If only we had truly disconnected silos the current crisis would not have happened

Sir, Gillian Tett writes: “Eight long years ago the top managers of western banks learnt the hard way just how damaging fragmentation can be; most notably, banks such as UBS suffered big losses in the financial crisis because they were divided into so many silos that it was impossible for top managers to get an overview of risks.” “Some new hires for a more connected Deutsche Bank”, October 30.

I am not specifically referring to Deutsche Bank but “No! Dear Ms. Tett No!”. The silos were not fragmented… they were very connected, by means of bank regulations, specifically by means of the portfolio invariant credit risk only based capital requirements for banks. Had the silos really been disconnected, we would not have had the systemic crisis, “eight long years ago”.

And that’s is why in 1999 I wrote in an Op-Ed “the possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

And that is why, in 2003 as an Executive Director of the World Bank, I formally stated: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

Sir, the problem with Gillian Tett, and many others, is that they are captured in their own non-fragmented silo… and of course, so am I too... only that my silo is a bit wider J

@PerKurowski ©

The truth about the crisis that the different silos, including FT’s, does not want or cannot see.

Sir, if all sovereign and private bank clients were paying the banks exactly the same risk-premiums, then the risk-weights used in Basel II to apportion the basic capital requirements for banks according to the various categories of credit ratings could have been right. But, they don’t!


The banks and the markets already incorporates in the setting of their risk-premiums the risk information provided by the credit rating agencies, and so when the regulators also used the same credit ratings for setting their risk-weights they made these ratings count twice. It was a huge mistake that resulted in:

1. The setting of minimalistic capital requirements that served as growth hormones for the ‘too-big-to-fail’.

2. That banks overcrowded and drowned themselves in shallow waters, whether of triple-A rated securities backed with lousily awarded mortgages to the subprime sector, or of equally or slightly less well rated “rich” sovereigns, like Greece.

3. A serious shrinkage of all bank lending to small businesses and entrepreneurs as lending to these generated, in relative terms, much higher capital requirement, which made it difficult for them to deliver a competitive return on bank equity.

With Basel III, regulators might be trying to correct for this mistake, instead of correcting the mistake. In other words, the Basel Committee would be digging us deeper in the hole where they placed us.