeking of its shareholders and directors, began to consolidate with the Big, or established their main office in the capital.

1988, with the Basel Committee’s risk weighted bank capital requirements, if colloquialisms are allowed, shit hit the fan.

By decreeing risk weighted bank capital requirements (insanely) based on that what’s perceived as risky is more dangerous to bank systems than what’s perceived or decreed) as safe, banks had to hold much more capital/equity against e.g., loans to small town businesses.

Out went the loan officers (like your George Banks who went to fly a kite) and in came the dangerously creative bank financial engineers... capable of expulsing the risks into the shadows. 

As I was not from the public sector, had in fact been quite critical of it, even before Hugo Chavez, strange circumstances and coincidences had me end up as an Executive Director at the World Bank, 2003/04. There I did what I could to voice my concerns, especially during the discussions of Basel II.

Not much luck in having these echoed… not there… not with Academia and not with the many NGOs purporting they defend the interests of developing countries. 

Why? I guess there is not too much interest and consultancy profit in banks of Calabozo and alikes

Fast forward to August 29, 2025. That day I asked both Grok and ChatGPT; “What is the impact on small cities of the risk weighted bank capital requirements?”

https://subprimeregulations.blogspot.com/2025/08/ai-grok-what-is-impact-on-small-cities.html

https://subprimeregulations.blogspot.com/2025/08/ai-chatgpt-what-is-impact-on-small.html

Sir, do you think the regulators will read and acknowledge AI’s answers?

PS. Here The document that I presented at the High-level Dialogue on Financing for Developing at the United Nations 2007.

@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

Since the risks regulated for are not the right risks, meeting risk weighted bank capital requirements means little

Sir, Philip Stafford reports “Reforms put in place by the Group of 20 leading nations have successfully tackled the most pressing issues that contributed to the crisis, according to the annual report from the Financial Stability Board, an international group of policymakers and regulators.” “Financial reforms: Shadow banking tamed, argues global watchdog” July 4.

Nonsense! If all evidences are duly reviewed, what most caused the crisis was the risk weighted capital requirements for banks. These allowed banks to leverage immensely, and thereby earn very high expected risk adjusted returns on their equity, with what was perceived, decreed or concocted as safe, like financing houses, sovereigns like Greece or the AAA rated securities backed with mortgages to the subprime sector.

The regulators regulated as if they were bankers. As regulators they should look at the risk that the risks are not adequately perceived or managed, and at the possibility of unexpected events. 

And that stupid risk weighting has not been eliminated because of the introduction of a non-risk based leverage ratio; on the contrary as that LR pushes up the capital floor, it might squeeze even more those affected by the roof set by the risk-weighted portion.

And regulators have also introduced additional sources of distortions like the liquidity requirements, which also are based on simplifications about what is liquid and what not. 

Their test of the stresses a la mode, or the elaboration of wills that might affect the living, could also signify new sources of systemic risks.

No the regulators have done a lousy job, primarily because they all circled their wagons around the mistakes they committed.

And if they go on doing what their mutual admiration club’s groupthink tells them to do, let’s hope the shadow banking sector goes underground, so that regulators don’t get their dirty nannying fingers around it too.

PS. No wonder FSB's "safer", "simpler" and "fairer" financial system video, has the comments disabled.

PS. I need a co-author that writes well and knows something about banks and finance, to help me write a book based on more than 2.500 letters ignored by FT

Banks had and have little capital, not because of SMEs, but because of what perceived, decreed or concocted as safe.

Attracta Mooney writes “Rules introduced to shore up bank balance sheets left lenders reluctant to lend large sums to SMEs” “Fund houses take on banks over lending” September 8.

That is so wrong but, knowing you FT, you will do nothing to correct that impression.

Banks need to shore up their balance sheets, not because of SMEs, but because of too much lending against too little capital requirements, to what was perceived, decreed or concocted as safe.

Since the introduction of risk weighted capital requirements for banks with Basel I in 1988, and especially since Basel II of 2004 assigned different risk weights within the private sector, for instance 20% for what has an AAA to AA rated and 100% to what has no credit rating, banks were given huge incentives to lend to The Safe and became thereby reluctant to lend to The Risky, like the SMEs.

I pray one day banks get back to their business of earning their returns on equity by lending with reasoned audacity, instead of by minimizing their equity

Meanwhile, clearly shadow banks will have their day!

@PerKurowski ©

PS. Oops… sorry Attracta Mooney: “Rules introduced to shore up bank balance sheets left lenders reluctant to lend large sums to SMEs”, is correct.

My mistake was that I read it as some “specific new discrimination” had been introduced against the “risky” SMEs, something which Basel III did not, but Basel III (especially the leverage ratio which raised the minimum floor) and the crisis, have indeed intensified the discrimination that came from before. And here was my take on that Drowning Pool problem.

PS. Oops… sorry again Attracta Mooney: Again I must accept I was wrong. When writing my first commentary I had completely forgotten the liquidity requirements for banks enacted by Basel III. Of course these also affected the SMEs' fair access to bank credit.

Italy has no chance of solving its bank and economy problems, if it does not understand the regulatory distortions

Sir, Sarah Gordon writes: “Thousands of small and medium-sized companies have gone under, taking with them the bank loans on which they depended, as well as demand for lending”, “The spreading pain of Italy’s bank saga”, August 11.

First let us make on thing very clear, those thousand and SMEs that have gone under more than they were expected to go under, did so as a result of the 2007-08 crisis. They had not one iota to do with causing the crisis.

And so let me explain it again, for the umpteenth time: Before current bank regulations, pre 1988, pre Basel Committee, no one made a distinction between a Lira or an Euro in capital invested in something perceived as safe, or in something perceived as risky.

But then the Basel Committee came along and decided that, if banks invested in something perceived, decreed or concocted as safe, then a unit of their capital (equity) could be leveraged more than 60 to 1, while, if invested in for instance some loans to SMEs and entrepreneurs, that same unit could only be leveraged 12.5 to 1.

And so of course that introduced a very serious distortion of the allocation of bank credit to the real economy, which persists until today, all because our besserwisser bank regulators, insist on that they are besserwissers.

If Italy does not allow its SMEs or entrepreneurs to have fair access to bank credit then it is doomed to stagnation… that is unless La Banca Sommersa comes to its rescue.

@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 ©

Mifid 2 could be creating dangerous risks promoting Systemic Important Research Institutions

Sir I refer to Laura Noonan’s “Deadline looms for banks to get their research arms in order” November 17.

We read “European rules, known as Mifid 2, will reshape the way analysts report on companies and how the research can be priced and circulated to investors… going from quantity to quality… banks to become more selective in the sectors they deal within an environment where clients will no longer support the 60-70 research teams that cover each major European industry… number of analysts publishing Emea research for the 12 top banks fell 17 per cent from 2007 to 2014.”

What are these busybody regulators doing? Don’t they understand what systemic risk is all about? And now they are pushing for Systemic Important Research Institutions, SIRIs.

Don’t they understand that going from quantity to quality often just entails going from the open market into even less transparent small mutual admiration clubs? Did they not learn about the systemic risks of giving information power to few like when they gave it to the credit rating agencies?

Quality? Quality is a result of the diversity that includes many “un-qualified” players but who could suddenly bring forward fresh perspectives, or be making those insolent questions required for having a chance at sustainable quality.

Did they not do enough damage to financial research when they subordinated the importance for banks of getting the risk premiums right, to getting the equity required low?

The more I read about what arrogant and hubristic regulators are up to, the more I feel we have to put faith in shadow organizations to be able to help our grandchildren to a livable future.

@PerKurowski ©

Stress testing of banks should foremost test whether these serve the real needs of the real economy.

Sir, I refer to your “Stress testing should not just apply to the banks” December 31.

In it you argue that “Regulators need a holistic approach to risk in the financial system” and therefore they should also include “the non-banks that are playing an increasingly important role in supporting the economy” so that “the world can be confident that the process of making banks safer is not simply shifting risk elsewhere”.

And again Sir, you totally ignore what is the biggest risk with a financial system, namely that it does not allocate bank credit adequately for the needs of the real economy. Again you seem to imply there is a possibility of having save banks standing there in shiny armor in the midst of the rubbles of the real economy… and of that being a worthy goal to pursue.

No Sir! The stress testing of banks we most need now, starts with ascertaining whether our risky small businesses and entrepreneurs are having fair access to bank credit. The stress testing of banks we most need now, should foremost test whether banks are serving the real needs of the real economy.

PS. As I have told you more than a hundred times, banks are not doing that, thanks to our stupid bank regulators... so perhaps they do not dare to stress-test their own mistakes. 

Regulators who darkened the banks in the sun, should not be allowed to shine light on those in the shadows

Sir, I refer to your “Regulators shine a light on the banking shadows” October 15. Therein your argue: “FSB’s rules on short-term securities lending are a sensible start” since “The shadow banking system was at the heart of the financial crisis” and then you refer to “the meltdowns of Lehman Brothers and AIG”

Quite a distorted view I would say… both Lehman Brothers and AIG troubles had little to do with the shadows and most to do with the regulations that applied to the banks in the sun.

On April 28, 2004, two months before Basel II was formally approved, SEC decided that " for Broker-Dealers that are Part of Consolidated Supervised Facilities and Supervised Investment Bank Holding Companies… computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards" should apply.

And that meant that, for instance Lehman Brothers, would be able to leverage its equity 62.5 times to 1 when investing in AAA rated securities, such as those that detonated the disaster.

And the same Basel Standards implied that, if a company like AIG, proud bearer of an AAA rating, puts its name to a debt instrument, banks would be able to leverage these investments 62.5 times to 1… and so of course everyone wanted to hire AIG’s AAA rating… at a reasonable price.

And, if someone does not understand the temptations a 62.5 to 1 leverage implies for a financial company, he knows nothing about finance and less about regulations. As a reference, hedge funds, those animals of speculation, these can rarely leverage their equity more than 10 to 1.

Sir, I am not at all sure that current regulators, those who so much helped to darken the prospects of our banks, should even be allowed to try to shine a light on the banks in the shadows… they done enough damage as is.

May I here remind you of some minimum terms we need to lay down before we allow regulators to regulate any banks?

We citizens need to lay down some strict terms for taming bad regulations risk.

Sir, Sam Fleming and Tracy Alloway report: “Rulemakers lay down terms for taming shadow banking risk” October 14.

And my wish would be for us citizens to be able to lay down some strict terms for taming any bad regulations risk.

For instance, in all shadow banking, a Euro, a Dollar, a Pound or whatever other currency of equity, are all the same equity, no matter what assets risks they are exposed to. Not so in formal regulated banks. There a Euro, a Dollar, a Pound or whatever other currency in equity, represents a different equity, according to the respective credit risk weight of the assets it is backing.

How regulators were fooled by naturally higher returns on bank equity seeking bankers, into believing that would not distort the allocation of bank credit, with great dangers to the real economy and to the stability of the banks, beats me.

And so the first term I would as a concerned citizen lay down for the regulators would be: “Whatever you do, don’t think yourselves smarter than the markets. And if you absolutely must distort the allocation of bank credit, one way or another, make sure you obtain the permission to do so, including of course that of those borrowers who will see their access to bank credit made more difficult and expensive because of it.

For the banks to stay out of the shadows, their regulators must not hide in the shadows, or hide the sun.

Sir, in your “Banking must stay out of the shadows” June 21, you hold that “Regulators are better equipped institutionally to monitor risks and respond when threats arise”.

Sorry, the Financial Times, which has such a clear role to play as a critical observer, should never be allowed to make such a categorical statement.

The truth is that regulators are just as well capable of making everything so much worse, by means of how they monitor and respond to threats.

For instance current risk-weighted capital requirements for banks, is the consequence of regulators responding to their own monsters, with little considerations of what monsters could be dangerous for the banks; and so, by distorting the allocation of bank credit, their regulations turned into the real threat.

Could it really be that all you at FT fear the regulators so much you do not even dare to ask them… where they have found the causality between a borrower being ex ante perceived as risky, from a creditworthiness point of view, and a bank failing?”

Or is it that you are all ideologically programmed to favor regulators?

Yes, you do accept that “regulators must beware of creating new fragilities”, but that seems more like a simple salute of the flag, when you then write that “the authorities have done much to re-regulate banks”. That is not true … any re-regulation worthy of its name must begin with a full understanding of what went wrong… and that the regulators have until now refused to do… just as you at FT have refused to holding them accountable to do so.

Just like we do not like overly sissy nannies to educate our kids, we do not want overly sissy regulators to regulate our banks.

Sir, Sam Fleming and Gina Chon begin by quoting David Wright, secretary general of Iosco saying “It is extraordinary that here we are, nearly seven years in [from the financial crisis] and we still have an inadequate understanding of some of the key aspects of financial markets” “Push begins to put lenders’ house in order”, June 19.

But then reporting on the meltdown of the subprime loans, and even though they mention that some regulators “have imposed though capital requirements on investors who buy asset-backed securities, they basically support putting the blame on some “shadow finance”, and do not even mention the role extreme low capital requirements, for the banks in the sunshine, played in creating the demand for bundled subprime loans which caused the crisis.

Those low capital requirements resulted because sissy regulators, personally scared of some risks, thought those were the risks which were dangerous to our banks. And, in doing so, they are killing our economies, by keeping our banks refinancing the safer past and not financing the riskier future that our young unemployed so much need to be financed, in order not to become a lost generation.

No Sir! We, who have thrived on risk taking, cannot afford our banks now being in hands of so sissy regulators.

And those journalists too sissy to dare holding the regulators truly accountable, we do not need them either.

Europe, don’t you wish your banks had been shadow banks, or at least were shadow banks now?

Sir, I refer to Patrick Jenkins’ and Sam Fleming’s analysis of shadow banks in Europe “Into the shadows – Taking another path” June 17. What a strange history telling!

First they quote Jean-Pierre Mustier, the former investment banking boss at France’s Societé Générale remembering “the dark days before the 2008 financial crisis” saying: “Before the crisis, there was a lot of ‘dark’ shadow banking… pushing chunks of loans… designed to dodge rules on excessive risk taking”, and write that “About $400bn worth of subprime loans and other assets… that had been coursing through the shadow banking”.

What? After Basel II was approved in June 2004, banks in Europe were allowed to hold AAA rated securities backed by subprime mortgages against only 1.6% in capital, signifying an authorized leverage of 62.5 to 1. The truth is that no shadow bank, no matter how defined, could never ever aspire to achieve such a leverage, unless in a fraudulent way.

Of course, a bank with a low risk portfolio could be allowed to hold less capital than a bank with a higher risk profile, but that would be one single capital requirement against its whole portfolio; and not as now, different capital requirements against different parts of the portfolio. Had it been like that the European banks would never had had the incentives to build up such huge exposures to the infallible sovereigns, the AAAristocracy or the housing sector, nor to abandon the “risky” small businesses the entrepreneurs and the start-ups.

Frankly, as is, the best chance that unemployed European youth has of not becoming a lost generation would seem to be for all European banks to run into the shadows.

Then the authors write that part of “the raison d’être of the shadow banks is arbitraging the regulated banking system”. Indeed but they should ask themselves first about who is serving up such incredible generous menu of arbitrage possibilities?

And we also read that “policy makers such as Mark Carney, governor of the Bank of England and head of the FSB, argue that some shadow banks will have to be supervised more like banks”. Europe, pray your shadow banks fast run deeper into the woods, way out of reach of these regulators who, with so much hubris, believe they should be the self appointed risk-managers of Europe.

Mark Carney, do not use shadow banks to hide the mistakes committed by the regulators of the banks in the sun!

Sir I refer to Mark Carney’s “The need to focus a light on shadow banking is nigh” June 15.

Carney writes “In the run-up to the crisis, opacity in shadow banking fed an increase in leverage and a reliance on short-term wholesale funding. Misaligned incentives in complex and opaque securitisation structures weakened lending standards…The goal is to replace a shadow banking system prone to excess and collapse with one that contributes to strong, sustainable balanced growth of the world economy… As the G20 completes work on the core of the financial system, reforms to shadow banking must, and will, progress. Now is the time to take shadow banking out of the shadows and to create sustainable market-based finance."

Mr. Carney what on earth had shadow banking to do with the crisis? The current crisis was set off by an incredible misalignment of incentives caused by adopting risk-weighted capital requirements, in conjunction with assigning a risk perception monopoly to some very few human fallible credit rating agencies.

Does Carney really believe that the problem with the AAA rated securities backed with lousily awarded mortgages, the bubble of the real estate sector in Spain, the excessive loans given to sovereigns like Greece, and similar which could be financed by banks against basically no shareholders’ capital had much to do with the shadow banking?

No way José!

The only way G20 can do something worthwhile in terms of reform, is to accept with much humility that the risk-weighted capital requirements not only distort the allocation of credit in the real economy but are also, from a medium term financial stability perspective, utter nonsensical... since major bank crises never occur from excessive exposures to what is ex ante perceived as risky.

With bank regulators like the Basel Committee the real economy needs non-banks.

Sir, I refer to Gillian Tett’s “Titans of finance have moved on from banks” February 14.

There she writes: “What is really striking is the volume of non-bank financing that is quietly being supplied with minimal regulatory scrutiny… Non-banks are swelling in size because they do not face the same regulatory burden as banks, allowing them to turn a profit on business that banks now find uneconomic.” 

That is one way of phrasing it which does not really convey the truth. Banks, allowed to leverage 40-60 times their equity when lending to infallible sovereigns, housing and the AAAristocracy, can hardly be said subjected to a lot of regulatory scrutiny. Quite the contrary, the real market anchored effective scrutiny of the non-banks, is surely larger than that of the regulators scrutiny of the banks.

And neither is it the regulatory burden that makes some bank lending un-economic. It is more the regulatory unburdening, low capital requirements, which has allowed banks to make extremely high risk-adjusted returns on equity when lending to previously mentioned “infallible”; and this has created the incentives for banks to completely abandon lending to the “risky”, like the medium and small businesses, the entrepreneurs and start-ups.

That the growing presence of non banks “worries regulators”, should come as no surprise, since they clearly do not give a iota about if banks allocate credit efficiently to the real economy. No, with bank regulators like the current ones, the real economy is doomed to depend much more on non-banks.

Excessive exposures to what is “absolutely safe” by regulated banks could be much more dangerous than whatever lurks in the shadows.

Sir Tracy Alloway writes “Shadow banks, we are told, are unregulated institutions that lurk in the dark corners of the financial system – away from the supervised activities of run-of-the-mill commercial banks”, “Competition for banking business lurks in the shadows” January 18.

But perhaps we should keep in mind that those unregulated shadow institutions are not able to leverage remotely as much as the banks who operate in sunlight… so the question of safety is sort of relative.

And Alloway also comments “that there is perhaps an underappreciated danger: that non bank lenders will encourage riskier behavior at larger banks that find themselves compelled to try to compete with the shadows”. But that would only happen if banks are able to dress up that riskier behavior in such as way that it is perceived as “absolutely safe” so that they do not need to hold much capital.

As is, the real risky behavior of banks is building up excessive and dangerous exposures to what is perceived as “absolutely safe”… all a consequence of capital requirements which are portfolio invariant.

Alloway hopes that these “shadow lenders serve a purpose” satisfying “the needs of the real economy”. Indeed let us hope and pray it is so, because as is, the supervised banks, with the risk aversion imposed on them, are kept from doing so.

If the visible banks are not rationally regulated, there is no choice for the real economy than to run for the shadows.

Sir, the risk weight function which determines the current capital requirements for banks are based on two monumental mistakes.

The first mistake is that for reasons of simplification the Basel Committee oversimplified and decided that the expected unexpected losses of those perceived as safe will be much less than the expected unexpected losses of those perceived as “risky”. And that means that the perceptions of risks will either reward or punish… twice.

The second mistake is that the risk weights are “portfolio invariant” and which means these do not take account of the added risks of asset concentration, or the dissipation of risks by means of diversification. And that means that the risk of the banking system might be increasing exponentially, even while being reported as safer.

And all this leads to banks then earning higher risk-adjusted returns on equity when lending to the “safe” than when lending to the “risky”.

And the direct result is that those perceived as “safe” will have a subsidized access to bank credit, paid by negating the same to those perceived as “risky”.

And that guarantees banks will not be able to assist in helping the economy to get out of a secular stagnation, as alerted by Lawrence Summers in “Washington must not settle for secular stagnation”, or to avoid that weak destabilizing growth to which Edward Luce refers to in “Anglo-Saxon trumpeting will strike a hollow note” January 6.

And, while these regulatory discrimination against medium and small businesses, entrepreneurs and start ups remain in force, then Italy, instead of becoming more like Germany in order to prosper, as Wolfgang Münchau proposes in “What eurocrisis watchers should look for in 2014”, would do well becoming even more Italy and run into the shadows of its economía, finanza e banca sommersa.

2025: #AI – ChatGPT – Grok: “A leverage ratio or Basel’s risk weighted bank capital requirements. expulses banking into the “shadows”?

Pray for some shadows sufficiently dark for some banks to escape the regulators... Caveat emptor, regulators regulating!

Sir when reading Brooke Masters report on “Regulators to tackle shadow banking”, November 19, and given the regulators doing that are the same old failed regulators, I can only fret for the future of whatever they identify as “shadow banking”.

If the regulators keep acting according to their so mistaken paradigm of weighting anything for perceived risks, even if those risks have already been weighted for, then they are dooming the shadow banks, like the surface banks, to create dangerously excessive exposures to what becomes officially considered as “The Infallible”… just like those exposures created in AAA rated securities back with lousily awarded mortgages to the subprime sector, loans sovereigns like Greece, or real estate financing in Spain.

And in that case, let us pray there will still be some banks hidden away in sufficiently dark shadows so that “The Risky”, like our small businesses and entrepreneurs, can at least have some access to bank credit… even if on the unnecessary expensive terms that the regulators’ dumb and useless risk-aversion has created. 

Lord Turner magnanimously admits that “Shadow banking is like cholesterol. There is good and there is bad”, but says “now we’ve got the really difficult job of getting national authorities to dive in and determine [which part of shadow banking] really worries us.” And that should worry us… because that sounds just like when the regulators discovered the too-big-to-fail banks they helped create, they just proceeded to make it worse by naming these Systemic Important Financial Institutions, SIFIs, and thereby relegating the rest into being systemic unimportant financial institutions. 

When will the regulators understand how much they distort all, when just distorting some? Why do they not just loudly proclaim that caveat emptor rules the shadows? Or perhaps we must: “Caveat emptor, regulators regulating!”

Sometimes, when the sunrays are dangerous, finance might be better off in the shadows.

Sir, Sebastian Mallaby in “Finance must escape the shadows” August 1, writes “the explosion in securitization was partly a response to a global craving for safe assets”. The question he needs to respond to though, before drawing any sort of conclusion, is how much of that was natural market craving, and how much the result of artificially induced appetite stimulation, such as allowing banks to hold these securities, if highly rated, against very little capital. 

With regulators who allowed banks to leverage their equity more than 60 to 1 when holding AAA securities or lending to Greece, we might all have been better off if all our banks had remained in the shadows, instead of exposing themselves to that kind of dangerous type of sunrays. The shadows, if not just fraudulent, would never ever have permitted such leverages. In fact Sebastian Mallaby’s own “More Money Than God” offers, in the case of the hedge funds, a great defense for finance to sometimes remain in the shadows. 

Now when Mallaby writes “Wherever you come down on these questions what is really striking is their absence from the public square”, there I cannot but agree wholeheartedly and express the same concern. Indeed you just need to see how FT have ignored or minimized this problem… and that cannot just be because it was little censored me who alerted FT about this in hundreds of letters.

The survival of Spain and Italy (and Portugal) is day by day being more in the hands of their respective shadow economies, their respective economia sommersa

Sir, no matter where you look in the developed world, you will find dangerous obese bank exposures to what was or still is officially perceived as absolutely not risky, like what was or is triple-A rated and the “infallible” sovereigns; and for the society equally dangerous, anorexic bank exposures to what is officially perceived as risky, like small businesses and entrepreneurs. Nevertheless the bank regulators insist on discriminating against ex-ante perceived risks. 

In this respect, when Robert Zoellick in “Europe is distracted by endless talk of firewalls” April 17, writes that “the survival of the eurozone now depends on Italy and Spain”, but, instead of trying to figure out how their private banks could help out, he recommends a minor capital injection in the European Investment Bank, I can´t help but to feel that the real survival of Italy and Spain (and Portugal) will, in its turn, depend on what the Italians and Spaniards (and Portuguese) can manage to do in their more real and less distorted shadow economies... their respective economia sommersa.

PS. That is specially so when in the official economy regulators apply perceived credit risk weighted bank capital requirements, which so much favors the access to credit of the sovereign over that of entrepreneurs and SMEs.