In terms of estrogen and testosterone, are there differences between bank exposures to what is perceived risky, and risky excessive exposures to what is perceived as safe?

“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” Mark Twain

Sir, Cordelia Fine writes: “Risk management in financial institutions is too important to be guided by scientific ideas well beyond their sell-by date. Blaming financial misadventures on a testosterone-fuelled male drive distracts us from what’s more likely to make a difference: regulation and culture. The best in-house antidote for bankers selling junk products and regulators bending to conflicts of interest isn’t women; it’s a dismissal slip”, “The Testosterone Rex delusion” March 3.

Absolutely! But with reference to the risks taken on by the banks that caused the 2007/08 crisis, that dismissal slip should foremost be given to regulators for having the ex ante perceived risks of banks assets substitute for the ex post dangers to our banking system.

And with reference to the absurd low response of the economy to the extremely high stimulates provided, the regulators should also be given that dismissal slip, for ignoring the purpose of banks, something that includes the efficient allocation of credit to the real economy.

Fine references Swedish journalist Katrine Marçal with whether “an investment bank named Lehman Sisters could handle its over-exposure to an overheated American housing market.” That is an ex post description that has little to do with the ex ante perception of the risks, and clearly less to do with bankers wanting to lend when it rained.

If some testosterone is needed to understand that risk-taking is the oxygen of development, and so the need for banks to also lend to those perceived as risky, like to entrepreneurs, then the regulators showed a fatal lack of it.

Their risk weighted capital requirements, more ex ante perceived risk more capital – less risk less capital is as dangerously nonsensical as can be. These only guarantee that when the true risks for our banking system happens, namely the dangerous overpopulation of safe havens, banks will stand there with especially little capital.

By allowing banks to leverage much more with assets perceived, decreed or concocted as safe, like AAA rated securities, like residential mortgages, like sovereigns (Greece) they allowed banks to earn the highest expected risk adjusted returns on equity on what was perceived as safe. Mark Twain could have said that made bankers wet dreams come true; and that was, while playing, the music to which Citigroup’s Chuck Prince held bankers had to dance.

And so, since what the members of the Basel Committee and the Financial Stability Board and most of their colleagues have really proven, is to be suffering from an excessive risk aversion, what would then Cordelia Fine opine, in terms of testosterone and estrogens?

God make us daring!

Here is an aide memoire on the major mistakes with the risk weighted capital requirements

@PerKurowski

No Ms. Tett! It was bank regulators clear lack of testosterone that caused the 2007 crisis and the current slow growth

Sir, Gillian Tett seems to argue that the 2008 bank crisis resulted from excessive testosterone. “Traders on a hot streak risk a double fault”

Not so Ms. Tett! I do not if he really said it but Mark Twain has been attributed opining that bankers lend you the umbrella when the sun shines and want it back as soon as it looks it could rain.

And never ever has there been a bank crisis caused by excessive exposures to something perceived as risky when placed on banks’ balance sheets.

But that did not stop scared lack of testosterone bank nannies to also require banks to hold more equity when lending to the risky than when lending to the “safe”.

So what happened? As banks earned much higher risk adjusted returns on the safe they could not resist the AAA rated securities backed with mortgages to the subprime sector, or sovereigns like Greece. And so a typical bank crisis, that of excessive exposures to what was ex-ante perceived as safe but that ex post turned out very risky ensued. In this case made specifically worse, by means of the lower equity banks had been authorized to maintain. For example in the case of the AAA rated securities Basel II, because of the standardized risk weights, banks were required to only hold 1.6% in capital, meaning an authorized leverage of 62.5 to 1. 

And since banks now find it harder to earn higher risk adjusted ROEs on more capital, they have abandoned lending to risky SMEs and entrepreneurs, those who open up roads on the margins of the economy, and so of course slower economic growth results.

The lack of testosterone is not a fundamental value of the Western civilization. On the contrary in churches we sometimes sang, or at least used to sing, “God make us daring!”

@PerKurowski

The regulation of the finance industry might need more male skills.

Sir, John Kay referring to linkages between “testosterone and risk-taking” writes “We might have better banks if there was rather less male risk-taking and more female regulating and organizing”, “The finance industry needs more female skill” March 18.

If we in a game of roulette bet one dollar on either a safe color or a risky number, we are talking about exactly the same expected financial results, in this case a loss because of the zero the house reserves to itself. But, from that testosterone risk taking point of view are they really similar bets?

Currently we have bank regulations which, even though all major bank crisis have resulted from excessive betting on what was ex ante perceived as safe but that ex post turned out to be risky, allow banks to leverage much more their equity with what is perceived safe.

Since for instance they give a risk weight of only 20% to an AAA rated private borrower but a 100% risk-weight to an unrated borrower, the regulator is indicating, in roulette terms, that betting one dollar on the safe color, gives you five times the expected risk adjusted return than betting that same dollar on a risky number.

And all that while the real economy needs banks to give fair access to bank credit to “risky” numbers, the SMEs and entrepreneurs.

So, since regulators seem to have been blinded by some excessive misguided risk-aversion, what might most be needed, is instead more male risk-taking among regulators.

PS. http://subprimeregulations.blogspot.com/2012/12/the-basel-ii-roulette-manipulation.html

@PerKurowski

Could it be that testosterone is not what it used to be?

Sir, Gillian Tett in “Central banking is still a man’s world” August 10, quotes the opinion that if Lehman Brothers had been ‘Lehman Sisters’…there would have been less testosterone fueled risk taking. And she also notes the absence of “sisters” in high post of the public sector.

She is on the wrong track. This crisis was not the result of an excess of testosterone fueled risk taking, but of a silly risk-aversion by bank regulators, who by means of their capital requirements, stimulated the banks to go where it was perceived as absolutely safe, like to the AAA rated securities, and to the “infallible sovereigns”, like Greece, and to avoid like pest what was perceived as “risky”, the small and medium businesses, entrepreneurs and start ups.

But, then again, it might also be that testosterone is not what it used to be.

There’s a call for more integrity in baseball? Great! But what about more integrity in bank regulations.

Bank regulators, by allowing banks to hold much less capital when lending to the infallible sovereigns or the AAAristocracy, than when lending to the small and medium businesses and entrepreneurs; effectively feed the former with bank borrowing testosterone, and thereby place the later in much worse competitive position than usual to access bank credit. 

http://subprimeregulations.blogspot.com/2012/07/complaint-i-presented-to-consumer.html

Sissy banks and sissy markets?

Martin Wolf in “Why financial regulation is both difficult and essential” April 16, says “It is impossible and probably even undesirable to create a crisis free system”.

Wolf falls way short since in fact even trying to create a crisis free financial system poses extreme dangers, being that risk is the oxygen of development.

No matter what, the world does not belong to the risk adverse and the real risk is not banks defaulting, the real risk is banks not helping the society to grow and develop. Not having a hangover (a bank-crisis) might just be the result of not have gone to the party!

What we then must do before rolling up our sleeves to do regulations, is to have a fresh look at what has been ignored for so long namely what are the financial institutions and specially the banks to do for us?

In that sense we need to stop focusing solely on the hangovers and begin measuring the results of the whole cycle, party and hangover, boom and bust! For instance the South Korean growth boom that went into a bank crisis in 1997-1998 seems to have been much more productive cycle for South Korea than what the current boom-bust seems to have been for the United States.

If we insist on using as the main ingredient for the regulation the risk of default, is it not time to start thinking of capital requirements for banks based on units of default risk per decent job created or climate change avoided? That would at least seem much more productive that units of badly gauged default risk per subprime mortgage financed. Honestly who could believe that the world would have come this far without a bank crisis now and again?

And, to top it up, FT ran two pieces yesterday suggesting banning testosterones from our trading floors! Sissy banks and sissy markets?