How can Eurozone’s sovereigns’ debts, not denominated in their own national/printable fiat currency, be considered 100% safe?

Sir, Laurence Fletcher in Tail Risk of August 28, writes: “Yields on German Bunds and other major government bonds have been moving steadily lower, as prices rise. That has burnished their credentials… as a safe haven in uncertain times”

Sir, how can Eurozone’s sovereigns’ debts, which are not denominated in their own national/printable fiat currency, be considered safe? 

The reasons the interest rates on that debt is low is the direct result of regulatory statism.

Risk weighted bank capital requirements that much favor the access to bank credit of the sovereign over that of the citizens.

That the European Commission assigned a Sovereign Debt Privilege of a 0% risk weight to all Eurozone sovereigns, even when these de facto do not take on debt in a national printable currency.

That ECB’s, with its QEs, have bought up huge amounts of Eurozone sovereign debts.

What would the interest rates on eurozone sovereign debt be if banks had to hold as much capital against their debts, than what they need to hold against European entrepreneurs?

@PerKurowski

With respect to Eurozone sovereign debts, European banks were officially allowed to ignore credit ratings.

Sir, Rachel Sanderson writes, “Data from the Bank of Italy on holdings of Italian government debt, usually the prime conduit of contagion, suggests any Italian crisis now will be more contained than in the 2011-12 European debt and banking crisis, argue analysts at Citi” “Rome political climate is uncomfortable even for seasoned Italy Inc.” August 22.

“But Citi [also] warns of sovereign downgrades. Italy is now closer to the subinvestment grade rating threshold compared with 2011, according to all three main rating agencies.”

But the European authorities, European Commission, ECB all, for purposes of Basel Committee’s risk weighted bank capital requirements, officially still consider Italy’s debt AAA to AA rated, as they still assign it a 0% risk weight.

So in fact all the about €400bn of Italian government debt Italian banks hold, and all what the European financial institutions hold of about €460bn of Italian sovereign debt, most of it, are held against none or extremely little bank capital. Had EU followed Basel regulations they would have at least 4% in capital against these holding, certainly way too little. Lending to any private sector Italian would with such ratings would require 8% in capital… the difference is explained by the pro-state bias of the Basel Committee. 

And that is a political reality that must also be extremely uncomfortable for the not sufficiently seasoned European Union Inc.

Sir, what will the rest of Europe say when they realize that it was not all Italy’s fault, as it was not all Greece’s fault?

@PerKurowski

Risk weighted bank capital requirements are anathema to neoliberalism

Sir, Rana Foroohar writes “we have spent decades of living in the old reality — the post-Bretton Woods, neoliberal one.” "Markets are adjusting to a turbulent world" August 19.

There are many definitions of neoliberal policies out there but they always include a large role for the hands of the free market and the reduction in government spending in order to increase the role of the private sector in the economy.

In 1988, for the banking sector, one of the most important economic agents, credit risk capital requirements were introduced by means of the Basel Accord. It gave incentives that distorted the allocation of bank credit to the real economy. For instance lower risk weights for the sovereign (0%) and for residential mortgages (35%) signifies subsidizing the sovereign and the safer present, by taxing the access to credit for the riskier future, like to entrepreneurs (100%). So I do not know what neoliberalism Ms. Foroohar refers to.

Ms. Foroohar, speculating on the possible “impact of an Elizabeth Warren or Bernie Sanders victory in the US primaries?” mentions a 13D Global Strategy and Research note that holds that such event would “fit perfectly into the cycle from wealth accumulation to wealth distribution”, something that Foroohar also believes “will be the biggest economic shift of our lifetimes.”

Sir, at the very moment income, through the purchase of assets, is transformed into accumulated wealth; there cannot be any significant redistribution of it, which means having to sell many of those same assets, without any significant destruction of wealth. If you’re scared of a deep recession, as we all should indeed be, then the last think you’d want to do is to deepen it with a wealth redistribution cycle.

So we cannot redistribute? Yes, we can, but that’s best done getting hold of the income before it is converted into assets, and then, preferably, sharing it out equally to all, by means of an unconditional universal basic income.

@PerKurowski

Regulators forced banks into what’s perceived safe, thereby forcing the usually most risk adverse into what’s perceived risky.

Sir, Robin Wigglesworth writes “Many investors such as pension funds and insurers [are] pushed towards the only other option: venturing into the riskier corners of the bond market, such as fragile countries, heavily indebted companies and exotic, financially engineered instruments. These are securities they would normally shun — or at least demand a much higher return to buy.” “Negative yields force investors to snap up riskier debt” August 16.

As an example he mentions “Victoria a UK-based company that issued a €330m five-year bond that drew more than €1bn of orders [because] the relatively high 5.25 per cent yield it offered, helped investors swallow misgivings over its leverage.”

Clearly liquidity injections, like central banks’ huge QEs, has helped to move interest rates much lower everywhere, but, as I see it, much, or perhaps most of what Wigglesworth refers to is the direct consequence of the risk weighted capital requirements for banks.

That regulations allowed banks to leverage much more their capital with what’s perceived (decreed or concocted) as safe, than with what’s perceived as risky, which meant that banks can more easily obtain higher risk adjusted returns on equity with the safe than with the risky… and those incentives were as effective as ordering the banks what to do. That made banks substitute their savvy loan officers, precisely those who would be evaluating and lending to a Victoria, with equity minimizing financial engineers.

As a result the interest rates charged to the safe… little by little forced those who did not posses savvy loan officers to take up the role of banks.

Will it stop there? Not necessarily. Banks, and their regulators, are now slowly waking up to the fact that the margins that the regulation benefited “safes” offer, are not enough for banks to survive as banks. 

But how to get out of that mess will not be easy. Solely as an example, when in 1988 bank regulators assigned America’s public debt a 0.00% risk weight, its debt was about $2.6 trillion, now it is around $22 trillion and still has a 0.00% risk weight. How do you believe markets would react if it increased to 0.01%? 

@PerKurowski

In 1988 one year before the Berlin Wall fell another wall was constructed, one which separated sovereign and private bank borrowings.

Sir, I refer to Ben Hall’s “State ownership back in vogue 30 years after fall of Berlin Wall” August 15.

The only real competitive advantage those in favor of SOEs can argue, is that governments usually have cheaper access to credit, so why put it in the hands of private investors who need to expect higher returns. 

But in 1988 by means of the Basel Accord 1988 the risk weighted bank capital requirements were adopted. With these banks were allowed to hold sovereign debt against much less, sometimes even zero capital, than what these had to hold against loans to the private sector. As a result the interest rate differences between private and public debt started to grow and with it, the SOE’s competitive advantage, and so we should not be too surprised about these being “back in vogue”. 

To illustrate my point just let me ask: Sir, where would the interest rates now be for the 0% risk weighted sovereign Italy, this even though it takes on debt not denominated in a domestic printable currency be, if Italian banks needed to hold as much capital against these as what they must hold against loans to Italian entrepreneurs?

PS. Here my letter to the Financial Stability Board

PS. Here my recent letter to the IMF

@PerKurowski

Venezuela needs to extract its oil much more than what it needs Citgo.

Sir, Colby Smith and Gideon Long report that “Venezuela has long been fearful of missing a payment on Citgo’s debt — the country’s only bond not yet in default — since it could mean losing control of Citgo the jewel in the crown of PDVSA’s foreign assets” “Venezuela sanctions leave refiner’s future in doubt” August 13.

Let us be clear, in terms of helping Venezuelan’s being able to eat and buy medicines, which is what they most need right now, it is not Citgo that is worth the most, it is what it can extract in oil and sell in the markets, because that’s where the real money is. Moreover, if creditors would lay their hands on Citgo, they would most certainly love to continue refining Venezuelan oil.

Sir, what’s the worth of Citgo if Venezuela does not sell to it its oil in very favorable conditions? If I was a creditor that had my possibilities to collect based on Citgo, I would be very nervous about hearing a “Hear it is, take it!” 

And that might be why they so anxiously try to convince Juan Guaidó that he can´t afford to lose it. Personally I would, as I have many times said say “good riddance”. 

Why on earth are government bureaucrats running a normally very low margin’s refinery operation?

Sir, in 2000 I ended an interview in the Daily Journal in Caracas with: “I still can't understand the economic reasons for having bought and kept Citgo. There is evidence in the reports that it's being subsidized by PDVSA. And, for those who argue so much in favor of privatizing PDVSA, I challenge them to first make an IPO for Citgo, subject to their obligation to purchase oil products at market prices."

So, legitimate President Guaidó, don’t ever think of paying $913, in late October, to holders of a bond maturing in 2020 issued by PDVSA, which is backed by a majority stake in Citgo.

@PerKurowski

Any new IMF managing director should at least know, as a minimum minimorum, that two current important financial policies are more than dumb.

Sir, I refer to John Taylor’s “Choice of new IMF head must not be dictated by the old EU order” August 12.

I have no problems whatsoever with all what Taylor argues and neither with IMF changing its bylaws to allow someone over 65 years to take up the post of managing director.

But I do have two very firm ideas about what the next managing director should know.

First, that the risk weighted capital requirements for banks, based on that what’s perceived as risky, like loans to entrepreneurs and SMEs, is more dangerous to the bank system than what’s perceived as safe, like residential mortgages, is more than dumb. These only guarantee a weakening of the real economy and especially large bank crises, caused by especially large exposures to something perceived, decreed or concocted as especially safe, which turns into being especially risky, while held against especially little capital.

Second, that to assign a 0% risk weight, as that which has been assigned by EU authorities to all eurozone sovereigns, and this even though these take on debt that de facto is not denominated in their own domestic printable currency, something which could bring down the Euro and the EU with it, is also more than dumb. 

Sir, I wonder if anyone of the G20 Eminent Persons Group, international worthies and the names Taylor mention understand and know this. And if they do, why are they silent on it?

@PerKurowski

Before ECB does one iota more, we must get rid of the loony portfolio invariant credit risk weighted bank capital requirements.

Sir, Rick Rieder writes, “A thoughtful consideration of where and how capital is being applied could have a positive influence that lasts decades. The status quo cannot be satisfactory for anyone hoping to see the eurozone continue as a global economic force in the century ahead” “ECB’s conventional tools will not solve eurozone woes” August 9.

Absolutely but, before having ECB by buying equities entering further into crony statism terrain, what should be done, sine qua none, is to get rid of those risk weighted bank capital requirements that so dangerously, both for the bank system and for the economy, distorts the allocation of credit. 

Precisely because banks need to hold more capital when lending to the riskier future than when lending to the sovereign, and safer present “the return on debt is not matching the risk. So potential lenders have retreated, leaving more expensive equity financing as the sole source of funding. That increases the overall cost of project financing. As a result, growth-enhancing projects never get off the ground, exacerbating today’s negative economic velocity.”

Precisely for the same reason, we are not getting enough of “What is needed is to improved productivity, which comes from innovation and technology.”

Sir, if that immense source of distortion is not eliminated then whatever ECB does will only kick the can further down the road from which one day it will roll back with vengeance on all of us.

My letter to the Financial Stability Board

My letter to IMF

@PerKurowski

Central banks and regulators are wittingly or unwittingly imposing communism by stealth, at least in Japan.

Sir, you refer to that Bank of Japan’s holdings of government bonds are already at more than 40 per cent of the outstanding stock… and to “massive equity purchases” [by means of buying into the ETF market], and to“the government is the biggest beneficiary of the BoJ’s low interest rate policy” “BoJ risks falling out of sync on global easing” August 7.

Add to that the lower capital requirements for banks when lending to the government than when lending to citizens, and it all adds up to a huge gamble on that government bureaucrats know better what to do with credit/money than private enterprises. It sure sounds too much like communism by stealth for my liking. 

In 1988 the Basel Accord assigned 0% risk weight to sovereigns and 100% to citizens and we all believed that when in 1989 the Berlin Wall fell we had gotten rid of communism for good. How can the world have been so naïve? It will of course end badly.

@PerKurowski

The battle between capital and labour may be surpassed by the battle between the working class and the not working class.

Rana Foroohar announces, “The age of wealth distribution is coming and will have major investment consequences”, “The age of wealth accumulation is over” August 5.

Indeed, but two questions stand out. 

First, for wealth to be redistributed some assets of the wealthy must be sold and, since precisely because of that there might be less interest among other to acquire those assets, the value of these could fall… with unexpected consequences. Here’s an example, what is best for New York City keeping property taxes and property values at current values, or increasing the taxes running the risk that property values fall and wealthy property owners run away somewhere else?

The second question is who is going to redistribute? Will a mechanism like an unconditional universal basic income be used, or will the usual redistribution profiteers be in charge of it?

Foroohar also announces, “Another battle will be between capital and labour.” That battle will always be present but, in these times when robots and AI seem to threaten jobs, the real battle could end up being between the working class and the not working class.

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

@PerKurowski

Don’t keep adding bank regulations for what is ex ante perceived risky. It is what is ex ante perceived as very safe that should concern us the most.

Sir, I refer to Sheila Bair discussion of how much banks are to set aside in order to cover for loan losses. “Congress should stay out of new bank rules for loan losses” August 5.

Bair mentions, “that FASB wants to switch to a new rule, known by the name of “current expected credit losses” or “CECL.” That rule “says that banks should set aside enough to cover expected losses throughout the life of a loan, taking into account a wide variety of factors, including historic loss rates, market conditions, and the maturity of the economic cycle.”

Bair argues the new rule has two key benefits. “First, banks will start putting aside money on day one of each loan so when trouble hits — as it did in 2008 — they will not be trying to play catch-up with their reserves.” 

Really, what money would they have had to put aside for the AAA rated securities gone bad? What money would they have had to put aside for loans with a default guarantee issued by an AAA rated entity like AIG?

Then “Second, it should make bankers a little more cautious in their lending decisions, as they will have to account for likely losses when the loan is made, not kick the can down the road until the borrower is actually in arrears.”

That all has me concerned with that we might be adding a new layer of discrimination against the access to credit of the risky.

Those perceived ex ante as risky already get less credit and pay higher risk premiums. Those perceived ex ante as risky already cause banks to have to hold more equity against loans to them. 

If those perceived ex ante as risky must now also require banks to set aside reserves earlier than what is required for those perceived as safe, banks might stop altogether lending to the risky, like to entrepreneurs, and that will absolutely hurt the economy.

And Sir, it would all be for nothing, because major bank crises are never caused by excessive exposures to what was ex ante perceived as risky when placed on banks’ balance sheets. 

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

If ECB’s original QEs stimuli had not been distorted by credit risk weighted bank capital requirements, there would be much less need for additional QEs.

Sir, Claire Jones writes: “EU treaties prevent the ECB from financing member governments by buying their debt, a tactic known as monetary financing. This rule aims to protect the central bank from political pressure and avoid stoking inflation. QE involves the central banks of eurozone states buying huge amounts of government bonds, financed by the ECB”… [Is QE legal?] “ECB argues that QE does not amount to monetary financing as it is only buying the bonds in secondary markets from other investors, rather than purchasing the debt directly from governments”, “Easing German constitutional court to rule on ECB bond buying” July 31.

Sir, as clearly the intent of ECB is to help financing member governments, and “stoking inflation” a publicized goal, I must say that sounds like a real weak defense.

But be that as it may, the question is also whether QE really helps the recovery in a sustainable way? ECB’s still so large outstanding ECB holdings of European sovereign debt suggest it does not. 

The main explanation for that is to be found in the many dangerous distortions in the allocation of bank credit that the risk weighted bank capital requirements produce.

Just an example, currently all Eurozone sovereigns, courtesy of EU authorities, have been assigned a Sovereign Debt Privilege of a 0% risk weight, and this even though not of them take on debt denominated in a currency that is their own printable one.

The sum of QEs, plus that regulatory favoring, basically premised upon the notion that European government bureaucrats know better what to do with money they are not personally responsible for than for instance European entrepreneurs is drowning Europe in way too much statism.

For the European Union to be saved financial power has to be taken away from its sovereigns (and Brussels) and devolved to its citizens.

http://teawithft.blogspot.com/2019/06/the-still-ticking-0-risk-weight.html

@PerKurowski

What keeps IMF and World Bank so silent on bank regulations that go against their respective mission?

Sir, you argue, “If the IMF and the World Bank were to disappear, the absence of their combination of expertise, credibility and cash would soon be painfully obvious.” “Bretton Woods twins need to keep adapting” July 18.

Absolutely but they would also be sorely missed as the right places for having serious discussions on many serious issues that can affect our economies. 

But in that respect both have also been somewhat amiss of their responsibilities. The Basel Committee’s credit risk weighted bank capital requirements, which so dangerously distort the allocation of bank credit, have not been sufficiently discussed.

The World Bank, as the world’s premier development bank, knows that risk taking is the oxygen of any development. With this in mind it should loudly oppose regulations that so much favors the safer present’s access to bank credit over that of the riskier future. Doing so dooms our economies to a more obese less muscular growth. 

And IMF should know that all that piece of regulation really guarantees, is especially large bank crises, caused by especially large exposures to something perceived or decreed as especially safe, and that turn out to be especially risky, while being held against especially little bank capital. 

Why the twins’ silence? Perhaps too much group think, perhaps too close relations with regulators, something that could make this topic uncomfortable to discuss. 

PS. My comments to the Financial Stability Board

With bank regulations biased against risk taking, the oxygen of development, emerging has been made so much more difficult for nations

Sir, I refer to Jonathan Wheatley’s report on emerging markets “Falling further behind” July 17. 

Banks used to apportion their credit between those perceived as risky, and those perceived as safe, based on their own portfolio considerations and risk adjusted interest rates. But that was before the Basel Committee’s risk weighted capital requirements.

Now banks apportion credit between those perceived as risky, and those perceived as safe, based on their own portfolio considerations, the risk adjusted interest rates, and the times bank equity can be leveraged with those risk adjusted interest rates, so as to be able to earn higher risk adjusted returns on equity.

That has leveraged whatever natural discrimination in access to bank credit there is in favor of the “safer present” against that of the riskier future. Since risk taking is the oxygen of any development, what might this have done to the emerging markets?

PS. Here is the document I presented in October 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York.

@PerKurowski

The case against insane globalism also remains strong.

The purpose of the Basel Committee for Banking Supervision BCBS, established in 1974 is to encourage convergence toward common approaches and standards. That sure reads as it could qualify as that global cooperation Martin Wolf asks for in his “The case for sane globalism remains strong” July 16.

But what if it is not sane?

BCBS has basically imposed on the world the use of credit risk weighted capital requirements for banks.

Since perceived credit risks are already considered by bankers when deciding on the interest rate and the size of exposures they are willing to hold, basing the capital requirements on the same perceived credit risks, means doubling up on perceived credit risks. 

And Sir, as I have argued for years, any risk, even if perfectly perceived, causes the wrong actions, if excessively considered. 

I dislike the concept of any kind of weighted different capital requirements, because that distorts the allocation of credit with many unexpected consequences. But if we wanted to have perceived credit risk to decide bank capital, it would of course have to be based on the conditional probability of what bankers are expected to do when they perceive credit risks, and these might be wrongly perceived.

Would we in such a case assign a 20% risk weight to what is rated AAA and a whopping 150% to what is rated below BB- as in Basel II’ standards? Of course not!

And if we did not think that government bureaucrats know better what to do with bank credit they are not personally liable for, than entrepreneurs, would we then assign the “safe” sovereign a 0% risk weight and the “risky” not rated entrepreneur a risk weight of 100%, which would clearly send way too much credit to sovereigns and way too little to entrepreneurs? Of course not!

And if we thought having a job as important or even more so than owning a house, would we then allow banks to leverage so much more with residential mortgages than with loans to small and medium enterprises, meaning banks can obtain easier and higher risk adjusted returns on their equity by financing “safe” houses than by financing “risky” job creation? Of course not!

Sir, in 2003, when as an Executive Director of the World Bank I commented on its Strategic Framework I wrote: "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."

Does this mean that I do not agree with Martin Wolf when he argues in favor of multilateral co-operation? Of course not! But it sure argues for being much more careful when going global with plan and rules.

By the way in those same 2003 comments at the World Bank I also wrote: “Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market”. And it did not take the world long before drowning in 2007 and 2008 in the AAA rated securities backed with mortgages to the subprime sector in the U.S.

But have those who concocted those ill suited risk weighted bank capital requirements ever admitted a serious mea culpa? No, they have blamed banks and credit rating agencies.

And in EU the authorities assigned a 0% risk weight to all Eurozone sovereigns even though they all take up debt that is not denominated in their local printable currency. And no one said anything?

Sir, in the whole world, I see plenty of huge dangers and lost opportunities that can all be traced back directly to BCBS risk weighted bank capital requirements. 

So, besides having to be very careful when going global, we also have to be very vigilant on what the global rulers propose. Of course, for that our first line of defense are the journalists daringly questioning what they do not understand or like.

Has FT helped provide sufficient questioning about what the Basel Committee has and is up to? I let you Sir answer that question.

http://subprimeregulations.blogspot.com/2003/03/my-comments-on-world-banks-strategic.html

@PerKurowski

Should the tax on robots be high or low?

Sir, John Thornhill writes that Carl Benedikt Frey’s “The Technology Trap” informs us that “the number of robots in the US increased by 50 per cent between 2008 and 2016, each of them replacing about 3.3 jobs” “The return of the Luddites” July 13, 2019.

Those who are so replaced must surely have been generating some non-wage labour costs, like social security, that robots don’t. Therefore I frequently pose a question that, with the exception of some Swedes, no one wants to give me a definite answer to. It is:

Should we tax robots low so they work for us humans, or high so that we humans remain competitive for the jobs?

In an Op-Ed from 2014 titled “We need decent and worthy unemployments” I wrote: “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, as a minimum in the sense of these not interrupting those working.”

And over the years I have become convinced that in a universal basic income, large enough to help us out of bed to reach up to what is available, and low enough to keep us from staying in bed, lies our best chances to find the basic social stability we need to avoid societal breakdown,.

The financing of that UBI could include that those who exploit data on us citizens shared with us part of their ad revenues, a high carbon tax, and perhaps taxing robots and AI (though I do not know with how much)

PS. I case you wonder why some Swedes answered the question that has primarily to do with the existence in Swedish of the magical word “lagom”, meaning something like not too much not too little but just right. J

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

@PerKurowski

So if the taxman/(Big Brother) is now to get a share of the revenues some Big Tech obtain exploiting our personal data… who is going to defend us citizens?

Sir, you deem “The ability of some of the world’s most profitable companies to escape paying fair levels of tax…unfair both to other businesses which do not trade internationally and to governments, which lose substantial revenue” “France leads the way on taxing tech more fairly”, July 12.

It might be unfair to us taxpaying citizens but “unfair to the government”, what on earth do you mean with that? That sounds like something statist redistribution profiteers could predicate but, frankly, the government has no natural right to any income.

And since Big Techs like Facebook and Google obtain most of their revenues by exploiting us citizens’ personal data, then if there were some real search for fairness, a tax on ad revenues from such exploitation should better be returned directly to us, perhaps by helping to fund a universal basic income.

But what ‘s the worst with these taxes is that now effectively governments will be partners with these companies in the exploitation of our data. With such incentives do you really believe our interest will be duly defended? We, who are afraid of what all our data could feed with information a Big Brother government, must now recoil in horror from that we will also be suffering an even richer and more powerful Big Brother.

PS. Sir, it is not the first time I have warned you about this.

https://teawithft.blogspot.com/2018/03/our-need-to-concern-ourselves-about-use.html

https://perkurowski.blogspot.com/2019/05/i-have-some-ideas-about-what-could.html

@PerKurowski

Many or perhaps most of our bankers would be much better off, at least happier, if they heeded George Bank’s “Let’s go fly a kite!”

Sir, John Gapper refers to “Two academics who studied investment bankers in London were surprised by their degree of cynicism and noted the absence of ‘meaningfulness, emotions and personal investment in work values’. “Bankers have been alienated from their jobs” July 11.

Call me a romantic if you want but, I know that when bankers who felt proud of being savvy loan officers were, with the introduction of the risk weighted bank capital requirements, pushed aside by equity minimizing and leverage maximizing financial engineers, there had to be a lot of frustrations.

Imagine if you as a loan officer had analyzed in depth the plan an entrepreneur presented in his credit application; and you had gotten to know him well; and you had agreed on a risk adjusted interest rate that made sense for both of you, and then your superiors told you: “No we can only leverage our equity 12.5 times with this loan so you either get him to accept a much higher interest rate, or we’re not interested”… and you knew that higher interest rate doomed the viability of the project? Would you not then feel like our beloved George Banks, that you’d better go and fly a kite?

Sir, most of those who became bankers during the last three decades must have a very hard time understanding what “It's a Wonderful World" is all about.

@PerKurowski

The 0% risk weighting of sovereigns and 100% of citizens, decreed fiscal irresponsibility.

Sir, Martin Wolf, discussing Trump’s tax cuts writes that America’s longterm fiscal position [has become] fragile”, “Trump’s boom will prove to be hot air” July 10.

Fragile indeed. In 1988 when the Basel Accord assigned America’s public debt a 0% risk weight, its debt was about $2.6 trillion, now it owes around $22 trillion and still has a 0% risk weight. 

Wolf opines “it is not too soon to note where the US is heading. It is hard to imagine anybody standing up for fiscal prudence. The choice is rather between rightwing and leftwing Keynesians. In the long run, that is likely to end badly.”

I fully agree but I must add that the risk weighted bank capital requirements, which so much favors credit to the sovereign over for instance credit to entrepreneurs, created such distortions that made it impossible for markets to send out their timely warning signals.

One can argues as much as one like that the credit risk of the sovereign is much less risky than that of an entrepreneur, but, the other side of the coin of that risk weighting, is that it de facto also implies a belief in that government bureaucrats know better what to do with bank credit they’re not personally liable for, than entrepreneurs.

For instance, does Wolf believe the current fiscal sustainability outlook of for the eurozone sovereigns would be the same if there had been just one single capital requirements for all their bank assets? Would he think French and German banks would still have lent to Greece/Italy as much and at the interest rates they did?

Does Wolf not think the immense stimuli injected by central banks in response to the 2008 crisis, would have been much more productive without the distortions in the allocation of bank credit produced by the credit risk weighing?

Sir, Trump’s tax cuts might not be helpful but, in the great scheme of things Trump is, at least for the time being, a really minor player when it comes to be apportioned blame for fiscal fragility. For instance how is the US be able to get out of that 0% risk weight corner its regulators has painted it into?

Sir, In November 2004 you published a letter in which I wrote: “How many Basel propositions will it take before regulators start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

@PerKurowski

Does Christine Lagarde really know about the zero risk weighting of eurozone sovereigns bomb?

Sir, Anne-Sylvaine Chassany writes how Christine Lagarde was interrogated in 2016 about an incident while she was the finance minister in France, related to a vital memo she missed, and which led to herfailing in “preventing an allegedly fraudulent €403m state payout”. “Although spared prison and a fine, she was found guilty of negligence, though the court decided the conviction would not constitute a criminal record” “Lagarde’s lesson in how to deal with imposter syndrome” July 10.

That must have been a very uncomfortable experience for Ms. Lagarde. And in this respect I wonder if she has for instance read what Sharon Bowles the then European Parliament’s Chair Economic and Monetary Affairs Committee opined in 2011?

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, 2 May 2011 Bowles said: 

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

Sir, that was eight years ago… and Mario Draghi or anyone else did not defuse that bomb and so it is still ticking.

A zero risk weighting of any sovereign bond, for purposes of bank capital requirements anywhere is lunacy to me, as it de facto implies believing that government bureaucrats know better how to use bank credit they are not personally liable for, than for instance entrepreneurs. But, when it is assigned to sovereigns who take on debt denominated in a currency that is not their domestic printable one, as is the case in the eurozone, then it goes way beyond lunacy.

Anne-Sylvaine Chassany writes that againChristine Lagarde faces a chorus of doubters. Ms Lagarde is not a monetary policy specialist or an economist by training, skills which, in a perfect world, ought to be part of the job description to succeed Mario Draghi at the helm of the European Central Bank.

That is of little concern to me; there should be more than enough monetary policy specialist or economists and, seeing what many of them have been up to lately, perhaps even too many. 

But does Ms Lagarde really know what she is getting into? Does she really think she can help defuse that zero risk weighting for eurozone sovereign bonds bomb that, if it explodes, will take down the euro, and perhaps the European Union with it?

Someone should ask her that. That is many times more important than the vital memo she missed seeing. Why not the Financial Times?

But then again would anyone really be able to defuse that bomb?

PS. Perhaps the title of this should be "Does Christine Lagarde know she might be on a suicide mission?

@PerKurowski

Venezuela’s undernourished children urgently need a huge public debt into oil extraction conversion plan

Sir, Colby Smith and Robin Wigglesworth report that Venezuela’s “opposition government plans to hold all its foreign creditors to the same terms no matter the kind of debt held, which public entity issued it, and whether or not the creditor had previously gone to a courthouse and received a judgment.” But also “Claims connected to the alleged corruption of the Chávez or Maduro regimes will be excluded” as will be those presenting “pricing inconsistencies or pending arbitration claims [until] would investigated further” “Venezuela’s opposition sets out debt restructuring plans” July 4, 2019.

On that I agree, 100%. And Venezuela presents a golden opportunity for the citizens of the world, to be able to reach a clear definition on what should be considered odious credits, and to agree on their consequences.

But, what I do not see yet, is the real understanding that Venezuela’s most urgent problem is not debt restructuring, it is that its people are dying and foremost that its young are growing up undernourished.

Let’s face it; no matter how much humanitarian aid can come to Venezuela, the problems with lack of food, medicines and basic day to day needs will not be solved, until sufficient oil extraction generates sufficient oil revenues. And of course until sufficient oil extraction generates sufficient oil revenues, neither will there be enough money to pay off creditors.

So all my gut instincts, acquired by having actively and frequently participated in large debt restructurings in the private sector, but also by having promoted and completed projects of Venezuelan public debt to equity conversions into industry and tourism projects, tells me the following:

Venezuela needs to sit down with its creditors, today, and come up with a plan of how to convince qualified oil extractors to put their money into Venezuela and begin extracting oil as fast as possible. Of course for that to happen there would have to be a reasonable agreement on how to share the net oil revenues between oil extractors, creditors and the Venezuelan citizens.

I do not mention the Venezuelan government since I am convinced that the only way we Venezuelans can end up living in a nation, and not in somebody else’s business, is to have our government work exclusively with what we citizens provide it with by means of taxes. And because I have learned to utterly dislike redistribution profiteers, of all sorts.

That said of course I understand the need for some type of transition agreement, like a period in which more and more of those net oil and other natural resource revenues are turned over by the government to citizens. Like reaching 100% of it in ten years.

Sir, here's a tweet I have been sending out now and again for about two years: “So Venezuelans can eat quickly, hand over Pdvsa (and Citgo) to Venezuela’s creditors quickly, to see if they put all that junk to work quickly, to see if they collect something quickly, and pay us Venezuelans, not the bandits, our oil royalties quickly.

https://perkurowski.blogspot.com/2017/06/a-simple-but-complex-question-from.html”

PS. Instead of oil production I prefer to use the term oil extraction, since I feel that to be more respectful and grateful to that hand of the providence that placed oil under Venezuelan land.

PS. “Living in somebody else’s business” was how a woman from a Uganda described to me in 2013, her and our case.

https://theoilcurse.blogspot.com/2013/04/we-oil-cursed-citizens-we-do-not-live.html

@PerKurowski

Should we tax robots low so they work for us humans, or high so that we humans remain competitive?

Rana Foroohar references “a recent report into the US labour market conducted by the McKinsey Global Institute found that… the biggest reason for the declining labour share, according to the study, is that supercycles in areas such as commodities and real estate have made those sectors, which favour capital over labour, a larger part of the overall economy”, “The silver lining for labour markets”, July 1.

“Do we have a supercycles that favour capital over labour”? At least with respect to real estate, especially houses, the “supercycle” we have is caused by bank regulators much favoring credit to what’s perceived as safe over credit to what’s perceived as risky, without one iota of importance assigned to the need of allocating credit efficiently to the real economy.

Then Foroohar refers to the problem: “shifting labour market dynamics will sharpen the political divides that already exist. Many “left behind” cities are home to more Hispanics and African Americans. Job categories that will be automated fastest are entry-level positions typically done by the young. Meanwhile, the over-50s are at the highest risk of job loss from declining skills”. As “The solution” Foroohar writes; “shift policy to support human capital investment, just as we do other types of capital investment”

Sir, unfortunately it is so much more complicated than that. Just the problems with student debts we currently hear about, evidences that we might not really know about how “to support human capital investments”.

Before social order breaks down, we need to start considering the need to generate decent and worthy unemployments, creating an unconditional universal basic income that serves somehow as a floor and decide what to do with AI and robots. Should we tax these low enough so that they do as much jobs as possible for us humans, or should we tax them high enough for us humans to remain competitive for the jobs they do?

PS. On “a mere 25 cities and regions could account for 60 per cent of US job growth by 2030”, may I venture those cities will not include those with the largest unfunded social benefit plans.

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

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

http://myubi.blogspot.com/2017/01/my-universal-basic-income.html

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

@PerKurowski

Bank capital requirements based on credit risk serves no purpose, based on fighting climate change does.

Sir, Ben Caldecott writes: “The UN’s Sustainable Development Goals and the Paris climate change agreement will be unattainable unless banks finance solutions to these massive social and environmental challenges.” “Banks need a better climate change strategy” July 1st.

The current risk weighted capital requirements for banks are idiotic since these are based on the assumption that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe. But these are also totally purposeless. I do not really favor this type of distortion but there’s no question banks would serve a better purpose if their capital requirements were based, not on credit ratings, but on Sustainable Development Goal ratings.

Obviously such capital requirements would automatically generate “loans that charge lower interest rates to borrowers who meet or outperform sustainability targets” just as the current ones generates lower interest rates to the sovereign and “the safe”, all paid by less and more expensive credit to “the risky”

Of course it would be of utmost importance in that case that the SDG rating agencies are not captured by any of the climate change fight profiteers that abound.

That said, before any climate change fight initiative, including the Paris agreement, what would be most effective is a high carbon tax, with all its revenues shared out equally to all citizens. Why has that not been implemented yet? The simple answer is that because for states that lives on cronyism that is of absolutely no interest.

Sir, if the world is to have a chance to afford successfully fighting climate change, or at least afford to mitigate some of its worst effects, we have to circle all our wagons in an effort to keep out of it all those who are just out to make monetary or political profits.

http://ourpiedaterre.blogspot.com/2015/04/my-proposal-for-this-earth-day-2015.html

@PerKurowski

FT, Western liberalism might not be obsolete but it sure isn’t what it was a couple of decades ago.

Sir, with respect to Vladimir Putin’s recent claim — “that liberalism is obsolete” you opine his “triumphalism is misplaced. Not all of liberalism is under threat. The superiority of private enterprise and free markets — at least within individual nations — in creating wealth is no longer seriously challenged.” “No, Mr Putin, western liberalism is not obsolete” June 29.

You are only partly right, because nowadays-Western liberalism is not what it was. 

When regulators allow those that are perceived, decreed or concocted as safe, to be able to offer their risk-adjusted interest rates to banks leveraged many times more than those perceived as risky, as has been the case since 1988, that has absolutely nothing to do with free markets.

And assigning for the risk weighted bank capital requirements a 0% risk weight to sovereigns, and one of 100% to citizens, has nothing to do with “superiority of private enterprise” either. Those risk weights de facto imply that bureaucrats know better what to do with bank credit they are not personally liable for, than private sector entrepreneurs, and that has much more to do with statist a la Putin regimes.

@PerKurowski

Compared to the Basel Committee’s, Thomas Gresham’ manipulations seem minor.

Sir, Jerry Brotton in reference to John Guy’s biography of Thomas Gresham “Gresham’s Law: The Life and World of Queen Elizabeth I” quotes Guy in that “Gresham’s financial achievements werea harbinger of a world to come: one in which national sovereignty is answerable to the machinations of the market”. “Man with the Midas touch” June 21.

Greshham“halved the national debt in nine months in a remarkable manipulation of Europe’s markets that would dazzle today’s Brexiters”

I am not so sure of that. Slightly more than 400 years later, in 1988, with the Basel Accord, for the purpose of risk weighted capital requirements, banks regulators managed to impose on a clearly not alert enough world, a risk weight of 0% for their sovereign and 100% for the citizens.

The resulting ability of banks to leverage so much more their equity with sovereign debt, reduced the risk adjusted interest rate they charged sovereigns and, of course made them so much more willing to lend to the sovereigns. More than thirty years have gone by, and yet there is almost no questioning of that 0% risk weight, be it by Brexiters, Remainers or financial journalists. 

Sir, I am certain that had Gresham heard about this for him most surely a feat, he might consider his achievements minor in comparison.

@PerKurowski

To explain the 2008 financial crisis a two pieces puzzle could suffice.

Sir, Tim Harford writes, “Raghuram Rajan, when he was chief economist of the IMF, came closest to predicting the 2008 financial crisis. He later observed that economists had written insightfully on all the key issues but had lacked someone capable of putting all the pieces together”, “How economics can raise its game” June 29.

According to 2004’s Basel II, a corporate rated AAA to AA, could offer banks to leverage their equity 62.5 times (100%/(8%*20%)) with its risk adjusted interest rate, while one rated BB+ to BB-, or not rated at all, could only offer banks to have their risk adjusted interest rate leveraged 12.5 times (100%/(8%*100%))

Sir, I am not arguing whether it is better to be a hard or a soft economist but, any economist looking at that proposition and not seeing it would cause serious misallocation of bank credit, should either go back to school, perhaps to take some classes on conditional probabilities, or go out on Main-street, and learn a bit of what real life is about.

62.5 times leverage? What banker could dare resists that temptation and stay out of competition thinking, what if that AAA to AA rating is true?

PS. That leverage applied for European banks and US investment banks supervised by SEC.

@PerKurowski

Current bank regulators are closer to a Vladimir Putin type of regime, than to any possible Western world liberal idea.

Sir, I refer to Lionel Barber’s and Henry Foy’s interview with Vladimir Putin. ‘The liberal idea has become obsolete’ June 28.

Putin is quoted with that “the liberal idea” had “outlived its purpose”.

Sir, there are way too many interpretation of what is “the liberal idea” to know for cartain what is meant by it. That “liberal idea” flag is often waved for quite opposite positions, like more or less government intervention, to assure more or less personal freedoms… to guarantee more or less some human rights… and so on. I guess “liberal” is also something in the eye of the beholder. 

But to me my kind of “liberal idea” took a deep dive, in 1988, with the Basel Accord, one year before the fall of the Berlin wall. Because that accord, Basel I, introduced risk weighted bank capital requirements, which decreed a 0% risk weight to the debts of some friendly sovereigns, and 100% to citizens’ debts.

That de facto implied a belief that government bureaucrats know better what to do with credit they are not personally liable for, than for instance our entrepreneurs. That de facto has much more to do with a Vladimir Putin type of regime, than with any possible Western world liberal idea.

@PerKurowski

In the Eurozone’s sovereign debt mine there is a choir of canaries going silent but, seemingly, that shall not be heard.

Sir, Gideon Rachman concludes, “Almost all of the modern threats — from a resurgent Russia to climate change and trade wars — are much easier for Britain to deal with, by using the collective strength of the EU.” “Brexit is an idea left over from a bygone era” June 25, 2019.

That is correct, but only if we exclude mentioning the problems within Europe. I refer specially to the sovereign debt bombs that are ticking within the Eurozone, the agents of “the EU’s most federalising project — the euro.”

Yes, that Germany “is stubbornly resisting demands from Brussels and Paris for deeper economic union” does surely not help but the real problem is that the biggest problem with the Euro, is not really acknowledged. 

When Greece turned into a dead coalmine canary, how much discussion were there about the fact that EU authorities had assigned Greece, as to all other Eurozone sovereigns, for purposes of bank capital requirements, a 0% risk weight? And that 0% risk weight was decreed even though all Eurozone sovereigns contract debt denominated in a currency that de facto is not their own domestic printable one.

Basically no discussion at all even though that 0% risk weight guarantees European banks are going to lend way too to the Eurozone’s sovereigns. Greece was small and ended being forced by ECB to walk the plank. But if Italy’s debt bomb explodes would it accept doing so? I doubt it.

Sir, to be a Remainer without requesting from EU a clear plan on how to defuse that still ticking debt bomb that could take the Euro down and perhaps the EU with it, seems not to be a very respectful position either.

@PerKurowski

To have Green bonds really take off, the market signals must better assure the Green projects’ profitability.

Sir, Siddarth Shrikanth writes:“Estimates suggest that a mere 5 to 10 per cent of green-bond proceeds have gone towards funding biodiversity conservation projects, as the vast majority flows in to energy, buildings and transport”. “Green bond issuance leaves the planet’s wildlife behind” June 22.

The explanation to that is that it is obviously easier to construct a credible scenario for the investors’ to recover their investments, something that, no matter how good Green bonds investors’ intentions are, most of them want to do.

So, if we really want “Green bonds” to take off, these must be supported with strong market signals that helps the Green projects to be profitable, bettering the chances of the bonds being repaid.

In that sense, except from perhaps except it from all taxes, I have no clue as to what could be done with “blue bond” aimed at supporting sustainable fisheries. What I do know though is that, very high carbon taxes, with all its revenues being distributed equally back to the citizens, would signify a huge boost for the biggest majority of Green bonds.

What stands in our way in that respect, are the Green-fight and the redistribution profiteers refusal to give up one cent of their desired franchise value.

Sir, I say it again and again, if we are not able to keep the climate change fight profiteers away, we won’t be able to afford the fight against climate change. Hell, we will not even afford to mitigate some of its consequences.

@PerKurowski

How do you square negative rates with a 0% risk weight?

Paul Horne writes, “It must be a fairly dire outlook to persuade investors to pay eurozone governments to hold their capital even as there must be doubt about Bunds and French OATs being the “safest” of investments at today’s prices.” “Investors need to be aware of the other bond bubble” June 21.

Indeed, but given the redenomination risk that would exist if the still ticking 0% Risk-Weight Sovereign Privilege assigned to Eurozone’s Sovereign bomb explodes, I guess investors might prefer being paid with Deutsche Marks than with Liras or Drachmas.

@PerKurowski

A real review of UK’s financial system requires breaching the etiquette rules of a mutual admiration club

Sir, I refer to Huw van Steenis’ “An opportunity for the Bank of England to rethink its priorities” June 21.

Is he really recommending among other for banks to “use machine learning”, so that they can better cope with even more voluminous regulations…like that on climate change that has become so fashionable nowadays?

Well no Sir. “A review of the UK’s financial system to strengthen the BoE’s agenda, toolkit and capabilities” should, foremost, include a review of the credit risk weighted bank capital requirements. 

That could start by asking Mark Carney, why do you believe that what is perceived as risky is more dangerous to our bank system than what is perceived as safe.

You could follow it up with: Does the use of this not guarantee especially large bank crisis, caused by especially large exposures to what was perceived (or decreed, like the Eurozone sovereign's 0% risk weight) as especially safe, and ended up being especially risky, against especially little capital?

You could follow it up with: Favoring so much bank lending to the safer present over that of the riskier future not risk weaken our real economy? 

But of course, asking those questions and similar that shall not be asked is not comme il fautin the central-bankers’ and regulators’ mutual admiration club.

Sir, one single capital requirement 10-15% on all bank assets would serve us much better than the BoE’s entire current rulebook, distorting less the allocation of credit and bringing back into banking all that “risky” activity that has been expelled by regulators to be handled by other intermediaries. 

But how would then ten thousands of regulators justify their salaries? 

PS. My letter to the Financial Stability Board

@PerKurowski

If a firefighter had seen an explosive artifact, and not done anything in four years to defuse it, would he still be a paid firefighter?

Sir, as you might understand from my many letters to you I agree with most of what Ian Hirst opines on Martin Wolf’s article (“Weidmann casts a shadow over the ECB”, June 13) “ECB must end conjuring tricks and begin a structural overhaul” June 19.

Sadly though, no matter how “rock solid the political support for the euro is, it might already be too late, even for Jens Weidmann, to do all that needs to be done to correct the mistakes Hirst hints at.

Hirst writes: “As Mr Wolf points out, the German public, in particular, need to be told some home truths. The euro has greatly benefited their economy (while greatly damaging competitors in southern Europe). It does not work without some transfer and debt support elements, mainly funded by Germany and the Netherlands.”

100 percent correct but I ask, are they able to manage the whole truth? Included that of German banks being able to hold loans to for instance Greece and Italy against zero capital while being required to hold eight percent in capital or so when lending to an unrated German entrepreneur?

Sir, in March 2015 Mario Draghi wrote the foreword to an ESRB report on the regulatory treatment of sovereign exposures. In it he said “The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. [It} recognizes the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets, as well as the intrinsic difficulty of redesigning regulations so as to produce the right incentives for financial institutions… I trust that the report will help to foster a discussion which, in my view, is long overdue.”

PS. “Long overdue”? We are now in June 2019 and I ask, has the Financial Times seen Mario Draghi or the ECB doing anything about the still ticking 0% Risk-Weight Eurozone Sovereign Debt Privilege bomb? 

PS. "the current regulatory framework may have led to excessive investment by financial institutions in government debt" March 2015. Why did it take so long and why did they need research to only suspect that?

The still ticking 0% Risk Weight Sovereign Debt Privilege bomb awaits Mario Draghi’s successor at ECB

Sir, Martin Wolf, sort of implying Mario Draghi followed his recommendations, which of course could be true, holds that “Draghi did the right things, above all with his celebrated remark in July 2012 that ‘within our mandate, the ECB is ready to do whatever it takes to preserve the euro’”. “Jens Weidmann casts a shadow over the ECB” June 11.

Did Draghi resolve that crisis for the better, or did he just postpone it for the worse?

That’s is not at all clear. In March 2015 the European Systemic Risk Board (ESRB) published a “Report on the regulatory treatment of sovereign exposures.” Let me quote from its foreword:

“The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognizes the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion that, in my view, is long overdue.” Signed Mario Draghi, ESRB Chair

The regulatory aspect that report most refers to is, for purposes of risk weighted capital requirements for banks (and insurance companies), the assignment of a 0% risk weight to all Eurozone sovereigns. 

Though the report states that: “Sovereign defaults… have occurred regularly throughout history, including for sovereign debt denominated and funded in domestic currency”, it does not put forward that all these eurozone sovereign debts are denominated in a currency that de facto is not a domestic printable one of any of these sovereigns.

Since Mario Draghi seems to have done little or nothing since then to diffuse this 0% Sovereign Debt Privilege bomb, which if it detonates could bring the euro down, and with it perhaps EU, this is the most important issue at hand. 

So when choosing a candidate to succeed Draghi as president of ECB the question that has to be made is whether that person is capable enough to handle that monstrous challenge. Who is? Jens Weidmann? I have no idea.

Sir, it would be interesting to hear what Martin Wolf would have to say to the new president of ECB about this. What would a “Do what it takes” imply in that case? 

PS. And when Greece was able to contract excessive debt precisely because its 0% risk weight should not the European Union have behaved with much more solidarity, instead of having Greece walk the plank alone?

PS. If I were one of those over 750 members of the European Parliament here are the questions I would make and, if these were not answered in simple understandable terms, I would resign, not wanting to be a part of a Banana Union.

PS. "The current regulatory framework may have led to excessive investment by financial institutions in government debt." Really?

PS. Is there a way to defuse that bomb? Perhaps but any which way you try presents risks. One way could be to allow all banks to continue to hold all eurozone sovereign debt they current posses, against a 0% risk weight, until these mature or are sold by the banks; and, in steps of 20% each year, bring the risk weight for any new sovereign debt they acquire up until it reaches 100%... or more daringly but perhaps more needed yet set the risk weight for any new sovereign debt acquired immediately to 100%, so as to allow the market to send its real messages. 

The same procedure could/should be applied all other bank assets that currently have a risk weight below 100%, like for instance residential mortgages.

Would it work? I don’t really know, a lot depends on how the market prices the regulatory changes for debt and bank capital . But getting rid of risk weighted bank capital requirements is something that must happen, urgently, for the financial markets to regain some sense of sanity.

PS. An alternative would be doing it in a Chilean style. Being very flexible with bank capital requirements, even accepting 0%, even having ECB do repos with banks non-performing loans: BUT NO dividends, NO buybacks and NO big bonuses, until banks have 10% capital against all assets, sovereign debts included.

PS. I just discovered that Sharon Bowles, MEP, 
Chair Economic and Monetary Affairs Committee
 of the European Parliament, in a speech titled "Regulatory and Supervisory Reform of EU Financial Institutions – What Next?
 at the Financial Stability and Integration Conference,
 2 May 2011, said the following:

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

That is very clear warning that something is extremely wrong... and yet nothing was done about it.

PS. And in 2015 the European Commission also described the problem with the zero-risk weighted sovereign debts within the eurozone.

PS. https://perkurowski.blogspot.com/1998/11/burning-bridges-in-europe.html

PS. In Financial Times 2004: “How long before regulators realize the damage, they’re doing by favoring so much bank lending to the public sector? In some countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits”

The empowerment of the Bureaucracy Autocracy

“Assets for which bank capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

@PerKurowski

America, warning, industrial policy fertilizes crony statism

Sir, Rana Foroohar argues that America has chosen “to support a debt-driven, two-speed economy rather than one that prioritises income and industry” “Plans for a worker-led economy straddle America’s political divides” June 9.

“Debt-driven” indeed, but that has mostly been by prioritizing the safety of banks and the financing of the government.

In 1988 the Land of the Free and the Home of the Brave signed up to a statist and risk adverse bank regulation system. The Basel Accord favors “the safer present”, for instance lending to the sovereign and financing the purchase of houses, over that of “the riskier future’, like lending to entrepreneurs. 

In 1988 when a 0% risk weight was assigned to it, the US debt was $2.6Tn. Now it is $22Tn, and still has a 0% risk weight. And just look at how houses have morphed from being homes into being investment assets.

There’s no doubt the report issued by Marco Rubio, as the chair of the Senate small business committee, is correct in that “the US capital markets had become too self-serving and were no longer helping non-financial business... and that public policy could play a role in directing capital to more productive places — away from Wall Street, and towards Main Street.”

But that does not mean the US, in order to “successfully compete with state-run capitalism” like China, has now to turn to industrial policy and thereby risk being captured by even more crony statism.

Regulators assigned a 20% risk weight to what, because it has an AAA rating could really create dangerous levels of bank exposures, and one or 150% to what is below BB- rated, and which banks do usually not want to touch with a ten feet pole. So why should we believe that governments who appoint such regulators, have better ideas than the market on how to funnel capital to the most productive places, connecting the dots between job creators and education.

Therefore the public policy most urgently needed is that of freeing America (and the rest of the world) from that public policy distortion of the allocation of bank credit, that which builds up dangers to the bank system, and weakens the real economy.

PS. Germany has benefitted immensely from so many eurozone nations helping to keep the euro much more competitive for it than what a Deutsche Mark would be. Therefore it is not really correct to bring up the “success” of Germany as an argument in favor of more state intervention.

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

There are issues much more important for the future of the euro and the EU than who becomes Draghi’s successor at ECB

Sir, Wolfgang Münchau holds that “Draghi’s successor needs intellectual curiosity and a willingness to admit errors” “How not to select the next ECB president” June 3.

Of course, that should be a sine qua non quality of all candidates. The real problem though is that anyone chosen to become the new president of ECB could get trapped in a web of groupthink, and solidarity requirements, which impede the admittance of the mistakes.

Therefore, before choosing the next president some questions vital to the future of the euro and EU need to be made, not only to denounce mistakes, but to listen what the candidates have to say about it.

For instance if I was a newly elected first time European Union parliamentarian, at the first opportunity given I would ask: 

Fellow parliamentarians: I have heard rumors that even though all the Eurozone sovereigns take on debt denominated in a currency that de facto is not their own domestic printable one; their debts, for the purpose of the risk weighted bank capital requirements, have been assigned a 0% risk weight by European authorities. Is this true or not?

If true does that 0% risk weight, when compared to a 100% risk weight of us European citizens not translate into a subsidy of the Eurozone sovereigns’ bank borrowings or in fact of all Europe's sovereigns?

If so does that not distort the allocation of bank credit in the sense that sovereigns, like Greece, might get too much credit and the citizens, like European entrepreneurs, get too little? And if so would that not signify some regulators, behind our backs, have imposed an unabridged statism on our European Union?

If so, does that not mean that some Eurozone sovereign could run up so much debt they would be seriously tempted to abandon the euro and thereby perhaps endanger our European Union?

Colleagues, I do not know who should answer us these questions, but the candidates to succeed Mario Draghi as president of ECB, should they not at least give us their opinions on it?

@PerKurowski