Even after the crisis there has been no change in who are represented when deciding on bank regulations.

Sir, Sarah O’Connor writes: “If we want groups to make fair decisions, our best shot is to make the groups representative of the people who are subject to those decisions.” Hear hear!, “Diversity coaching from the Olympic dressage event” August 22.

In the matter of bank regulations, where were all those who perceived as risky by the banks, like entrepreneurs, suffered the Mark Twain realities of bankers lending you the umbrella when the sun shines and wanting it back if it looks like it could rain?

Had they been present perhaps regulators would have understood the concept of conditional probabilities, and therefore had realized that assets perceived by bankers as risky become safer, not riskier; while assets perceived by bankers as safe become riskier, not safer.

Can you imagine how much tears, sufferings and lost opportunities that would have saved the world, primarily our young?

The saddest part of the story is that even after the crisis should have evidenced to all the regulators had no idea of what they were doing, there has been no changes at all in who are being represented when analysis and decisions are taken, so they still keep seeing and considering the risks in the same or quite similar way, the bankers are perceiving the risks. 

How good it would have in the Basel Committee some representation of the young who know that risk taking is the oxygen for the development they need, and that the older do not have the right to “safely” extract all equity from the current economies.

@PerKurowski

If building houses where they are actually wanted, which we should, what do we do with the unwanted lot?

Sir, Robin Harding holds “What should not be in doubt is that supply limits are the single biggest problem with housing… reform the planning rules, and let people build homes where they are actually wanted.” “Planning rules are driving the housing crisis” August 15.

I agree, of course we should build houses where they are actually wanted, but the challenge of what to then do with the unwanted lot, poses major difficulties. 

It is not solely “the role of falling interest rates in pushing up house prices” that has caused houses to become financial assets. Much other preferential treatment is given to the financing of house purchases. Among other, because the financing of houses is perceived so safe by regulators, banks need to hold much less capital against residential mortgages than, for instance, against loans to entrepreneurs. (Those entrepreneurs who could create the jobs that would allow for mortgages to be duly serviced and utilities to be paid).

All that has helped house prices to shoot up and become the most important financial asset for way too many, whether for the owners, or for the banks or other who have helped many owners to extract whatever equity he had in his house.

As a consequence our society, our economies, have become mindboggling exposed to the need of keeping up house prices, while simultaneously needing house prices to become more affordable. To navigate well those waters will not be an easy task. 

Looking at some demographic realities perhaps what needs to be done is not to build more houses, but to build more senior citizens residences, thereby freeing many upstairs so that children could move up from the basements or other young move in.

@PerKurowski

Bank regulators have clearly violated that holy social intergenerational contract Edmund Burke wrote about.

Sir, Marin Wolf writing that while “UK has messed up policy in five significant respects: growth; ageing; risk-sharing; housing; and redistribution.” argues that the focus on intergenerational equity is not helpful” “The focus on intergenerational inequity is a delusion” May 18.

In that I do not agree.

For the umpteenth time: The risk weighted capital requirements for banks, that which allow banks to leverage more and thereby earn higher expected risk adjusted returns on equity when financing what’s perceives as safe, like the present economy, houses and sovereigns; over what’s perceived as risky, like the riskier future and the entrepreneurs, is a direct violation of that very core of minimum intergenerational equity that should guide our actions.

And not only will our young pay dearly for it. Those young currently living in the basements of their parents' houses will one day shout out: “Now it's our turn to live upstairs, you move down to the basement!” And way too many of those elder who possess assets, like houses and shares will, when they really need, find it very hard to convert these into the main-street purchase capacity they hoped for.

I pray it will not come to that, but it is useful for everyone to look at Venezuela where their young are now all fleeing to find better opportunities abroad, while most of the elder are stuck in a society that is rotting. And from boom to bust can happen so fast.

@PerKurowski

When banks can leverage more their equity financing “safe” built houses than financing “risky” job creation, too many young are doomed to live unemployed in our basements

Sir, Bill Mendenhall in a letter of December 18, “Lord Turner got there first on productive credit” mentions a report by Jim Pickard “Labour looks at making mortgage lending harder for banks” December 12. Pickard’s report was not in FT’s US edition.

Pickard wrote: “Shadow chancellor John McDonnell is considering making mortgage lending more onerous for banks in an effort to push them to lend more to smaller companies…The proposals were set out in “Financing Investment”, a report commissioned by the Labour leadership and written by GFC Economics.

According to GFC, British banks are “diverting resources” away from vital industries and instead focusing on unproductive lending, such as consumer credit borrowing.

The paper argues that the Prudential Regulation Authority, the BoE’s City regulator, should use existing powers to make banks hold relatively more capital against their mortgage lending. The report’s authors say this would be an “incentive to boost SME lending growth”.

The GFC report also claims that the BoE’s Financial Policy Committee “makes no distinction between unproductive and productive lending” to companies, arguing that the banking sector “should be geared towards stimulating productive investment”.

The report calls for the FPC to use existing powers to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy.

The report acknowledges that such interventions would be seen by critics as risky measures that could “impede the smooth functioning of markets” and distort the efficient allocation of capital. But it warns that “financial stability risks will emerge if an economy loses its competitiveness”.

Sir, you must be aware that this includes much of what I have written to you in thousands of letters, for more than a decades, and that you have decided to ignore.

But, if that report acknowledges that “to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy… would be seen by critics as risky measures that could ‘impede the smooth functioning of markets’’, why does it not then question the distortion the current existing differences in risk weights cause?

Pickard also mentions that the report warn that “financial stability risks will emerge if an economy loses its competitiveness”. No doubt! Banks cannot be the sole triumphant survivors in an economy that is losing strength.

And when now Mendenhall writes that “Lord Turner got there first on productive credit” because in his 2015 book Between Debt and the Devil he pointed out that “the banking sector’s decades-long switch away from lending to businesses towards mortgage lending only serves to inflate asset prices, which leads to property bubbles”, that does not mean that Lord Turner really understood or understands what has happened.

In June 2010, during a conference at the Brooking Institute in Washington DC, I asked Lord Turner “Do you really think the banks will perform better their societal capital allocation role if regulators allow them to have much lower capital requirements when lending to the consolidated sectors than when lending to the developing?

To that Lord Turner (partially) responded: "we try to develop risk weights which are truly related to the underlying risks. And the fact is that on the whole lending to small and medium enterprises does show up as having both a higher expected loss but also a greater variance of loss. And, of course, capital is there to absorb unexpected loss or either variance of loss rather than the expected loss.”

Pure BS! With that Lord Turner evidences he ignores that banks already clear for the higher risks when lending, so that when also clearing for it in the capital, the whole credit allocation process gets distorted… and banks end up lending more to build “safe” downstairs for our children to live in with their parents, and lending less to “risky” entrepreneurs who could get them the jobs to afford buying their own “upstairs” 

No, Lord Turner is just one of those too many regulators that want banks to hold the most capital against what is perceived as risky, while in fact it is when something perceived as safe turns out to be risky, that we would most like that to be the case.

@PerKurowski

When a loan to buy a house is worth more to a bank regulator than a loan to a job-creator, things cannot end well.

Sir, Chris Giles writes: “The reason why we have more “boomerang families” and grown-up kids applying to “the bank of Mum and Dad” is because forming a new household is so expensive for young people. Much pricier than it was for those of us who bought houses in the 1990s.” “However you analyse it, housing is in a mess” November 10, 2017

With Basel II of 2004, bank regulators, assigning a 35% risk weighting of the basic 8% capital requirement, allowed banks to leverage their equity 35.7 times to 1 when financing residential mortgages. But if financing an unrated 100% risk weighted entrepreneur, those who could help create the jobs our young needs to be able to buy their own houses, then the banks were only allowed to leverage their equity 12.5 times to 1.

So if entrepreneurs might have had a 25% possibility of having their credit applications approved in the old good days of one capital for all and all for one capital, now that could have been reduced to 5%.

So should we really be surprised if our young ones end up living without jobs in their parents’ basements?

So should it surprise us if those young one day say: “We were cheated. Ma-and-pa, you move down to the basement, now it’s our time to live upstairs”

@PerKurowski

Fewer younger and with its banks working with standards appropriate for the much older, dooms Brazils economy

Sir, Martin Wolf writes: “Brazil is in economic, political and moral crisis…too many people are unemployed, the economy is too feeble, the politics too corrupt, and the state too captured…Brazil needs a political and economic rebirth. The crisis makes this necessary. If that does not happen, the future looks sad.” “Brazil’s crisis creates an opportunity” November 8.

Wolf recommends, among other “A funded pension scheme could raise national savings. The government must also have the freedom to control the numbers and pay of civil servants. Doing all this would liberate resources for other areas”

Indeed. But for those resources to be able to flow to where they can be most productive, Brazil also needs to rid itself of that odious regulatory risk-aversion imbedded in the risk-weighted capital requirements for banks. If not Brazil’s future, as well as that of any other nation that keeps those regulations, is doomed to be very bleak.

From “1970 to 74 in 2017…the fertility rate in Brazil has fallen from five children per woman to just 1.7… the population is ageing”.

I understand that for one of Mr Wolf’s age (and perhaps even mine) a risk minimizing investment strategy makes sense but were any financial advisor to suggest that to a young professional starting out, he might very well lose his accreditation. 

http://teawithft.blogspot.com/2009/10/please-free-us-from-imprudent-risk.html

@PerKurowski

If I were a bank regulator, I would set the lowest capital requirements against the loans to young entrepreneurs

Sir, Leo Lewis writes Tatsuo Yasunaga, the Mitsui & Co chief believes that “The innovation of which he is most proud is a support system that encourages staff to create business start-ups within the company. Twenty proposals have been received in the first year. ‘It encourages our young guys to . . . run the business themselves… I’d like to encourage them to enjoy business’”, “Japan’s champion of young entrepreneurs” October 30.

Do I agree? If I were a bank regulator I would make sure banks would be able to earn their highest risk adjusted returns on equity, when lending to the young on which we all depend. What they now do fixing the capital requirements with risk weighs of 0% on sovereigns, 20% on AAA rated, 35% on purchase of houses and 100% on unrated entrepreneurs, is exactly the opposite.

PS. Major bank crises never ever result from excessive exposures to "risky" young entrepreneurs.

@PerKurowski

If you cannot lose yourself, how on earth will you learn about finding yourself?

Sir, Janan Ganesh writing about needed freedom asks: “Where can you lose yourself, either in crowds or in isolation from them? Where can you meander for hours? Where do you have to watch your words and manners the least? Where lets you get to and from other places on a whim?” “Citizen of nowhere” Prize for freest city goes to . . .” October 14.

Yes, where? And if today you can, where will you go tomorrow when facial recognizers follow you around?

Frightening. I have always held that all young (and perhaps old too) need to be able to lose themselves in order to gain the insights that allow them to find themselves. And that discovery journey must of course not be carried out with the assistance of a GPS.

Modern technology, including of course social media, seems to dramatically be changing the way young (and old too) position themselves in life and society.

PS. Try the following experiment. When you are driving down a mountain and you have some young passengers in the car, mention that you are going south, and when you are driving up, mention that you are going north. You’ll be amazed how many young will think you are right, without giving the least consideration to the fact you are driving in the opposite direction

@PerKurowski

A Universal Basic Income would allow many at least some human time, so as not having to be full time androids.

Sir, Leslie Hook writes about Uber drivers having to work 24 hours a day, and feeling like androids, “FT Big Read. Uber: The view from the driving seat” October 5.

I have talked with many young bankers and heard they also, just like Uber drivers, feel a bit like androids; having just to automatically fill in many pre-ordained formulas, mostly just in order to reduce bank equity requirements, and never ever getting the chance of that so fulfilling opportunity of asking a client, “What do you intend to do with the money?” and thereafter deciding on whether recommend the credit or not to their superior.

But what can we do about it? Perhaps a Universal Basic Income would at least allow us to be half-time androids and half time humans.

What comes thru loud and clear from the article though is that we need lots of Uber and Lyft competing for our android services. Imagine being an android and having to serve a not too intelligent high-tech monopoly? That has to be as bad as it gets… sort of.

And of course we need new bank regulators.

@PerKurowski

Regulatory risk aversion exposes our Western civilization to the risk of a “Mom, dad, you move down to the basement!”

Claire Jones writes on Alexandru saying: “Out of every 10 of my friends, only one works. It’s not a good situation for my generation,” Alex says. He and many of his friends still live at home with their parents. “When I talk to them about the past it sounds better. They all had a job and the opportunity to have a family.” “Temporary fortunes” July 6.

And Ms Bellieni “lives with her young child and husband, who also does many temporary jobs, in a property that belongs to his parents. “Otherwise we couldn’t make it”

Banks are allowed to hold much less capital when financing houses than when financing SMEs and entrepreneurs, as regulators think the former is much safer for the bank than the latter. As a result banks can earn much higher risk adjusted returns on their equity financing houses than financing “the risky”.

But since SMEs and entrepreneurs are job creators par excellence, could these regulations create an excess of basements in which the unemployed or underemployed young can live with their parents, and a substantial lack of jobs?

Mario Draghi, the Chair of the Financial Stability Board and his ECB officials clearly do not see this as a problem, hey they might not even see it as a distortion. That could be since like overly worried nannies they are totally focused on avoiding bank crises, and do not care one iota about how banks do their job in the in-betweens.

Sir, the younger generations, squeezed by this anti Western civilization value of risk aversion, and an increased loss of jobs to robots and automation, could at some point become sufficiently enraged so as to say… “Mom and dad, you move down to the basement, it is our turn to live upstairs!”

Note: Not the first time: 2009: "Please free us from imprudent risk-aversion and give us some prudent risk-taking"

@PerKurowski

When you parents prod banks to finance houses more than SMEs, more of your children will have to live with you.

Sir, Stephen Burgen when reporting on the horrifying lack of jobs in Spain, especially for the younger, informs: “According to a report by Spain’s Youth Council, a body of youth organisations, nearly 80 per cent of those aged between 16 and 29 years old live with their parents” “Part-time labour” April 22.

For purposes of setting the capital requirements for banks, in 2004 Basel II set the risk weight for financing residential houses at 35% while that for financing an unrated SME or entrepreneur was set at 100%.

That meant that banks could leverage their equity much more when financing the purchase of a house than when lending to SMEs or entrepreneurs.

That meant that banks would earn higher risk adjusted returns on equity when financing the purchase of a house than when lending to SMEs or entrepreneurs.

And so of course, the result of such distortion in the allocation of bank credit, will mean there will be much more financing of houses than job creations.

C’est la vie! Those who will most pay the consequences of bank regulators being so dumb, are of course the young.

Though their chances of obtaining clear answers are very slim, here are some questions the young could try to ask the bank regulators.

Burgen writes: “Casual contracts keep Spaniards looking for permanent work. Only a minority enjoy the benefits and security of permanent employment”. “Part-time labour” April 22.

Welcome to the new world… in which structural unemployment, created among other by robots and automation, and nurtured by dumb regulators, might mean hundred of millions young never ever having something resembling an employment.

I ask would not a Universal Basic Income, let’s say some 400 Euros allow everyone to adapt? It would be a small but useful ladder with which to step up to the gig economy. 

That could be much more efficient than introducing additional costly distortions such as paying “up to €9,600 per annum to employers who offer young people permanent contracts” or “giving public sector workers on short-term contracts [special benefits to obtain] permanent jobs”. Really? Threatening to take away the permanent jobs of bank regulators if they don’t smart up, fast, seems like a better strategy.

http://bombaaaa.blogspot.ca/2014/07/mi-carta-al-rey-felipe-vi.html

@PerKurowski

World Bank: How can we create decent and worthy unemployments to help face a worldwide structural lack of jobs?

Sir, Kristalina Georgieva, writes about the needs for jobs, the difficulties involved with creating these jobs, everywhere, and of how the World Bank is trying to help. “Job insecurity is a fact of life for young people” April 22.

That is all very commendable but what I truly miss, for instance during the 2017 Spring Meetings of the World Bank and IMF, is a discussion, long overdue, about what to do if sufficient jobs are nowhere to be found.

The very real possibility of hundred of millions of young people soon facing the prospects of a lifelong lack of employment, perhaps only eased by some few temporary gigs, is a monstrous social challenge, that must be tackled in time.

For instance if in order to create jobs, we invest so much that there is little left over for taking care of if we fail to do so, then perhaps our problems could compound.

And I am of course not talking about the normal set of social safety nets to take care of a temporary lack of jobs, but of much more fundamental measures… like perhaps the need of a well funded universal basic income paid out to all.

http://perkurowski.blogspot.com/2012/04/we-need-worthy-and-decent-unemployments.html

Education is of utmost importance for creating jobs, but business as usual will not suffice. For instance some of the remuneration of teachers and professors need to be contingent on how it goes for the students. The current way of loading up university students with debt, that has to be repaid no matter what, basically in order to pay professors great salaries up front, smells a lot like a scam… or like bankers’ bonuses based on short-term results.

http://perkurowski.blogspot.com/2007/01/should-not-higher-education-be-more-of.html

PS. Had the issue of how robots and automation is impacting the job market been raised earlier, we would perhaps not have to be listening to useless Wall construction proposals.

http://perkurowski.blogspot.com/2017/02/here-some-disorderly-lose-cannon.html

@PerKurowski

Our younger generations have much more valid reasons than savers and bankers to profoundly resent bank regulators

Sir, Patrick Jenkins reports that the world’s savers and bankers have every reason to resent the posse of policymakers, one of the most powerful quangos in the world, the Group of Central Bank Governors and Heads of Supervision — GHOS for short, and that will meet on January 8”, “Time for GHOS train to leave the shadows and reconnect” January 3.

At the meeting the group will discuss “the future direction of global financial regulation” the “system of risk-weighting the assets on banks’ books” and “the riskiness of banks’ mortgages and SME lending”

Well no. Those who most should resent GHOS (and the Basel Committee for Banking Supervision) are the young.

These irresponsible bank experts, without considering the purpose of banks, and without any empirical studies on what causes bank crises, decided that it was much better and safer for banks to finance “safe” houses than to finance “riskier” SMEs.

That translated into bank financing more the basements where unemployed young can live with their parents, than financing the job creation that can allow the young to be able to afford becoming parents too.

To top it up, they also decided that it was much safer to lend to the governments than to the private sector.

I have for more than a decade and in more than 2.500 letters tried to convince FT to help me to ask these “bizarrely secretive” regulators some very basic questions. Unfortunately until now I have had no such luck.

@PerKurowski

Martin Wolf, concerned about our young’s future, praises risk-taking culture. Is this change of mind permanent?

Sir, Martin Wolf writes: “With an ageing population, power is over-concentrated in the hands of the old… The solution is to give parents votes on behalf of minor children.” “Ageing Big Ben’s timely reminder that our political system needs repair” December 23.

In February 2007, in a letter responding to an article in FT by Christopher Caldwell titled “Why the ‘right of the children’ is a juvenile concept”, and based on an Op-Ed I published in Venezuela, I wrote: “If the average life length of a person in UK were 80 and our democracies had anything to do with representation of interests, as in companies, then a new born should have 80 votes, a middle age 56 year old like me 24 votes and someone over eighty should count his blessings if he is allowed to keep his single vote. Of course the previous is clearly just an exaggeration, but it serves to argue in favor of the one-child-one-vote concept, in which the votes of the children are to be exercised by their mother, father or older siblings.”

Wolf, in praise of Big Ben and those responsible for it “George Airy, astronomer royal, [and] Edmund Beckett Denison (later Baron Grimthorpe) also writes: “For an amateur to have won such an important commission tells us much about the risk-taking culture of the high Victorians, as does the innovative nature of his unprecedentedly accurate clock.”

What is this? Martin Wolf suddenly thinking of empowering the young and praising a “risk-taking culture”? I ask because for too long Wolf has refused to support my argument that current risk adverse bank regulations, with their risk weighted capital requirements, has the banks only refinancing the “safer” past and present, and not the “riskier” future our young ones need to be financed, so that they don’t have to stay in their parents’ basements, until these pass away.

Sir, that the U.S. Census Bureau segments population in so many ways to report election results, without including the category of fathers and mothers, is also clear evidence on how underrepresented our young are.

PS. I am not really sure about: “The future of a country managed for the benefit of the past, cannot be not bright.” Is it my English that is lacking, a typo or just a Freudian slip? Per Kurowski

@PerKurowski

Over time simplewissers will always trump condescending besserwissers

Sir, Joan Williams writes: “working-class whites who feel abandoned by professional and business elites. A few…have noticed their pain, but for the most part elites’ social consciences have been aimed elsewhere, at ending racism or sexism, at environmentalism or eating food that is sustainably farmed.” “Cluelessness about class means we miss Brexit lessons” November 24

Unfortunately the working-class whites are just the tip of the iceberg. The day our young will realize that we their elders have gladly allowed banks to finance the construction of the basements where they can stay with us, but not the SMEs that could give them the jobs they need in order to also afford becoming parents, something really bad could happen.

Over the years I have had way too many opportunities for my liking to remember that not fully confirmed Viking tradition of the ättestupa, that cliff from which the elderly voluntarily jumped from when not being any longer useful to society.

@PerKurowski

And there are similar ones at Grand Canyon

Martin Wolf: You want it darker? There is some possible light out there, even during Trump time.

Sir, just one week before Leonard Cohen past away, bless his soul, I bought and heard his last record “You want it darker”. I then knew something very bad, but at the same time very beautiful, was happening to him. 

I bring this up because when I read Martin Wolf’s “The economic consequences of Mr Trump”, November 11, what immediately came into my mind was a “You want it darker Mr Wolf?” though without the beautiful component.

Sir, let us put all that doom and gloom darkness aside for a second and look at what good could happen.

Wolf writes: A second area of concern is financial regulation. Mr Trump has supported repeal of the 2010 Dodd-Frank Act, the regulatory response to the financial crisis. Many financial businesses hate it. Yet the question is whether it would be replaced by a more effective alternative or by a return to the pre-crisis free-for-all.”

“Free for all”? No! Let us be more precise about who those “all” were.

Bankers, who because of the risk weighted capital requirements, could fulfill their wet dreams of obtaining the highest risk adjusted returns on equity on safe assets.

Government bureaucrats, who because of the 0% risk weighting of the sovereign, would find it much easier to access credit to realize their occurrences.

House buyers since the very low capital requirements against the financing of houses, would fuel a credit boom that increased the values of their investment

And who paid for the freedom of the free? “Risky” SMEs and entrepreneurs who found their access to bank credit curtailed. Those renting and who missed out on the financing subsidies. And, since banks would no longer finance the riskier future and keep to refinancing the safer past, the young lost out big time on their opportunities to find the jobs they need in order to repay the staggering educational credits they have contracted.

Mr. Wolf, do you want it darker?

Last week, after more than a decade, I finally got some super-duper experts in the IMF to concede that perhaps the risk weighted capital requirements for banks, especially the 0% risk weight of the sovereign and 100% of We the People, could be distorting the allocation of bank credit, and also keeping the rates on public debt artificially low.

If that, something which by no means is reflected a Dodd-Frank Act that surrealistically does not even mention the Basel Committee, could translate into the elimination of the regulatory distortions of bank credit, then at least something economically very good and very important, could come out during Trump’s time.

@PerKurowski

Gillian Tett, worry less about grey-hair’s casinos and much more about your young’s bank regulators manipulated ones.

Sir, Gillian Tett, as she should, becomes depressed when she ends up at an Atlantic City casino that “looked more like an electronic opium den for senior citizen.” “The rise of the silver slotter leaves me with a sour taste” October 29.

But, unless there is fraud, each one of those bets at the Atlantic City casino, has exactly the same expected pay out; namely a slight negative value because of the houses wins, like that when a zero comes up on the roulette. The cost of entertainment.

But out there in the other world, in the Main-Street, regulators have told banks that if they play it safe, like on black or read, like on sovereigns, AAA rated, or financing residential houses, they will earn much higher (expected) returns on equity, than if they bet on risky SMEs or entrepreneurs.

If Gillian Tett is concerned about the future of her children and grandchildren, that should depress her much more.

Sir, even though I have seen some few casino players fading away in absolute tragic destitution, I assure you that what the Basel Committee has done to the grey haired future of my, and your children and grand children, leaves me with a much more sour taste than thousands of Atlantic City casinos.

@PerKurowski ©

Europe beware, Mario Draghi and his buddies are playing “she loves me - she loves me not” with your future

Sir, I refer to Claire Jones reporting on Mario Draghi’s difficulties on deciding what to do “to come up with a stimulus package that convinces markets the ECB is doing enough both to keep the fragile recovery on track and to keep hawks on his governing council onside”, “ECB has six weeks to update QE, says Draghi” October 21.

Mario Draghi was the former chair of the Financial Stability Board, and is the currently the President of the European Central Bank and chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision. No doubt that in the area of high-finance, Draghi is about as important as one can be… perhaps more important than one should be allowed to be.

Because Mario Draghi, though he might be a very knowledgeable technocrat, in the sense that he knows for instance that it can be quite risky for a bank to lend to an unrated SME, something with which all bankers would agree, is unfortunately not sufficiently wise to understand that what is for instance rated as super-duper safe AAA, is what can be truly dangerous for banks, precisely because bankers do also not think that to be dangerous.

And unfortunately Mario Draghi, like his regulatory technocrat buddies, seems also to have missed out on a Finance 101 course. That because seemingly he does not understand that when you allow banks to leverage more their equity, and the support these receive from society, with assets that are perceived safe than with assets perceived risky, banks will invest more than usual in what’s safe, because there is where it will obtain higher expected risk adjusted returns on equity. And the consequences of that are twofold, and both negative. First it leads to dangerously overpopulating the safe havens, and second, equally dangerous, especially for the real economy, to underexploring those risky bays where SMEs and entrepreneurs reside. 

As an example, the risk weight the Basel Committee has assigned to the financing of residential housing is 35%, while that for unrated SMEs is 100%. This causes banks to finance the basements where the kids can live with their parents, but not the necessary job creation required for the kids to be able to become themselves parents in the future.

It is truly shameful! Europe (and world) wake up!

@PerKurowski ©

Just you wait till the young discover what the Basel Committee for Banking Supervision has been doing to their future

Sir, Anne-Sylvaine Chassany tells us that “Océane, a 21-year-old Nice resident with purple hair, tattooed forearms and stretched earlobes would love to move to London and open a tattoo parlour” “A waitress with tattooed arms opens my eyes to the youth vote” July 27.

Well that would quite likely require Océane to get a bank loan. But what would Océane say if she understood that her chances of getting a loan at reasonable rates, which might never have been that great to begin with, are now much smaller, because of the regulators.

The risk-weighted capital requirements favors the lending to what is perceived, decreed or concocted as safe, that which always have had ample access to bank credit, over the lending to the risky… and by favoring it unfairly discriminates against the access to bank credit of those ex ante perceived as risky. 

One day, some researcher will calculate the number of loan applications by SMEs and entrepreneurs that have been denied, or approved at much higher interest rates, as a direct consequence of these regulations. When those figures are published and the young realize discovers that banks stopped financing their risky future, and are only now refinancing the safer past, like placing a reverse mortgage on the economy, then, as long as the young are able to look up from their iPads, all hell could and should break lose.

Hear the young: “Baby-boomers why did you do that to us? The banks of your parents did take the risks needed for your future!”

And nothing can foster inequality as much as denying opportunities of fair access to credit… with “fair” meaning here, a not-distorted free-market based risk evaluation process.

@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 ©