It is way overdue FT stops thinking of Brexit solely as a disastrous defeat, and starts exploring its opportunities

Sir, I refer to Wolfgang Münchau’s “The shock that will shift a nation’s business model” October 10.

Indeed it is long way overdue that at least some of you in FT stop the crying and begin thinking about Brexit not as an unqualified defeat/disaster, but as an opportunity.

But let me be clear. When Münchau mentions the need for “a shift in the direction of the UK economy away from transactional capitalism towards a more inclusive version of a free-market economy”, that begins precisely by throwing out the Basel Committee’s risk weighted capital requirements for banks.

That single piece of regulation, which turned banks away from maximizing returns on equity by means of banking, into doing so by means of capital (equity) minimization; and all based on avoiding ex ante perceived, decreed or concocted risks, has been about as damaging to the real economy as anything I can think of.

But Sir, to recognize that after ignoring the literally thousands of letter I have sent you on that subject, would of course require FT to eat loads of humble pie. Are you without fear and without favour enough to do that?

@PerKurowski ©

Do we also need the possibility of clawbacks or prison to concentrate the minds of bank regulators?

Sir, Harvey Clark Greisman, when discussing Gillian Tett’s “Clawbacks emerge as a vital weapon in finance”, September 30, argues: “The only penalty that will concentrate bankers’ minds is prison”, October 10.

And what about regulators? If ever submitted to public shaming, could that suffice? 

How do we keep them from doing such insane things as regulating banks before clearly defining the purpose of the banks? 

How do we keep them from imposing capital requirements in order to make banks safe without one single empirical study on what has caused major bank crises in the past?

How do we keep them foremost concerned with doing no harm?

How do we keep them from committing the list of horrendous mistakes contained in the following aide memoire?

@PerKurowski ©

Ask European SMEs and entrepreneurs if they believe Europe is overbanked?

Sir, I refer to Claire Jones’ and Martin Arnold’s “Bankers signal alarm over Eurozone lenders” October 10.

If were an SME or an entrepreneur, not being able to access the opportunity of the bank credit I need for me to have a chance to fulfill my dreams, I would be furious and desperate if hearing Sergio Ermotti, chief executive of UBS say “Europe is in a huge overcapacity situation, with a combination of private sector and public sector banks and quasi-public sector banks that have been allowed to compete”. 

Gary Cohn, president and chief operating officer of Goldman Sachs is also quoted with, in comparison to Europe and elsewhere with that the US banking sector was “in the best shape ever”. Nonsense, the real strength of any banking sector is a 100% function of the strength of the real economy they depend upon; and few would hold that the US and world economy “in the best shape ever”. That type of affirmation can only come from someone who believes the real economy should be serving the banks, and not caring one iota for need of the banks serving the real economy.

And Nigel Vooght, global head of financial services at PwC, the consultancy is quoted with”: “Banks need to wake up and start to react, because they are an integral part of society, but they don’t have a divine right to be here . . . All the banks are trying to switch from an interest rate-based model to a fee-based model.”

I totally disagree. Banks have, thanks to regulators, not been pursuing “an interest rate-based model” but an interest rate-based capital minimization model. If they are to be an integral part of society, switching from interest rates to fees will just not cut it. Banks need to realize that their fundamental role is to allocate credit efficiently as possible to the real economy, and that’s just not possible using different capital requirements based on ex ante perceived credit risks. 

@PerKurowski ©

Let robots make us an offer we can’t refuse, for us to allow them to supplant us; perhaps a Universal Basic Income?

Sir, Simon Kuper writes about “How to cope when robots take your job” October 9.

Before I got censored, there too, in 2012, in an Op-Ed in Venezuela titled “We need worthy and decent unemployments” I wrote: “What politician does not speak up for the need to create decent and well paid jobs for young people? But, if that's not possible, and the economy is not able to deliver that on its own ... What on earth are we to do?” 

And I followed that up with “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 so perhaps not only journalists but all other who end up unemployed because of robots too, should require those employing robots to pay a out a Universal Basic Income, as a quid-pro-quo for us allowing these to supplant us. Or if they have better ideas, let the robots themselves make us an offer we can’t refuse.

Ideally that could allow many to operate on the fringe margins of earnings, allowing them to keep busy with what they most like to do.

For journalists the alternative could be to get really creative so as to obtain some ad income from a story that goes viral. Sadly, in that case, the temptations of sacrificing truth in order to gain virality might prove to hard to resist… as we already see happening more and more, here and there and everywhere.

PS. Look at it this way. If robots send us into early retirement, should not robots pay taxes too? Should not the employers of robots have to pay payroll taxes for these? That could help to fund our Universal Basic Income. And that could also help us humans to compete with the robots for jobs on a more level playing ground. 

PS. A Universal Basic Income is a step-ladder that will allow us to reach up easier to the gig-economy.

PS. If then taxing robots funds our living by means of a Universal Basic Income, could we all become a robots owning gentry,  reading and writing poetry like Jane Austen’s landed gentry?

PS. Where does Donald Trump suggest we build the wall against the robots who threaten American jobs, and who is going to pay for it?

P.S. How many jobs have robots taken from humans only because robots are not subject to minimum wages and payroll taxes?

PS. Soon unemployed PhD’s will not even be able to drive taxis in New York, as driverless cars will be deemed safer.

PS. I have been concerned with growing structural unemployment for a long time, like to the point of suggesting It's time to just scratch each other's backs.

PS. By the way, in all statistics on employment, where can we find information on how many robots gained employment, for instance in the USA during the last quarter of 2016?

PS. When playing the employment game, humans & robots face same par salary, but robots count with extra payroll tax handicap strokes

PS. Grandparents, can you imagine the horrors if your grandchildren come to depend on dumb artificial intelligence and on 3rd class robots?

PS. I anställning spelet, har både mänskor och robotar samma par lön, men robotar har 31,34% extra arbetsgivaravgift slag.

PS. Here some disorderly lose cannon questions about life in the just around the corner Robot/Automation La-La-Land

PS. Dwindling workforces puts the International Labour Organization (ILO) at a crossroad: To unionize unemployed or robots?

PS. At what rate should we tax robots? A very high one in order to make us humans more competitive, or a fairly low one to allow robots to do as much heavy lifting as possible for us in our economy?

@PerKurowski ©

I would not shed tears for the Basel Committee for Banking Supervision’s demise. Neither would millions of SMEs.

Sir, Caroline Binham and Jim Brunsden, with help of Laura Noonan, report that the Basel Committee for Banking Supervision is introducing reforms that include a contentious “output floor” that would limit banks’ ability to use their own internal models to assess risk. “In many cases this will effectively raise the amount of capital that banks have to hold” “Basel group warns of call for lenders to ramp up capital” October 8.

What do they mean with “in many cases”? How can anyone believe all banks authorized to use internal models do not use these to minimize the capital they need to hold …so that they can maximize their returns on equity?

Sadly, what is really contentious with all this, is how on earth we ended up with such infantile regulators.

Anyhow the authors report these reforms are creating some discord between the US and Europe; to such an extent it “tests the viability and purpose of the Basel group, founded 41 years ago to harmonise banking rules around the world.”

Sir, if that would signify the end of the Basel Committee, you know I will not shed a tear. Neither would the millions of SMEs and entrepreneurs who over the years have been denied fair access to bank credit, if they finally came to realize that was a direct consequence of Basel’s regulatory discrimination. 

Knowledgeable bank regulators know below BB- rated assets are risky. Wise ones know what’s AAA rated is dangerous. The world is overdosing on information and knowledge and it sorely needs more wisdom.

PS: Here is an aide memoire on the regulatory monstrosity of the risk weighted capital requirements for banks.

@PerKurowski ©

Current central bankers are just as lost as Greenspan and friends were lost before 2008, for exactly the same reason

Sir, Sebastian Mallaby when discussing the “alarming froth” in asset prices like shares, bonds and houses, due to “extraordinarily loose monetary policy”, but yet producing “low growth and low inflation” writes: “A … troubling echo concerns the role of regulation. If financiers seem to be taking too much risk, today’s doctrine holds that regulation should restrain them.” “Bubbly finance and low inflation cause alarm” October 8.

NO! NO! NO! Today’s regulations hold that banks should be taking on too much safety. Banks are not allowed to build up dangerous exposures to what is perceived as “risky”, like for example the below BB- rated, which has been assigned a risk weight of 150%; but banks are sure allowed to leverage immensely their capital, and the support they receive from society, with assets rated AAA to AA, risk weighted a mere 20%.

And, if the banks are big and “sophisticated” enough, then they are even allowed to use their own risk models even if, by definition, banks are always interested in minimizing their capital requirements so as to allow them to maximize their expected returns on equity.

There must be something in the air that stops expert central bankers from reaching out to their inner common sense and be able to understand how loony current bank regulations are.

The risk-weighting completely distort the allocation of bank credit to the real economy, making banks ignore their vital role in financing the “riskier” future, and having them to concentrate solely in refinancing the “safer” past. That dooms the world to gloom and doom or as they prefer to call it, to secular stagnation.

And all for nothing! Major bank crises never ever result from excessive exposures to what is ex ante perceived as risky; these always result from unexpected events or from excessive exposures to what was ex ante erroneously thought to be very safe.

@PerKurowski ©

Risks, even if perfectly perceived, can lead to very wrong actions if excessively considered

Sir you write: “as the expansion of world trade has slowed over the past few years, familiar warnings about the political risks to growth have re-emerged… The International Monetary Fund warned this week that political risk was one of the biggest threats to the world economy… But unless and until these political risks materialise, there is no need to panic about trade, and the best way of keeping it expanding is simply to encourage overall economic growth” “The IMF sends a signal on political risk realities” October 6.

That is entirely correct Sir. Risks, even if perfectly perceived, can lead to very wrong actions, if excessively considered. But Sir, why do you refuse to apply that kind of argument to current bank regulations?

There we had the banks perceiving credit risk, some doing it well an others less so, and then deciding on what amount of exposure they wanted, and what interest rate, risk premium, they would charge. But NO! that was deemed insufficient by the meddling and nervously nannying technocrats in the Basel Committee, and so they invented that they should also react to the same risk perception, and set the capital a bank should have against an asset accordingly. And so credit risk (or credit safety too) got to be excessively considered, which has completely distorted the allocation of bank credit to the real economy.

But not a word is spoken about this; probably because it is all backed by some very hard to understand risk management concepts that few dare to discuss. And so now we have for instance ended up with the absurdity of having what can really grow into dangerous excessive bank exposures, like the AAA to AA rated, being risk-weighted at 20%, while the totally innocuous below BB-rated get a 150% risk weight. Sheer lunacy!

So now, ironically, in order for bank credit to be efficiently allocated to the real economy; and not endanger the banking system’s stability, the perceived risks need to be wrong. What is “safe” must be perceived riskier and what is “risky” must be perceived safer. 

PS. An aide mémoire on the loony risk weighted capital requirements

@PerKurowski ©

Before redistributing wealth, we owe it to the poor to give them the best opportunities to make it rich on their own

Sir, Deborah Hardoon of Oxfam, when commenting on the latest World Bank study writes: If world leaders want to stamp out extreme poverty they need to ensure that the poorest get a fairer share of economic growth. “Poorest receive an even smaller piece of the pie” October 5.

No one could argue with that. And yes, quite often there is no alternative than to redistribute income and wealth; though in that case, in order to keep the redistribution profiteers at bay, I much rather prefer a Universal Basic Income scheme.

But, before any redistribution, we must exhaust all possibilities for the poor to have the opportunity to achieve, on their own, a fairer share of the economy. And that, besides for instance the chance to having the best education possible, includes having fair access to bank credit, something which they are currently denied.

The risk weighted capital requirements for banks; less capital for what is safe; like the past, the rich, the sovereign, the AAArisktocracy - and more capital for what is risky; the future, the poor, the unrated We the People, only decrees inequality.

Anyone once informed about this, and that then keeps quiet on such odiously discriminating bank regulations, becomes to me a suspect of following a business or political model that depends on growing inequality. Impossible? Am I exaggerating? I don’t think so. I come from a country, Venezuela, where we have actually heard some government affiliates arguing “we need to keep them poor so as not lose control over them”.

PS. Let me in on a little secret; the more poor that become rich, the better for us all!

@PerKurowski ©

The Basel Accord’s statism and misregulation trumped all neoliberalism and deregulation

Martin Wolf writes: “banks remain highly fragile businesses. By their nature, banks are highly leveraged entities with ultra-liquid liabilities and far more illiquid assets…What remains disheartening is that shareholders and a few small fry among the employees have been punished, but the decision makers who ran these institutions have escaped more or less unscathed.” “Deutsche Bank offers a tough lesson in risk” October 5.

Wolf is totally correct on that! But, may I ask, what about the responsibility of regulators who, against all common sense, allowed banks to leverage their equity and the support they received from society; limitless when lending to its own or to a friendly sovereign; over 35 to 1 when financing residential mortgages; and 62.5 to 1 only because a human fallible agency rated a creditor AAA to AA?

There’s been absolutely nothing of holding those regulators accountable, worse yet they are still in charge of the most important monetary policy decisions.

And what about the responsibilities of leading opinion makers like Martin Wolf himself, when they refuse to acknowledge the extremely serious distortions in the allocation of bank credit to the real economy risk weighted capital requirements for banks produce?

I am currently reading Philip Ther’s interesting “Europe since 1989”. Already I do not how many times in the very first chapters I have seen neoliberalism and deregulation mentioned. What a difference a year makes! Had Ther began his history in 1988, he might have had to include the Basel Accord with its risk weights of 0% for the Sovereign and of 100% for We the People. Frankly, when all is said and done, the Basel Accord’s statism and miss-regulation has trumped all neoliberalism and deregulation.

As for the Deutsche Bank, its best chance for a sturdier future, lies in regulators telling all banks to abandon the business model of maximizing returns on equity by minimizing capital that their regulations promoted.

Let us pray, for our children’s and grandchildren’s sake, that banks return soon to earn their returns on equity by evaluating risk adjusted interest rates and size of exposures, without any considerations to capital requirements.

@PerKurowski ©

Regulators must now help banks escape the business model of capital minimization their distortive regulations created

Sir, Richard Blackden, while discussing European banks, writes: “Their return on equity (RoE) — a common measure of a lender’s performance — has been hit by regulators’ demands that they hold more capital.” “European banks still out in the cold” October 4. 

If banks had to hold the same amount of capital against any asset (as they de facto used to), then banks could do traditional banking, which was investing without distortions in the assets that offered them the highest risk adjusted margins.

Currently banks can’t do that because, with the risk weighted capital requirements, the risk adjusted margin of an asset, has now to be placed in perspective of how much capital is required against it. And so banks have become used to maximize their risk adjusted returns on equity, not so much by banking in the traditional sense, but by minimizing capital.

Of course just generally increasing capital requirements, while leaving a part of the risk weighting distortions in place, makes it much harder for the banks and the markets to understand and adjust to new realities.

Therefore, the faster regulators rid the banking sector of the risk weighting distortions, and impose one single capital requirements for all assets, the better for banks and, even more important, the better for the real economy.

I am sure investors would love to invest in banks that were made to operate and compete as banks in the traditional sense.

This world were you can now read about a bank’s common equity tier one ratio being for instance 10.8 per cent; something which could seem indicative of a leverage of less than 10 to 1; only to find out the real leverage could for example be over 30 to 1; and this only because some regulators wanted for him and you to have better information, is too damn confusing for any normal investor that could have wanted to have some bank shares, in his conservative portfolio.

@PerKurowski ©

Banks, like Deutsche, to survive, need to move out of that artificial regulatory world of equity minimization

Sir, I refer to David Marsh’s narrative on Deutsche Bank’s troubles “German banking woes reflect shattered ambition and Schadenfreude” October 3.

There Marsh writes: “Throwing off its traditional conservatism, Deutsche Bank has moved into a realm of risk-taking where recklessness has ridden roughshod over rectitude”

Not exactly so. Deutsche Bank, like many, really like most banks, was moved into the=at artificial world created by regulators of avoiding risk-taking, since then it needed less capital, since then it thought it could earn the higher expected risk adjusted returns on equity that the market had been made to believe it should expect.

Before there is full understanding of the distortions that the credit risk weighted capital requirements for banks cause, there is little chance of finding sustainable solutions for the banks (and for the real economy).

Sir, there are many Deutsche Banks in waiting, just that they don’t know it, they just keep dancing to that lousy music the Basel Committee and the Financial Stability Board plays to them. As I have written to you many times before, banks must begin to maximize their returns on equity with banking, not with bank equity minimization.

@PerKurowski ©

Regulators irresponsibly weighted and loaded the dices against risky SMEs’ having fair access to bank credit

Sir, Tim Harford discusses George Cockcroft’s novel The Dice Man, in which “the narrator Luke Rhinehart decides to hand his life over to randomness. His biggest decisions will be made by dice. And, referencing Steven Levitt’s research in FreakonomicsExperiments.com, Harford ends up writing “(In retrospect, if Levitt had used a biased coin, he would have made hundreds of people happier.)” “Big decision ahead? Just roll the dice…” October 1.

I am not sure as to what bias Harford refers to, since clearly not all biases are the same.

An un-weighted, and un-loaded dice, represents an equal chance for any of a dice 6 sides to come up. And it used to be that any bank borrower had an equal chance that his risk premium and size of exposure adjusted loan application, if competitive, would be approved. Not anymore.

The regulators, by allowing banks to leverage their equity and the support society gave them differently based on the ex ante perceived credit risks, loaded the dices against those ex ante perceived as risky and in favor of those perceived as safe… and absolutely nothing good has come out of that bias. It overpopulated safe havens, like the AAA rated securities, and sovereigns like Greece, and underexplored risky bays, like SMEs and entrepreneurs.

But strangely enough, this seems of no interest to the Undercover Economist or to all other of his FT colleagues. “Do I dare or not to listen to Kurowski’s argument?” Perhaps some of them could benefit from rolling an unloaded dice.

@PerKurowski ©

A good slogan for any candidate would be: “Make the Land of the Free and the Home of the Brave, Free and Brave again”

Sir, I refer to Gillian Tett’s discussion on the importance in politics of good slogans “Make slogans great again” October 1.

I do not consider myself a slogan maker, but I sure know that the much more than a slogan slogan I would most like to see, is “Make the Land of the Free and the Home of the Brave, Free and Brave again”

That is because bank regulators, with their dangerously stupid risk weighted capital requirements for banks attacked the very core of the American spirit, namely the willingness to take risks and the equal access to opportunities for all.

Sir, after hundreds of letter on this I do not feel the need to expand more on it… some aide memoires should suffice.

@PerKurowski ©

More safer drones now- less risky feet on the ground. That’s great for now… but what about tomorrow?

Sir, Simon Kuper writes: “Every society tries to make the trade-off between security and freedom… According to Google, mentions of “freedom” exceeded mentions of “security” in English-language books every year from about 1830 through to 1985. In 1985, mentions of “security” surpassed “freedom” in books… We entered an era of compulsory seatbelts, bans on public smoking and laws against drink-driving.” “Safety first: the new parenting” October 1.

To which I would add that we also entered into the era of the risk weighted capital requirements for banks (1988 Basel I); with which regulators cared more about the short term safety of banks than about the long term safety of economy.

So when Kuper writes: “Every society tries to make the trade-off between security and freedom”, I would hold that de facto more often that represents a trade-off between short and long term security. That is because unfortunately, c'est la vie, security weakens and freedom strengthens. Simon Kuper, having cycled alone to school at age of eight, and comparing that to his daughter’s (perhaps even supervised) walk of one block to the bakery, knows what I mean.

And one major security issue is that security measures are not all equally applied. Out there, in the real world, there are still “savages” living in strengthening freedom, while we subject our young to suffer debilitating security. What that is going to mean to their future no one really knows… but while our kids are more comfortable [and “safer”] in their rooms socializing on computers, the “abandoned” are perhaps getting stronger and making the streets ever more insecure.

Don’t we wish we had the strength to allow our kids to be more savages? That strength can only come out of fully understanding and accepting the implications… we must allow them to take more risks. But it is so hard to gain acceptance for the concept that there’s nothing as risky as excessive risk aversion… especially when so many nannies are in charge.

Here we are, soon 10 years after a crisis that should have laid bare the stupidity of bank regulations that only lead to dangerous overpopulation of some safe havens (AAA rated securities and Greece) and equally dangerous under-exploration of risky bays (SMEs and entrepreneurs)… and the issue of the distortions it produces in the allocation of bank credit is not even discussed.

Sir, I do fret we, as a society, are slowly drowning ourselves in oceans of imagined security. Even our war capabilities are security driven… more safe drones - less risky feet on the ground. That’s great now… but what about tomorrow?

If our sons are not allowed to lose themselves, how on earth will they learn how to find themselves?

PS. I just refer to “sons” as I had only daughters, and both my grandchildren are girls, and you know it is not easy to live as you preach.

@PerKurowski ©

More than tighter or looser, what EU needs are capital requirements that distort less the allocation of bank credit

Sir, I refer to Jim Brunsden’s “EU set to resist tighter capital requirements” September 30.

EU (and all other) needs to decide what’s more important for it, the short term stability of its banking sector, or the future perspectives of its real economy. If it is the first then increasing the capital requirements must be a priority.

But, if the real economy is more important, then instead of being more accommodating with the capital requirements, as is now being discussed, it needs much more to rid itself of those risk weighted requirements that so distort the allocation of bank credit.

That would not not necessarily entail having to increase too much bank capital. Some increases for holding what’s “safe” could be compensated by some decrease of capital required for holding what’s “risky”, like loans to unrated SMEs. The latter would not affect the stability of the banks since there is never excessive dangerous bank exposures built up with what is ex ante perceived as risky.

How to proceed? I do not have data to recommend something exact but, one way of doing it, could be that of assigning a risk-weight of 60% for all assets… and then increase it by 5% in order to reach 100% for all assets in eight years.

Another, much more cumbersome of course is to define individual capital requirements for each bank, starting with were each one of these currently find themselves.

And of course a Chilean type recapitalization plan that entails central banks taking much of the not performing loans off bank’s balance sheets, subject to conditions such a not paying dividends, and at one time having to repurchase those loans, would give a big needed boost to the whole credit market.

@PerKurowski ©

How much should we claw-back from inept bank regulators who neglected their fiduciary responsibilities?G

Sir, Gillian Tett writes: “If bankers are going to defend their craft, let alone their high pay, they have to start truly sharing risks with shareholders and taxpayers…If clawbacks had been in place a decade ago, those scandals at Deutsche and Wells might never have erupted in the first place.” “Clawbacks emerge as a vital weapon in finance” September 30.

That applies to regulators too.

The Basel Committee neglected to define the purpose of the banks before regulating these and so came up with the risk weighted capital requirements for banks that have so distorted the allocation of bank credit to the real economy.

The Basel Committee also neglected to do the empirical studies to determine what cause bank crises and so placed much higher risk weights on what was perceived as safe, when actually all crises have resulted from unexpected events like natural disasters, illegal behavior like lending to affiliates, or excessive exposures to what was erroneously perceived as very safe.

The results? A banking crisis because of excessive exposures against too little capital to what was perceived, decreed or concocted as safe; and economic stagnation resulting from too little financing to the “risky” SMEs and entrepreneurs.

Is that not an amazing fiduciary negligence that merits, as a minimum minimorum. some claw-backs?

PS. And all those journalists and famed columnists that so blithely ignored the regulatory faults when denounced over and over again, should they go scot-free?

@PerKurowski ©

Millions of small loans not given to “risky” SMEs, only because of bank regulations, endangers our social stability

Sir, Mohamed El-Erian writes: “for things to continue as they are, you need to be confident that the economic, financial, political and social tensions spawned by low growth will not become the defining drivers of the economy. And that is increasingly unlikely in light of what is transpiring on the ground every day… If the political response continues to disappoint, low growth will give way to a recession while artificial stability in the financial system is replaced by disorder.” “Yet more low but stable global growth is unsustainable” September 30.

Absolutely! As I have been arguing in more than two thousand letters to FT over the years, we have been doomed to dangerous doom and gloom by bank regulators, as they have impeded the economy to breath that risk-taking oxygen that allows it to move forward, so as not to stall and fall.

Just think about the millions of small credits to “risky” SMEs and entrepreneurs around the world, that have not been awarded the last decade only because of Basel Committee’s stupid, dumb, senseless, useless, risk weighted capital requirements for banks.

To bridge that cliff of joblessness and hardships that it has and will have caused, I can’t think of anything else than a Universal Basic Income, a Citizen's Dividend, or whatever you want to call it. Of course that has to be duly funded, in much by reducing the margins of the redistribution profiteers, no funny money will do.

@PerKurowski ©

How could regulators, and FT, believe that banks, if given the chance, would not to try to minimize capital?

Sir you write: “At present, large banks are allowed to use their own internal models to calculate risk-weighted assets — a crucial measure for determining the amount of capital they are required to hold. Yet over time, banks’ RWA as a proportion of total assets have been drifting down. There is a strong suspicion that this is not just due to making safer loans.” “Europe must address its banks’ enduring malaise” September 30

Of course not! What suspicion? How could regulators, and FT, believe that banks would not try to maximize their risk adjusted returns on equity by minimizing the equity they were required to hold? The big banks, with their own Supercalifragilisticexpialidocious risk models; the smaller banks, by abandoning lending to those with Basel’s standard approach requiring them to hold more capital, like SMEs and entrepreneurs.

There are two ways for a bank to maximize its return on equity. One is minimizing the equity they need to hold, the other is lending or investing in assets deemed risky, at interest rates that are higher than would be normal, to make up for the fact there is more capital involved, but thereby also making the risky riskier. Sir, if you were on a bank Board which one would you prefer?

Sir, the Basel Committee’s, the Financial Stability Board’s and your own naiveté, is just startling.

@PerKurowski ©

For regulators to impose risk weights is antithetical to the American principle of treating all citizens equally.

Sir, Judy Shelton writes: “The Fed has adopted monetary policy decisions that channel low-cost funding to wealthy investors and corporate borrowers at the expense of people with ordinary bank savings accounts and retirees on fixed-income pensions. That is not only inherently political — it is antithetical to the American principle of treating all citizens equally.” “Trump is right to take aim at the ‘political’ Fed”. September 29.

That might be political or not, but let us not forget that the current financial mess derives from something not really political but simply dumb; the senseless distortion of the allocation of credit to the real economy caused by regulators imposing risk weighted capital requirements for banks. That began in 1988 with Basel I and really took off in 2004 with Basel II, and Basel III is in many ways worsening it.

Just looking at the risk weights of: 0% for the sovereign, 20% for the AAArisktocracy, 35% for residential houses, 100% for We the (unrated) People and 150% for the below BB-rated outcasts; and considering that credit risk is already cleared for by banks with interest rates and the size of exposure, should say it all. And if that’s not antithetical to the American principle of treating all citizens equally what is.

But since Judy Shelton is a member of the Trump economic advisory council, and Donald Trump has often been involved with casinos, let me explain it all in terms of betting. The underlying principle of any casino is that all bets have the same expected financial outcome, a small loss, which represents the profit of the house. But what would happen if regulators manipulated the whole betting process and declared that the winnings of the house would depend on how risky each bet was, with risk being determined by the odds?

For instance if any safe bet, like on color, or on a pair or an impair number, gave the casino a much higher expected profit than a bet on a “risky” single number, that casino would make huge profits, until those betting there found out, and then it would go out of business.

And that is what regulators are doing when allowing banks to leverage their equity, and the support they receive from society, differently depending on the perceived credit risk. Worse yet, when it comes to the big banks, those who were deemed able to run their own capital risk models, the regulators authorized the casino owners to do their own manipulations.

And that means that The Risky, like SMEs and entrepreneurs, have their access to bank credit much more severely curtailed than usual. And stagnation results.

Worse yet, all that distortion for nothing, because bank crisis never result from excessive exposures to something ex ante perceived as risky, these always result from unexpected events or excessive exposures to something erroneously perceived as very safe.

And to add salt to injury, these failed and risk adverse bank regulations that affect banks in The Home of the Brave, emanate from a Basel Committee and a Financial Stability Board dominated mostly by European bureaucrats.

@PerKurowski ©

Sir, I wonder, is it not time that Mr Martin Wolf looks into the possibilities that little me might have a point?

Sir, in the UK as in most other countries banks have been given the following instructions by their regulators:

If you invest in something safe, like lending to a good sovereign, lending to those with very high credit ratings, or financing residential houses, then you are allowed to hold little capital. That means that you then will be able to leverage your equity and the support society awards you a lot; meaning that you then will be able to earn high expected risk adjusted returns on equity.

But, if you invest in something risky, like lending to SMEs and entrepreneurs, then you need to hold more capital. That means that you then will be able to leverage less your equity and the support society awards you; meaning that you then will probably earn lower expected risk adjusted returns on equity.

Sir, those instructions clearly guarantee that bank credit will not be allocated efficiently to the real economy. Those instructions lead to the dangerous overpopulation of safe havens, and for the economy to equally dangerous under exploration of the riskier but perhaps more productive bays. Those instructions stop banks from financing the riskier future, making them only refinance the safer past. Those instructions will waste, or in some cases even make worse, all what stimulus like QEs, low interest rates, fiscal deficits and other are supposed to help and correct.

On this subject I have written Mr. Martin Wolf literally hundreds of letters over the last decade. Mr. Wolf besides kindly allowing me to publish on his Economists’ Forum in October 2009 an article titled “Free us from imprudent risk aversion”, has completely ignored the subject of the distortions caused by the Basel Committee’s regulations.

In July 2012 Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

That was a reference to part of my arguments that I of course much appreciate but, as can be seen, it had only to do with how useless these regulations are in terms of guaranteeing bank stability.

Now I find that Mr. Martin Wolf quite lugubriously writes: “If the UK is to thrive economically, it will not be enough for it to manage Brexit, hard though that will surely be. Its policymakers must also start from a realistic assessment of the UK’s mediocre performance. This is no world-beating economy. It is not even a Europe-beating economy, except on creating what are too often low-wage jobs. It will have to do far better if it is to deliver the higher living standards its people want in the tougher environment ahead.” “Economic ills of the UK extend well beyond Brexit” September 29.

Sir, I just wonder, is it not time that Mr Martin Wolf looks into the possibilities that little me might have a point… and not only for the UK?

I mean it could be quite timely given the upcoming annual meetings of the IMF and World Bank in Washington and in which Mr. Wolf will again moderate a couple of events, one on inequality and one on jobs, both themes affected by the regulatory distortions.

PS. Unfortunately this year like last, I will not be in Washington so as to be able to participate as civil society and express my concerns there, also for the umpteenth time.

@PerKurowski ©

What if ideas on more productivity were evaluated strictly based on the CVs of those originating these?

Sir, I refer to Sarah O’Connor’s “Want your staff to do more? Just listen to them”, September 28.

Let us suppose you are sitting around a table with all your employees, to hear their suggestions of how to improve productivity. And you also have in front of you their respective CV’s.

And now let us also suppose your boss tells you: “If you find a good idea presented by those having a Master degree or more, I will triple your salary but, if you find that idea among those with less qualifications, you will only get a 10 percent raise.” What will happen?

I ask this because, in terms of bank credits that could lead to more productivity, that is precisely what bank regulators, with their risk weighted capital requirements for banks, are telling the bankers. “If the good idea comes from one AAA rated, you will be allowed to leverage a loan to him much more, meaning you could earn a much higher expected risk-adjusted return on equity, than if that good idea came from an SME or an unrated citizen.

Capisci Sarah?

@PerKurowski ©

Is there no moral issue in Venezuela bondholders being paid as a result of people being denied food or medicines?

Sir, Jonathan Wheatley writes: “In a broad sense, Caracas is already a serial defaulter. It has defaulted on its people by denying them access to the dollars they need for essential imports…” “Only one of Venezuela’s creditors is being paid without fail, on the button, every time: its international bondholders” “Venezuela clutches at straws in desperation to avoid bond default” September 28.

Let me ask: What would be a correct description of he who collects from a debtor knowing that he is being paid by a government because it denies food and medicines to its people? Or is that a moral irrelevance?

And what if the international bondholder’s would all just turn up to be close affiliates to the current government? I mean “A PDVSA bond maturing in 2017, on which a $2.3bn payment is due on November 2, is trading at about 80 per cent of par — hardly a sign of panic” could be indicative of it. Would it then just be another case of corruption? Insider trading?

The world needs a Sovereign Debt Restructuring Mechanism (SDRM) but, for that to be of any service or at least not a disservice to We the People, it needs to start with clearly defining what should be considered as odious credits or odious borrowings. As a minimum all bonds should not be bearer bonds, as we citizens should always have the right to clearly be able to identify who are financing our governments, and in what conditions, so that if we are not able to hold our governments accountable, like in Venezuela, we are at least able to hold its (our) creditors accountable.

@PerKurowski ©

Martin Wolf, bank regulators ordered trust to crumble, so the west is already falling. Your silence is complicit

Sir, Martin Wolf lashes out at the possibilities of Donald Trump being elected president of US and on its consequences. I agree though I would not go to such extreme as arguing that “It would, for example, end efforts to manage the threat of climate change, possibly forever”. "If trust crumbles, the west is lost" September 28. 

But I also believe that the possibilities of the US, among democrats, republicans and We the People, to put a stop to most potential Trump lunacy is very big… almost a certainty.

But in my firm opinion the west is already crumbling thanks to those statist and risk adverse regulations that were introduced in 1988 with Basel I and that really exploded in 2004 with Basel II.

The credit risk weighted capital requirements with their risk weights of 0% for the sovereign, 20% for the AAArisktocracy, 35% for residential houses, 100% for We the (unrated) People and 150% for the below BB-rated outcasts, has completely distorted the allocation of bank credit to the real economy. The west was not built with such regulations but the west is certainly doomed to gloom with it.

Unfortunately, the world of top experts, renowned academicians and famed journalists, which includes Martin Wolf, have not been able to even bring up Basel’s distortion of bank credit into discussions. And the testers of bank stress keep on looking only at what is on the balance sheets and without caring a iota about what does not, like sufficient loans to SMEs and entrepreneurs.

If the west had to choose between Donald Trump and the Basel Committee, I know who I would vote for, again of course counting on a lot of support to reign in his worst excesses.

PS. Here are two questions that if a moderator of the US candidates for president debate I would ask:

Donald Trump, how much damage would the republicans and democrats allow Hillary Clinton to do if she is elected president?

Hillary Clinton, how much damage would the democrats and republicans allow Donald Trump to do if he is elected president?

@PerKurowski ©

Is now OECD blaming central bankers? Has it no shame? OECD is just as guilty.

Sir, William White, the chair of the OECD’s economic and development review committee tells us “Only government action can resolve a global solvency crisis” September 26.

I don’t get it. Is now the OECD blaming central bankers? What? Since 1988, with the Basel Accord, Basel I, approved enthusiastically by the OECD, the sovereigns of the OECD, in other words OECD governments, for the purpose of the capital requirements for banks, have been risk weighted at 0%, while We the People have been assigned a risk weight of 0%. What good has that done us?

White writes: “The monetary stimulus provided repeatedly over the past eight years has failed to produce the expected expansion of aggregate demand.” Is expansion of aggregate demand by monetary stimulus the only thing that was expected to solve stagnation? If so, our grandchildren are screwed. What about the workings of the real economy, like the SMEs and the entrepreneurs, those that OECD and bank regulators don’t want to have access to bank credit, only on account of these being risky borrowers?

@PerKurowski ©

The absurdity of Mario Draghi’s leadership is even worse when considering his close connection to bank regulations

Sir, Wolfgang Kuhn writes: “Mario Draghi, the president of the European Central Bank, relies on bank lending to stimulate the economy but criticises “an excess of eurozone lenders” (“Draghi blames ‘over-banking’ for low profits”, September 23). He worries about systemic risks of big financial institutions but he wants to get rid of small ones.” “Draghi’s leadership is a cause for concern” September 26.

Indeed, but let us try to understand Mario Draghi. Besides being the president of ECB he was once the chair of the Financial Stability Board and is the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision.

So, with his bank regulator hat on, Draghi might think that if the whole banking system was reduced to some few Too Big To Fail banks, then his troubles would be over.

Jest aside, Draghi’s close link to bank regulations makes it even so much worse. Draghi should know that the risk weighted capital requirements for banks stops bank credit from being allocated efficiently to the real economy, and that is probably the greatest absurdity with him. He injects liquidity, and then he stops it from reaching “the risky”, like SMEs and entrepreneurs.

I don’t know why, but in the case of Mario Draghi (and other regulators) I often get the feeling that some Jerzy Kosinski - Being There - Chauncey Gardener - Chance the gardener characters, have somehow managed to infiltrate the higher spheres of finance.  They are walking systemic risks!