Bank regulators insist on feeding the systemic risk of credit ratings, even after it became tragically evident.

Sir, Kate Allen writes “Funds that allocate capital based on instruments’ investment grades and index weighting may look as if they are playing it safe but they are, in fact, taking a gamble, creating towers of risk, any floor of which could prove unstable… do not look to the canaries in the financial markets’ coal mines to sound an early warning. By the time the downgrades come, it will be too late” “Tail Risk” February 28.

Indeed by the “time issuers’ credit ratings were downgraded, [banks] were already staring the worst-case scenario in the face.

Basel II’s standardized risk weights for the risk weighted bank capital requirements:

AAA to AA rated = 20%; allowed leverage 62.5 times to 1.

Below BB- rated = 150%; allowed leverage 8.3 times to 1

Absolute lunacy! With the same risk weight banks would anyway build up much more exposure to what they ex ante perceived as very safe, than against what they perceived as very risky.

As is, that regulation dooms our bank systems to especially large crisis, resulting from especially large exposures, to what is perceived as especially safe, against especially little capital. 

Allen observes: “An investment structure that is revealed to have done a bad job only when disaster arrives, as in the financial crisis”. Unfortunately no. Bank regulators blamed the credit rating agencies, and not themselves for betting too much on these, and so that so faulty regulations that should have been eliminated with a big “Sorry!” is still very well active. 

PS. In FT January 2003: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

PS. At World Bank: April 2003: "Market or authorities have decided to delegate the evaluation of risk into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"

@PerKurowski

Will there now be opportunities for gig unionists?

Sir, Sarah O’Connor thinks the unions might have a good chance to adapt to the gig economy “Gig economy deals promise a brighter future for trade unions” February 27.

I am not so sure. There is a de facto class war in the real economy between those with jobs wanting better conditions and those just wanting a job. And that is what nourishes the gig economy.

Imposing on the gig economy benefits, is just like raising minimum wages, it just raises the bar for the offer of jobs. An unconditional universal basic income would instead provide a step stool to better reach up to whatever jobs are offered.

Of course those who benefit, politically or financially, from a conditional redistribution, or from negotiating on behalf of workers, do not like that option as it clearly erodes their job opportunities. 

How will unions handle it? I have no idea; perhaps there will be some gig unionists.

PS. In the same vein, perhaps Alexandria Ocasio-Cortez is a gig politician. We’ll see if she lands a second term. Having helped New York lose Amazon’s 25.000 well paying jobs does not bode well for here there. Perhaps she will get a call from another state.

PS. Amazon is one of those entities automating and robotizing the most. So it is a bit surprising to read that Alexandria Ocasio-Cortez opines “We should not be haunted by the specter of being automated out of work. . . . We should be excited by that”

@PerKurowski

More than between left and right, the division is between tax paying citizens and witting or unwitting possible redistribution profiteers

Sir, Wolfgang Münchau writes, “Liberal democracy is in decline for a reason. Liberal regimes have proved incapable, of solving problems that arose directly from liberal policies like tax cuts, fiscal consolidation and deregulation: persistent financial instability and its economic consequences” “The future belongs to the left, not the right” February 25.

The risk weighted capital requirements placed on top of any natural risk aversion distorts the allocation of bank credit in favor of what is perceived as safe and against what’s perceived as risky, has nothing to do with liberal policies. The risk weights of 0% the sovereign and 100% the citizens, just puts crony statism on steroids.

Münchau also “The euro, too, was a liberal fair-weather construction.” That could be but when EU authorities assigned a 0% risk weight to all public debt of eurozone sovereigns, denominated in a currency that is not their domestic (printable) one no one could call that a liberal construction. It was idiotically dooming the euro to failure.

Sir, I feel left or right labels do not really define what we citizen are up against. Our real adversaries are those I have come to call redistribution profiteers. In my home land Venezuela, where the central governments some years has received 97% of all export revenues, that is easy to see. But even in the rest of the world that is happening, unfortunately without being sufficiently understood. Much of it is the result of citizens lacking the most basic societal information, namely how much their central and local government receive in income, from all taxes, per citizen. 

Of course taxes are needed but such per citizen data, published regularly, would also put pressure on improving the day-to-day quality of government bureaucracy. I mean we want our taxes to be spent well. Don’t we?

PS. As a self declared radical of the middle, or extremist of the center, I feel the best hope we now have to improve our societies is by means of an unconditional universal basic income. That UBI should be 100% paid for, be large enough to help all reach up to jobs in the real economy and be small enough so as not allow anyone to stay in bed.

@PerKurowski

FT journalists. Is this really the legacy you want to leave to your children?

Not daring to ask bank regulators to explain why they've decided that what’s ex ante perceived as risky, is more dangerous ex post to our bank systems than what’s ex ante is perceived as safe

If QE seems to have turned into irreversible and the economy even needs a QE4, does that not point to something not going right?

Sir, Michael Howell writes:“Modern financial systems have grown dependent on huge central bank balance sheets… our concern today is a growing shortage of central bank liquidity caused by the deliberate unwinding of the QE policies put in place to replace the private sector funding that evaporated in 2007-08” “Liquidity drain will force central banks towards ‘QE4’” February 20.

What does this mean? That ever growing central bank balance sheets are now to be a standard feature in our economy? If QEs is to replace private sector funding, are we not heading into central bank statism?

What has QEs achieved? Because of the risk weighted capital requirements, the liquidity injected has resulted in way too little financing of the “riskier” future (entrepreneurs) weakening the real economy; and too much to the “safer” present (mortgages, buybacks, AAA rated securities and public debt) creating bubbles.

If it comes down to a QE4 let’s pray regulators admit their mistake and throw out forever the idiotic risk weighting.

Idiotic? Yes, consider the following tail risks.

The best, that which perceived as very risky turning out to be very safe.

The worst, that which perceived as very safe turning out to be very risky.

And the risk weighted capital requirements for banks kills the best and puts the worst on steroids… dooming us to suffer an weakened economy as well as an especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

@PerKurowski

If Germany’s euro debt gets to be redenominated in Deutsche Marks, what would happen to its commercial surplus?

Sir, Kate Allen writes: “German bonds, or Bunds… are the eurozone’s safe asset… the spread against equivalent Italian bond yields to about 2.9 per cent.” “Tail Risk” February 19.

So if Bunds is the Eurozone’s safe asset, how come EU authorities assign it a risk weight that is just the same as all other Eurozone sovereigns’ debts, namely 0%? And this even when they all are indebted in a currency that is not really their own domestic (printable) one.

That 0% risk weight translates into that European banks do not have to hold any capital against debts of the Eurozone sovereigns… a clear subsidy... especially to those sovereigns most remote from earning that 0%.

So, had that not been the spreads of many eurozone sovereigns against Bunds would have been much larger, and in such case many of those sovereigns, like Greece, like Italy, like Spain, like Portugal would have had to borrow less, and would therefore have had to reduce their commercial deficits, reducing by that Germany’s commercial surplus.

Allen opines: “Investors need to put their money somewhere and [if there are not enough Bunds they are forced into substitutes which then rapidly become overloaded and suffer price bubbles.”

Indeed but when we consider that much of that investment money was supplied by ECB buying European sovereign debt, including Bunds, perhaps we should start by looking there before we might add fuel to a dangerous fire.

PS. Brexit,  the 0% risk weight and the EU

@PerKurowski

If only regulators had analyzed their risk weighted capital requirements for banks in terms of bets.

Sir, Tim Harford refers to Nassim Taleb, warning of “the ‘ludic fallacy’ — treating the unknown risks of life as though they were the known risks of a game of chance”, “Experimental living beats thinking in bets” February 17.

That is somewhat like when regulators treated the unknown risks in banking and set their risk weighted capital requirements. 

Harford also mentions Annie Duke’s recommendation “that we should always be willing to ask ourselves, ‘do I want to bet on that’ — it’s easy to be overconfident if there are no obvious consequences for being wrong. A bet forces us to think about the odds and the possibility that someone else may know better.”

Oh, if only our bank regulators have asked themselves: “Do we want to bet our bank systems on that what gets an AAA to AA rating, issued by human fallible credit rating agencies, is so safe we should only need to require banks to hold 1.6% in capital against such assets and so allow them to leverage 62.5 times with these?” Had they posed that question, the crisis resulting from excessive exposures to AAA rated securities backed with mortgages to the subprime sector would not have happened.

“We have risk-weighted the capital requirements for banks in order to make our bank system safer.” Someone has either played tricks on them or they are bluffing. The sad part is that so few dare to call them out on it. And, when I do that, many just brush me off with a “he’s just got an obsession”.

Though Harford accepts that “Thinking in bets is a rigorous and admirable habit” for many cases he favors “Thinking in experiments [as that] allows us to learn [and might be] less painful.

In case of bank regulations experiments are not needed. Just go out and look at all the crises and try to find one that was caused by excessive exposures to something perceived as risky when placed on the balance sheets of banks. None! Should that not tell you something about our unwillingness to learn when the lessons are hard to swallow? 

Sir, using Edward Thorp’s real casino risks, in banking, the Basel Committee represents “the crooked dealer” and the risk weighted capital requirements “the poisoned coffee” 

Casino games, like roulette, are all based on offering all possible bets exactly the same expected payout adjusted for their respective probabilities. If it was not so, no casino would survive. So it was in banking, until risk weighted capital requirements offered banks higher risk adjusted return on equity for what was perceived, decreed or concocted as safe (betting on a color), than for what was perceived as risky (betting on a single number). The consequence? Our bank systems will fail especially bad, by building up especially large exposures to what is especially perceived as safe, against especially little capital. The 2008 crisis, and Greece, were just canaries in that mine.

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

@PerKurowski

For social harmony, in our time, we need a big enough and a small enough universal basic income.

Sir, Chris Giles refers to a “1994 OECD study [which] contained a warning of the dangers in store for countries that failed to tackle problems in their labour markets. “It brings with it unravelling of the social fabric.” “Improve employment rates to tackle inequality” February 15.

Giles opines, “Flexibility and social protection is a winning combination for advanced economies. While it does not prevent all employment problems, whether you take a right-of-centre “work not welfare” attitude or a left-of-centre “a hand up not a handout” stance, in general the combination works.”

I agree! An unconditional universal basic income, large enough to allow many to reach up to whatever jobs are available, is “a hand up not a handout”.

And an unconditional universal basic income, small enough so as not allow many to stay in bed, is also “work not welfare”.

So what’s keeping an UBI from being implemented?

To begin there’s not sufficient recognition of the real conflicts, basically a class war, between those who having a job want better pay and those who want a job at any pay.

But, first and foremost, it is those who profit, politically and monetary, on imposing their conditionalties when redistributing tax revenues, who strongly oppose a UBI, since it, naturally, would negatively affect the value of their franchise.

PS. The Chavez/Maduro regimes are clearly outliers among the redistribution profiteers but just as an example I once calculated that the 40% poorest of Venezuela had received less than 15% from the Bolivarian Revolution than what should have been their allotment had Venezuela’s net oil revenues been shared out equally to all. On the other side many of the odious profiteers pocketed many thousand times what should have been their share.

@PerKurowski

A tweet dedicated to all those in FT that write the column of "Tail Risk"

Two tail risks:

The best, that which perceived as very risky turns out to be very safe.

The worst, that which perceived as very safe turns out to be very risky.

Risk weighted capital requirements for banks, kills the first and puts the worst one on steroids.

http://subprimeregulations.blogspot.com/2018/08/risk-weighted-capital-requirements-for.html

Cheers

FT, do you really mean it?

FT, do you really mean that if David Malpass becomes president of the World Bank the Asian Infrastructure Investment Bank (AIIB) dominated by China will become a worthier development bank than WBG?

Sir, in “US makes a poor choice for World Bank chief” February 7, you lash out that if David Malpass becomes president of the World Bank, that will lead to a “dysfunctional organisation that will encourage its activity to shift to other development banks, including the Asian Infrastructure Investment Bank.” Really? Has this do to with David Malpass, or has this to do with someone else who is not to your liking?

In support of your doom you mention that Malpass’ “judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under” 

Sir, like many he had confidence in those AAA rated securities that SEC, which supervised investment banks in the US, allowed, based on recommendations of the Basel Committee, Bear Sterns to hold against only 1.6% in capital, to leverage over 62.5 times. I have not read much about you judging the regulators’ specialty wanting.

As for the World Bank you argue that its role is “providing global public goods such as managing scarce water supplies, combating pandemics and coping with the effects of climate change.”

No, its role is not to substitute for governments? The World Bank is a development bank, which means, at least in my book, its role is to help and assist financing countries to develop their own capacities to manage scarce water supplies, combate pandemics and cope with the effects of climate change.

Sir, you know I have a concern about the World Bank, namely that it does not object to the current risk weighted capital requirements for banks. I hold that it should, because risk taking is the oxygen of any development.

Who knows, perhaps someone who has seen first hand what happens if you trust what’s “safe” too much to be safe, might be exactly what the World Bank needs.

@PerKurowski

I hope David Malpass, nominated by USA, if confirmed as president of the world’s premier development bank, understands that risk-taking is the oxygen of all development.

Sir, Robert Zoellick writes: “If policymakers overlook the experience of developing countries during the crisis, they are less likely to consider emerging market dynamics, understand developing economies’ sources of resilience and appreciate vulnerabilities” “Who ever runs the World Bank needs a plan for emerging markets” February 6.

Of course no one should overlook experiences obtained during crises but, focusing excessively on these, puts a damper on the potential growth between the crises.

In his book “Money: Whence it came, where it went” (1975), John Kenneth Galbraith, referring to the accelerated growth experienced in the western and south-western parts of the United States during the 19thcentury, argued that it was the result of an aggressive banking sector working in a relatively unregulated environment. “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

For instance when banks are required to hold more capital when lending to their “risky” entrepreneurs, than when lending to their “safe” sovereign, as current Basel regulations mandate, that is bad enough in developed countries, but, in developing/emerging countries, it is absolute lunacy.

While an Executive Director in the World Bank 2002-2004, a time during which Basel I was discussed I did what I could to alert to the huge mistakes of its pillar, the risk weighted capital requirements for banks. Unfortunately I was not able to convey my warnings, and these were approved in June 2004.

I hope that David Malpass, now nominated by USA, if confirmed as the next president of the World Bank, fully understands the following:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements impede banks from taking efficiently the risks that are needed to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd.

Second, that what’s perceived ex ante as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large bank exposures to what is especially perceived (or decreed) as safe, against especially little bank capital.

God make us daring!

PS. Here is a brief summary of what I had to say on this issue before and during my term as an ED. It includes two letters published by FT

@PerKurowski

Carrot: We will pay you $xxx for each Kalashnikov you hand over. Stick: If we find you one after x you’ll go to jail for ten years!

Sir, in your “Broad front needed to address Venezuela crisis” you opine that the “Diplomatic effort requires reasonable balance of carrot and stick” February 5.

Indeed! In 2007 the degenerated Hugo Chávez decided to weaponize his supporters, the “colectivos”, by importing 100.000 Kalashnikovs from a willing salesman, Russia.

For Venezuela to come out reasonably well from its current predicaments, those rifles must be collected.

If all those who oppose the possession of guns in their own country dedicated just three percent of their efforts to help Venezuela to collect those rifles so as to have these destroyed, they might provide more human assistance than shipping many tons of foods and medicines.

If that’s not done all food or medicines sent might not reach those unarmed Venezuelans who most need it.

@PerKurowski

Redistribution profiteers have a vested interest in us ignoring the wealthy already redistribute their purchase capacity.

Sir, Tim Harford writes “One academic paper produced by Emmanuel Saez (a star in the study of inequality) and Peter Diamond (a Nobel laureate and colleague of Mirrlees) estimated that the combined rate of tax on the income of high earners could be 73 per cent in the US without proving counter-productive…[for that they] assume that a dollar is 25 times more valuable to a person on about $50,000 a year than to a person on $500,000.” “The super-rich are an easy target for tax rises” February 2.

Indeed, and that‘s why those with much higher income sometimes buy shoes that are 25 times more expensive than those earning much less. But, where does that type of analysis take us? Should jobs producing expensive manually produced shoes be prohibited? Should we have dollars with sensors that measure the value we assign to them? 

The problem with all the “resolve poverty and inequality by taxing the wealthy” is that it ignores the fact that all the purchase power that the income of the wealthy contains, is immediately returned to the real economy when purchasing assets and services. 

In this sense those prescribing higher taxes on wealth are, at the end of the day just arguing, they are better redistributors than the wealthy. Are they? Perhaps yes, perhaps no. In Venezuela those redistributing wealth have clearly done so in order to get their hands on the wealth. In Venezuela we have a saying that goes “The one who cuts the cake in order to distribute the cake, keeps the best part of the cake.

PS. Thomas Piketty should visit the Museum of Louvre in his Paris, and make a checklist of how much would not have existed there, had it not been for some “filthy rich”

@PerKurowski

Lie Detectors, many journalists would also benefit from lessons on fake news.

Sir, Simon Kuper describes the experiences of Belgian journalist Valentin Dauchot when dispatched to discuss fake news with classes of 10 and 11-years-old in Europe. Lie Detectors, a Brussels-based NGO that sends journalists to do that, finds that “children are often internet-savvier than teachers, and probably more so than old people”. “A lesson in fake news”, February 2.

Sir, I wonder how those children would classify the following information:

“Since your teachers have decided that dark forests are much more dangerous for all of you to enter, than staying out playing in an open field, anyone of you who enters the darkness of such forest, will be forced to eat broccoli and spinach for a full month. Anyone of you staying in the sunlight of the open field, will be rewarded with chocolate cake and ice cream each day for a whole month”. True or fake?

The children would respond: “Of course we wish it was true of course but, unfortunately, it has to be fake. Who would give us chocolate and ice cream for staying where we want to be, and spinach and broccoli for not entering what we already find to be scary?

Correspondingly, how would adults respond when they hear that regulators have risk weighted the capital requirements for banks, allowing these to hold much less of it against safe assets than against risky assets?

Most adults would say surely “True” “Great!”, and this even if anyone who has read anything about bank crises know well that the worst of these always result from excessive exposures to something ex ante perceived as very safe but that, ex post, turns out to be very risky, e.g. AAA rated securities.

Of course bankers, in this case being the children, cannot believe their luck with such fake regulations being decreed true by the Basel Committee. Imagine, earning the highest risk adjusted returns on equity on what’s perceived as safe! Imagine being able to hold much less equity against what we most love to hold, which of course leaves much more for bonuses to us!

Sir, how could Lie detectors help the adults, including of course journalists, like many in FT, to be more alert to the truthfulness of news and regulations? A good place to start would be with a full explanation of confirmation bias… that here resulting from most loving much too much the populist message of: “We have risk weighted the bank capital requirements for you so as to make these safer” 

@PerKurowski

When restructuring Venezuela’s debt, start with identifying all odious credits.

Colby Smith writes “analysts reckon Venezuela has some $140bn debt outstanding with over $65bn owed to bondholders and another roughly $40bn due to China and Russia.” “Venezuela’s welter of debt will mean a messy restructuring” February 2.

The key word here is “reckon”… because the indebtedness of Venezuela has clearly not followed a transparent process. Frequently there are references to odious debts, but very rarely or never to the fact that these most often arise from odious credits that should never have been awarded. That “odiousness” extends from a shameful lack of due diligence to outright participation in corrupt acts.

All citizens in the world would greatly benefit from having a clear definition of what should be considered odious credits, and of its consequences. Without it, any Sovereign Debt Restructuring Mechanism (SDRM) similar to the one proposed 2002 at the IMF by Anne O. Kruger, would be found wanting.

PS. Because Robin Wigglesworth has touched on this theme I am copying him. 

https://ftalphaville.ft.com/2016/05/06/2161045/donald-trump-and-the-sovereign-debt-restructuring-mechanism-revisited/

https://www.ft.com/content/fa6850cc-96c3-11e7-b83c-9588e51488a0

The Blue Monday fiction is nothing when compared to Basel Committee’s risk weighted capital requirements fiction.

Sir, Tim Harford writes, “Given that it is pure fiction, the “Blue Monday” meme is showing surprising longevity”, and he asks “Why do such ideas endure? What do they tell us about our attitude to science, evidence or the truth itself?” “The pseudoscience of Blue Monday hits trust” January 26.

But really, what’s the significance of some falling for an innocous Blue Monday fiction, when compared to that fiction that what's perceived as risky is more dangerous to our bank systems than what's perceived as safe? 

The first one might cause some to travel on not a really adequate date for them, the latter, when translated into risk weighted bank capital requirements for banks, distorts the allocation of credit to the real economy; only guaranteeing especially large crises, because of especially large bank exposures to something perceived as especially safe that turns out to be especially risky, held against especially little bank capital.

Harford refers to Onora O’Neill in that “we should be aiming for a better ability to trust what is trustworthy and to mistrust what is not”. In the case of journalists he says that “the non-experts among us could do more to keep ourselves well-informed.”

Since the information on bank regulations is out there readily available for anyone who cares to look at it, that should suffice to answer his question on whether “we should be more trusting, or more sceptical?”

Sir, Skepticism 101 courses are much needed. May I humbly suggest you and Harford could benefit from taking one of these?

@PerKurowski

If you finance “safe” consumption more than “risky” production, growth will come to a standstill.

John Dizard writes: “What if global income growth, or even national income growth, cannot cover the cost of servicing capital? Then the capital market machinery would have to shift into generating losses rather than returns.” “Bondholders face greater likelihood of haircuts as system goes into reverse” January 26.

Absolutely! When regulators decided that banks could hold less capital against the “safer” present than against the “riskier future”; meaning they could leverage more with the safer present than with the riskier future; meaning they would be able to earn higher expected risk adjusted returns on equity when financing the safer present than the riskier future, they ordained that to happen.

Basel II assigned a risk weight of 35% to residential mortgages, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 35.7 times.

Basel II assigned a risk weight of 100% to unrated entrepreneurs, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 12.5 times.

That allows banks to earn higher risk adjusted returns on equity financing residential mortgages than giving loans to entrepreneurs.

The consequence? Many will sit in their houses without the jobs needed to service the mortgages or pay the utilities.

@PerKurowski

What good is it to celebrate the euro’s first 20 years if, as is, it won’t make the next 20?

Sir I refer to Martin Wolf’s “Marking the euro at 20: the eurozone is doomed to succeed” January 16.

November 1998 in an Op-Ed titled “Burning the Bridges in Europe” I wrote: 

“As participants in a globalized world in which Europe has an important role, we must naturally wish all members luck, no matter what worries we might secretly harbor.

The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. The Dollar is backed by a solidly unified political entity, the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. 

Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

Sir, twenty years later those observations are still valid, and way too little has been done to solve the challenges.

Now add to that the fact that even though Eurozone sovereigns take on debt in a currency not denominated in their own domestic printable one, EU authorities have assigned a risk weight of 0% to all of them. That all points to that it will end badly.

So Sir, though Martin Wolf raises many more or less valid alerts and gives some recommendations worth heeding, he should also be thinking about how to get the euro out from that “0% risk” death-trap corner into which it has been painted.

@PerKurowski

What I as a former Executive Director, pray that any new President of the World Bank understands

A letter to the Financial Times

Sir, I was an ED at WB from November 2002 until October 2004. During that time Basel II was being discussed. It was approved in June 2004. 

I was against the basic principles of these regulations that had begun with the Basel Accord of 1988, Basel I. That should be clear from Op-Eds I had published earlier, transcripts of my statements at the WB Board, and in the letters that I wrote and FT published during that time. Here is a brief summary of all that 

Since then I haven't changed my mind... that package of bank regulations is almost unimaginable bad.

I pray the next president of the world’s premier development bank, whoever he is, and wherever he comes from, at least, as a minimum minimorum, understands:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements, will distort against banks taking the risks that help to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.”, John A Shedd.

Second, that what’s perceived as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large exposures to what is especially perceived (or decreed) as safe, against especially little capital.

Sir, would you not agree that mine is a quite reasonable wish?

@PerKurowski

The world’s banking systems are dangerously fragile, courtesy of inept and statist regulators.

Sir, Martin Wolf writes: “Should we be concerned about the state of the world economy? Yes: it always makes sense to be concerned. That does not mean something is sure to go badly wrong in the near future… It is the political and policy instability, combined with the exhaustion of safe options for credit expansion, that would make handling even a limited and natural short-term slowdown potentially so tricky.” “Why the world economy feels so fragile” January 9.

Sir, as you know because of the thousands of letter I have obsessively written to you on this subject, which you have equally obsessively ignored, I am absolutely sure something has been going very badly for a long time, and will explode… perhaps the sooner the better.

In April 2003, as an Executive Director of the World Bank, in a board meeting I said, "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."

Likewise, a world obsessed with allowing banks to leverage their capital immensely only because something is perceived or decreed as safe, is doomed to overload what’s “safe” way too much with debt, while, relative to that, financing what’s “risky” way too little. That will sure exhaust, sooner or later, any "safe options for credit expansion". That makes for a hell of a fragile bank system. 

Wolf writes, “The long-term credit cycle reached its denouement in the disastrous financial crisis of 2007-08.” 

That crisis was solely caused by excessive exposures to what was perceived as safe, mortgages to residences and AAA rated securities, against which investment banks in the US and all banks in Europe had to hold little capital. Did regulators wake up and change their risk weighted capital requirements, which are so idiotically based on the idea that what’s perceive as risky is more dangerous to our banking system than what’s perceived as safe? No! No real denouement there.

And then Greece exploded in 2009, and the fact that statist EU authorities had assigned all Eurozone sovereigns a risk weight of 0%, which allowed EU banks to lend to Greece against no capital requirement at all, which clearly doomed the not so well managed Greece to excessive indebtedness, does not even appear listed among the causes for its tragedy. No denouement there either. EU sovereigns are still risk-weighted 0%.

Sir, just look at houses. Easy financing made available by very low capital requirements turned what used to be homes into investment assets. All this while entrepreneurs, those who could create the jobs so that house owners can afford to service their mortgages and pay the utilities, were denied credit or charged higher interest rates, because of higher bank capital requirements. Just you wait till that easy financing stream stops and too many house owners wish to convert their houses into main-street-purchase capacity again. It's going to be hell.

@PerKurowski

Imposing a marginal minuscule cost per web-ad-message could perhaps help level the playing field for the boring truths against the much more fun fake news.

Sir, Tim Harford expresses it clearly when he writes, “Fake news itself does not pose an existential threat either to democracy or the free press. What does pose such a threat is a draconian response from governments.” “There is no need to panic about fake news” January 5.

Indeed but Basic Skepticism 101 courses are still much needed. I have for decades objected to that draconian response from regulators that states: “We will make your banks safer with risk weighted capital requirements”, which they based on the loony idea that what’s perceived as risky is more dangerous to our bank systems than what is perceived as safe. 

Of course that is as fake as a regulation can be. Not only does it distort the allocation of credit to the real economy but it also puts bank crises on steroids. As for now, that only guarantees especially large crisis, because of especially large exposures, to what is especially perceived as safe, against especially little capital.

Hartford also worries about “that there is far too little transparency over political advertising in the digital age: we don’t know who is paying for what message to be shown to whom”. I agree but one important cause for that is that there is no marginal cost to be paid by those spreading news and ads on the web.

If every ad messaging on the web forced the messenger to pay a minuscule amount per message, then we would be more carefully targeted, meaning wasting less of our limited attention span, and it would be less easy for fake-more-fun-news messengers to compete with “real” not-as-fun-news outfits, if there now is such a thing.

PS. If those revenues help fund an unconditional universal basic income, then it would be even better. 

@PerKurowski

There's a new class war brewing, that between employed and unemployed.

Sarah O’Connor, discussing the challenges of the Gig economy writes, “Offering employment benefits to drivers might well help to snap up the best workers and hang on to them. But if customers were not to shoulder the cost, investors would have to.”“Uber and Lyft’s valuations expose the gig economy to fresh scrutiny” January 2.

Sir, to that we must add that if the investors were neither willing to shoulder that cost, then the gig workers would have to do so, or risk losing their job opportunities.

That conundrum illustrates clearly the need for an unconditional universal basic income. Increasing minimum wages or offering other kind of benefits only raises the bar at which jobs can be created, while an UBI works like a step stool making it easier for anyone to reach up to whatever jobs are available.

Sarah O’Connor also mentions how a collective agreement was negotiated between a Danish gig economy company and a union. Great, but let us not forget that in the brewing class-war between employed and unemployed, the unions only represent the employed… and we do need decent and worthy unemployments too, before social order breaks down.

PS. There's another not yet sufficiently recognized neo-class-war too. That between those who have houses as investment assets and those who want houses as homes.

@PerKurowski

The Fed and bank regulators have done many times more harm to the real economy than the political leadership, President Trump included.

Sir, Rana Foroohar writes:“It is clear that the power of monetary policy to support the real economy has diminished. In lieu of better political leadership, the key task for central bankers in the years to come may be to roll up their sleeves and do the gritty work of bolstering not the markets, but Main Street.” “Central bankers refocus on Main Street” December 31.

That’s not likely to happen. The Fed and bank regulators have clearly evidenced they are not up to that task. Without the slightest consideration to how banks are to serve the real economy, and its needs for development, with their risk weighted capital requirements for banks, they blocked “the risky” Main Street’s access to bank credit, in order to favor all that which was perceived (or decreed) as safe… like residential mortgages (and the sovereign) 

Now every one of them will eagerly be trying to escape his or her responsibility, by blaming Donald Trump, who in many ways is acting as a perfect godsend scapegoat.

PS. “We are almost 10 years into a recovery cycle — the time when economic slowdowns typically occur”. That might be so, but it still sounds so expertly besserwisser. 

"Paga-peo" a Venezuelan name for a scapegoat

@PerKurowski

European banks that leveraged more than 40 (25) times were (are) not banks; only scary betting propositions.

Sir, Stephen Morris, summarizing the state of European banks writes, “Poor profitability, outdated business models, negative rates and little cause for optimism have driven investors away”“Europe’s banks languish in a climate of gloom”, December 28.

As I see it, something leveraged way over 40 times, as many European banks were before the 2008 crisis, should hardly be called bank. When regulators went along with some bankers’ plea to reduce the capital the banks needed to hold, perhaps for bankers to be able to pay themselves larger bonuses, they simply destroyed the bank system that was. 

If I was a regulator, and wanted my banks to grow stronger than their competitors, the last thing I would do, is to allow them to hold little capital.

The regulators, with Basel II in 2004, showed they believe banks could leverage 62.5 times with assets that have obtained an AAA to AA rating. The market initially believed their risk-weighing capacity and valued banks accordingly. The markets, after 2008, no longer believe such nonsense; “There is better risk-reward elsewhere,” one fund manager is here quoted to have said.

The European Commission assigned a sovereign debt privilege of a 0% risk weighting, meaning no bank capital requirement, to all those sovereigns within the Eurozone that take on debt denominated in a currency that de facto is not their domestic (printable) one. The market had blamed Greece for its excessive public debt and is only now beginning to wake up to that statist horror.

Morris writes: “One activist is trying to force it to exit large swaths of the business, arguing it absorbs too much capital for too little return”. That does not mean capital is unavailable for banks.

Do you want bank investors to return? Then offer them to invest in well-capitalized banks with well-diversified portfolios. To invest in banks that values the highest first class loan officers, not some bright equity minimizing financial engineers.

PS. Seeing “Mary Poppins return” reminded me of why good old George Banks went to fly a kite.

@PerKurowski

President Trump seems to be on route to become one of the greatest “paga-peos” (scapegoats) in history.

Sir, Gillian Tett writes that for her “money, there is another, darker, way to interpret this week’s [extreme volatility in US equity markets]. Two years into Mr Trump’s presidency, global investors are questioning the administration’s financial credibility…Steel yourself to cope with further turbulence triggered by Mr Trump”,“Expect more turbulence from Trump’s Fed fight”, December 28.

Indeed, president Trump is to be blamed for some of it, but the truth is that had the markets been more normal, not so much bubbled-up, he would only cause some ripples never Tsunamis.

That Trump has given indications to fire Jay Powell, the Fed chair, is bad in as far as it interferes with the necessary independence and credibility of a central bank. But, that said, let me also hold that, if a central banker or a regulator believes that what bankers perceive as risky is more dangerous to bank systems than what they perceive safe, and therefore use credit distorting risk weighted bank capital requirements, as they’ve done for a long time, that is a clear justified cause for their removal.

Venezuelan historians sometimes recount that in old days the refined ladies of the society always used to keep a young slave close by. Whenever they let out noisy and smelly gases, they would hit the slave hard and loudly on his head spelling out “Boy/Girl!” whichever applied. These useful blame-takers, scapegoats, were known as “paga-peos”, literally “fart-payers”.

Sir, President Trump clearly produces some gases himself, but he could also go down in history as one of the greatest paga-peos ever.

When booming equity markets, house prices and unsustainable debt levels everywhere, built up with easy bank credit, huge liquidity injections and ultra-low interest rates come crashing down, as they must, sooner or later, those who are much more to blame for it, could all jointly point at President Trump and shout “He did it!” and Ms. Tett might smilingly nod in agreement.

PS. Though in Spanish here you will find more interesting details about the “paga-peos” tradition and about how it can be used with even worse intentions.

@PerKurowski

A governance code that forces regulators to clearly define the purpose of banks is much needed.

Sir you write, “From January 1, a revised corporate governance code will apply to UK-listed companies, for instance. It now states that the board’s duty is to ‘establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned’”. “Taking the measure of good corporate culture” December 27.

Sir, if only such code had existed and been applied by bank regulators.

As is the risk weighted capital requirements for banks which so dangerously distorts the allocation of credit to the real economy, were developed without any consideration to what is the purpose of banks, that is unless you think that being a safe mattress into which to stash away cash, is all that banking is about.

If “What are banks for?” had been asked, the Basel Committee would not have allowed banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs, those who could perhaps help to create more of the jobs needed in order to be able to service the mortgage and pay utilities.

You also write: “The Banking Standards Board, set up in 2015 to help the UK sector regain trust, runs an annual assessment of members, monitoring areas from honesty to accountability with a staff survey, focus groups and interviews.”

Sir, with respect to accountability, has that Board ever asked regulators why they think that what bankers perceive risky is more dangerous to our bank systems than what they perceive as save?

@PerKurowski

One country, setting the example of a very high carbon tax, and sharing out all its revenues equally among all its citizens, would be a real game changer, in so many ways.

Sir you correctly argue, “Time is running out for us to halt dangerous rises in temperature…this is no longer a scientific or technological challenge, it is far more a political and social one.”, “How to rescue the global climate change agenda” December 27.

But when you hold “The depressing reality about climate change is that we could solve the problem, at manageable cost” that is not necessarily so. Sir, let’s face it, the truth is that there are way too many whose real interest, more than solving the challenges of climate-change, is to profit from the process, whether financially or politically, whether they are aware of it or not.

I’m as concern as anyone with the problem but in my case I really did not mind so much president Trump’s blindness, since I have always thought of the Paris agreement in terms of being just an interesting photo-op that would serve as a very dangerous pacifier.

So to align political and social incentives; to allow the market signaling how the problems should be best tackled; and to keep costly profiteering out of the process, I have for years thought the best alternative is a very high carbon/pollution tax which revenues are shared out in their totality equally among all citizens.

Why does that idea not meet more interest? The answer is clearly that the redistribution profiteers see that route as one that could very dangerously affect the value of their franchise, since there could be pressure for the revenues to be redistributed to all, a sort of unconditional variable basic income, should also for instance include all income generated by any existing gas/petrol taxes.

Our planet that I often refer to as our pied-à-terre needs a champion that decides to go down this route to set an example to follow. My grandchildren are Canadian so I would love Canada showing the way.

PS. This is exactly what I proposed how Mexico City should tackle its serious pollution problems in a letter you kindly published in May 2016.

@PerKurowski

Let us issue shares fed with some results of our economy to all of us, and then worship these.

Sir, Rana Foroohar asking “At what point does bad corporate behavior become willful malfeasance?” writes, “Facebook is the natural culmination of 40 years of business worshipping at the altar of shareholder value.” “Facebook puts growth over governance” December 25.

Really? If all the incredible developments around Facebook, Google, Apple, Amazon, and Microsoft and similar, results from “worshipping at the altar of shareholder value” then perhaps we should issue a share to each citizens that feeds on a substantial part of profits, like those of Facebook, or taxes, like carbon taxes, and have us all worshipping these shares, instead of trusting the acts of genius politicians or bureaucrats with agendas of their own. 

Those shares, which would pay out an equal unconditional societal dividend to all of us, is by the way what a Universal Basic Income is all about. 

Of course, as usually comes with new developments, there are new and serious problems, and data privacy is one of them. Foroohar asks “ Have we reached one of those watersheds when US and European authorities are going to step up and do something about it? Let us beware, there’s no guarantee that would not be even worse. 

Foroohar says she is reminded of “bank executives who had no understanding of the risks built into their balance sheets until markets started to blow up during the 2008 financial crisis” 

I am though more reminded of regulators who allowed banks to leverage over 60 times their equity with what rated as AAA could be very dangerous to our bank system, and less that 8.3 times with what rated below BB- bankers do not like to touch with a ten feet pole. I am reminded of regulators who assigned a risk weight of 0% to the sovereign of Greece, and thereby doomed that nation to its tragedy.

@PerKurowski

The crisis of modern liberalism is caused more by authoritarian besserwisser distortions than by market forces.

Sir, Wolfgang Münchau writes: Margaret Thatcher’s successful brand of entrepreneurial capitalism in the UK in the 1980s… Through the sale of council houses, she turned tenants into property owners.”, “The crisis of modern liberalism is down to market forces” December 25.

True, but later immense injections of liquidity, ultralow interest rates, and extreme preferential risk weighted capital requirements for banks when financing the purchase of houses, has helped turn houses from being just homes into being investment assets. That of course has left all those who do not own these investment assets, even further behind.

Therefore I cannot agree with Münchau’s conclusion that liberalism is failing because of market forces. At least in this case the distortions are not caused by market forces, but by regulators and central bankers who have insufficient idea about what they’re doing. Of course, if crony statism forms part of market forces, which perhaps de facto it sadly could be, then I would be wrong.

When Münchau finally opines, “Any system that leaves behind 60 per cent of households will eventually fail” that is not necessarily so. The world is plagued by examples by how such systems have too often proven to be even more resilient than those who do not. On a small model scale, just look at how Venezuela’s current regime has been able to hang on to power for at least a decade more than it should have been able to.

@PerKurowski

Why should Goldman Sachs financing 1Malaysia Development Berhad (1MDB) be worse than it financing Venezuela’s Maduro’s regime?

David Crow and Laura Noonan in an FT The Big Read write, “Goldman is under increasing scrutiny over its role in underwriting $6.5bn of bond offerings for 1MDB in 2012 and 2013, a service for which it reaped a hefty $600m in fees and trading gains. After the money was raised, $2.7bn was allegedly siphoned off by the Malaysian financier Jho Low, who is accused of masterminding the fraud, to pay for a lavish lifestyle and to bribe Malaysian officials.” “Tim Leissner: Goldman Sachs banker at the heart of 1MDB scandal” December 24.

Sir, why should this operation be considered so worse than when, in May 2017, Goldman Sachs, Lloyd Blankfein approved to hand over about US$800 million to the notoriously corrupt, criminal and human rights violating government of Venezuela’s Maduro?

GS, in exchange for their money obtained $2.8billion Venezuelan bonds paying a 12.75% interest rate, which if repaid would provide GS with about a 42% yearly return, 2.000% more than what US pays. Is that not bribing foreign government officials and should therefore perhaps fall under the Foreign Corrupt Practices Act of 1977?

With respect to money being siphoned off, if anyone in GS doubts that much of that loan did not go the same route, then the days of GS are soon over. Such naiveté does not survive in the world of finance.

We are now in December 2018, and still not the slightest sign of a "Sorry Venezuelans" from Lloyd Blankfein. An elite, aware of its true responsibilities, would be shaming Lloyd Blankfein… and surely not inviting him to their homes. 

@PerKurowski

If there’s a re-vote on Brexit, what will the Remainers suggest Britain remains in?

Sir, Jeff Colegrave makes a well reasoned case of why, if there is a new vote on Brexit, it is on the Remainers’ shoulders to make very clear what they are supporting to remain in. “Remainers risk hubris without a positive case for the union” December 17.

The three outstanding problems Colegrave wants to have a clear definition on are:

How the Eurozone can avoid that a generation of youth becomes again sacrificed, on the altar of the common currency.

How the EU can avoid manifestly failing to adequately address the issue of migration. 

And “the lack of democratic political architecture within the European project, [which] cannot lightly be dismissed as some kind of arcane irrelevance. 

I could not agree more. I would be a committed Remainer, only if EU shows clear intentions to stop being such a Banana Union. You do not build a real United European States with a bureaucracy such as that currently present in Brussels.

Let me be clearer yet. If a Remain wins, the last thing British citizen, or all of their other EU citizens colleagues need, is for that to be presented as a triumph or an endorsement of Brussels.

PS: With respect to the sacrifices on the altar of the common currency, I have sent you many letters, in which I have blamed EU authorities for the tragic over-indebtedness of many euro sovereigns, when assigning to the public debt contracted in a currency that de facto is not their domestic (printable) currency, for purposes of bank capital requirements, a 0% risk weight. But of course these letters are ignored, because Per Kurowski suffers just an obsession about current bank regulations. 

@PerKurowski

Even the best central bankers can mess it up, royally

Sir, Tim Harford writes: “A flint-hearted technocrat can at times deliver better results for everyone. In the early 1980s, Fed chair Paul Volcker demonstrated the basic idea that inflation could be crushed by a sufficiently badass central banker.” “Stop sniping at central banks and set clear targets” December 16.

Indeed, and Paul Volcker was a hero of mine too, that is until I realized his role as the facilitator of the risk weighted capital requirements for banks.

In his book “Keeping at it”, penned together with Christine Harper, Paul Volcker writes: “The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be…. At the end of a European tour in September in 1986, at an informal dinner with the Bank of England’s then governor Robin Leigh-Pemberton… without a lot of forethought, I suggested to him that if it was necessary to reach agreement, I’d try to sell the risk-based approach to my US colleagues.”

And that was that! In that moment, accepting the European nonsense that what bankers perceive as risky is more dangerous to our bank systems than what banker perceive as safe, Paul Volcker, a central banker, helped condemn us to suffer especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital. I thank him not!

Harford opines “The health of our democracies demands that our politicians start taking responsibility again”

Absolutely! And with respect to bank regulations that requires the politicians to ask for explanations like: Why do you risk weigh the assets based on their perceived risk and not on their risk based on how bankers perceive their risk? Have you never heard about conditional probabilities?

PS. The Basel Committee document that provides an explanation on the portfolio invariant risk weighted capital requirements does not make any sense to me, but perhaps Tim Harford understands it. If so could you please ask him to explain it to us? 

@PerKurowski

Only a very dependent statist central bank would assign its sovereign a 0% risk weight.

Sir, Lord Skidelsky writes, “The failure of central banks to prevent — or even foresee — the 2008 financial crash stems directly from their acceptance of Eugene Fama’s efficient market theory, which implied that commercial banks needed only light regulation.” “Central banks should not set economic policy” December 13.

NO!

The risk weighted capital requirements for banks, by which banks, according to Basel II, could leverage limitless with sovereigns, 62.5 times with AAA to AA rated, and only 12.5 times with risky entrepreneurs and SMEs is anything but light regulation. It is a very heavy handed intervention.

Lord Skidelsky rightly says: “Most of the money pumped into the economy by quantitative easing leaked out into the financial and real estate sectors rather than stimulating the real economy”. Yes, but that was primarily so because some inept besserwisser regulators were/are convinced that what bankers perceive as risky, is more dangerous to our bank system than what bankers perceive as safe; and those having assets are usually perceived to be safer, something which ain’t necessarily so. 

Sir, also, let me be clearer yet; a central bank that agrees with a 0% risk weight of the sovereign is far from independent; it is a very dependent statist central bank.

@PerKurowski

What produces more bread? An economy with all consumers being equal, or one with some being filthy rich?

Sir, David Redshaw quotes John Kenneth Galbraith from his 1929 book The Great Crashwith: “The rich cannot buy great quantities of bread.” “Excess wealth can lead to speculative froth” December 13.

True, but when the rich transfer their purchasing power by buying assets that would often otherwise not be demanded, might that not be causing others to have job opportunities that would allow them to buy greater quantities of bread, than would have been the case without the rich?

And Redshaw goes on to say “The economy is motored by the regular and reliable spending of a confident workforce rather than by the mega rich, whose erratic and luxury-end spending always seems to end in boom and bust.”

Really? When has an erratic and luxury-end spending by the mega rich ended in a boom and bust? Last time I looked it was poor buyers of homes in the subprime sector in the US, empowered by being packaged into AAA rated securities, these securities in its turn empowered by regulators who allowed European banks and US investment banks to leverage more than 60 times their capital with these only because they had an AAA to AA rating, which ended in boom and bust.

Sir, never forget that a paper is also measured by what it allows to be published.

@PerKurowski

The risk weighted capital requirements for banks have helped cause an utterly dysfunctional capitalism.

Sir, Martin Wolf, after reviewing Colin Mayer’s “Prosperity”,Jonathan Tepper’s and Denise Hearn’s The Myth of Capitalismand Deborah Hargreaves “Are Chief Executives Overpaid?” writes, “These books suggest that capitalism is substantially broken. Reluctantly, I have come to a similar conclusion. This is not to argue for the abandonment of the market economy, but for better companies and more competition” “Rethink the purpose of the corporation” December 13.

Sir, one of the most important tools of a functional capitalism, is the ability to channel efficiently the savings into investments. The most important artery for that have, for a couple of hundred years, been our banks. But our bank regulators, with their risk weighted capital requirements, that which allow a higher leverage with what is decreed or perceived as safe than with what is perceived as risky, have sadly clogged up those arteries.

To “Rethink the purpose of the corporation”? Much more important is for the regulators to define the purpose of the banks, beyond that of being a safe mattress into which stash away cash.

I challenge Mr Wolf to find, in all current Basel Committee bank regulations, a word about the purpose of banks being intermediating credits efficiently. 

Wolf also writes: “We should be explicitly encouraging a thousand different flowers of governance and control to bloom. Let us see what works.”

Absolutely… and that’s why, as an Executive Director of the World Bank, in an official statement I held that "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

Sir, and what when a globalized best practice is based on such a loony theorem that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe? Are we not then globalizing stupidity?

@PerKurowski

Europe, if you spoil your kids too much they will not grow strong. That goes for banks too.

Sir, Patrick Jenkins analyzes several concerns expressed about European banks when policymakers gathered to mark the retirement of Danièle Nouy from ECB’s Single Supervisory Mechanism (SSM); who is to be succeeded by Andrea Enria as the Eurozone’s chief banking regulator. “As European banks regulator retires, six big challenges remain” December 11.

The former Grand-Chair of the Federal Reserve, Paul Volcker, in his recent book “Keeping at it”, co-written with Christine Harper, recounts the following when, in 1986, the G10 central banking group tried to establish an international consensus on bank regulations and capital requirements:

“The US practice had been to asses capital adequacy by using a simple “leverage ratio”-in other words, the bank’s total assets based compared with the margin of capital available to absorb any losses on those assets. (Historically, before, the 1931 banking collapse, a ten percent ratio was considered normal)

The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be.”

Sir, even though the Basel Accord was signed in 1988 and further developed in 2004 with Basel II, and with which the European risk weighting was adopted, I am sure we can trace the differences between US and Europe banks to these original differences on capital requirements. The US has been much more strict on capital than Europe. In fact the problems with American banks during the 2008 crisis were mostly restricted to those investment banks, which supervised by the SEC, had been allowed in 2004 to adopt Basel II criteria.

In Europe meanwhile banks could do with much less capital, which meant that much more was left over for bankers’ bonuses. In essence, Europe’s banks were dangerously spoiled. The challenge these now faces is having to substitute their equity minimizing financial engineers with good old time loan officers; and convince the capital markets of that. Good luck!

@PerKurowski

To save the earth, start by saving it from phony saving-the-earth profiteers

Sir, Martin Sandbu writes about “how a conflict of interests over climate change — something that really is humanity’s common challenge — aligns with and reinforces a deeper culture war dividing centrist urban elites from system-critical populists… [So] we have missed the potentially much greater obstacle of political polarization in the age of populism” “The burden of tackling climate change must be shared”, November 5.

Hear hear! This is exactly the type of issues and challenges we must learn to tackle, if there’s going to be any hope for us to survive as the society we always dreamt of, or avoid turning into that society we always dread, something that in fact means even more than our survival on earth.

But, when Sandbu speaks about what “reinforces a deeper culture war dividing centrist urban elites from system-critical populists”, I disagree, because the real hard core divide in this case is between those expected to pay for to help save our planet, and those who expect to profit from those efforts.

But Sandbu also refers to a remedy to that, when he mentions, “the carbon ‘fee and dividend’ approach advocated by climate scientist James Hansen [which] would levy duties on fossil fuels and redistribute the revenue in equal per capita amounts to all residents”

That’s precisely in line with what I recommended in a letter published in FT on how Mexico City should go about in order to reduce its serious pollution problems.

If Emmanuel Macron, perhaps hand in hand with Canada’s government that is also thinking about higher carbon taxes, decides that all revenues from taxes on fuel, and similar, are to be shared out equally among all citizens, that would set an example to other nations, that would at least be worth some ten Paris agreements.

Sir, let me be cleat about it. If I am going to help to save the world, by paying higher carbon taxes, I want all of it translate into a clear market signal that saves the planet, and not into something which unduly enrich those promoting saving the world, or those profiteering on the process.

@PerKurowski

An ESM European bond insurance scheme would make Eurozone sovereign debt crises bigger and more likely

Sir, Michael Heise, chief economist at Allianz writes: “An idea that might be capable of preventing or at least mitigating bond market dislocations is a European bond insurance scheme [operated by the European Stability Mechanism]… It avoids the heavy political burden of debt mutualisation and austerity regimes, actively encourages private sector lending and reduces contagion between sovereign debtors.” “Insurance tackles danger of sovereign bond shockwaves” December 4.

Heise explains:“A critical issue would be the setting of the premiums… A simple formula could apply: the triple A refinancing costs of the ESM, plus a risk premium that reflects both the rating of the country and any progress it has made on its public finances.”

It all sounds very rational, and such an insurance scheme would obviously be very useful for some in the case of a sovereign debt emergency. The harder and more important question though would be whether the existence of such scheme makes a sovereign debt crisis more likely or not.

For the purpose of the risk weighted bank capital requirements EU authorities assigned a 0% risk weight to all those sovereigns within the Eurozone, even though these de facto do not have their public debt denominated in a local domestic (printable) currency, the euro.

That stopped the markets from sending the correct signals and helped caused for instance Greece to contract public debt way in excess of what it should have done. 

Heise correctly states: “Set the insurance premiums too low and it degenerates into a disguised eurobond, a bond whose liability is jointly shared by eurozone countries.”

Sir, there is no doubt in my mind that those insurance premiums would be set way too low by any Eurocrats, and so in fact an ESM European bond insurance scheme would act as another non-transparent sovereign debt pusher, and thereby make any crises likelier and bigger. And that’s not the way to go about solving the challenges posed by the Euro twenty years ago.

@PerKurowski

To understand how the west might be lost it is important to remember how it was won.

Sir, Martin Wolf when reviewing Paul Collier’s “The Future of Capitalism” titles it as “An important analysis of how the west was lost” December 3.

I have not read it yet, but I will be attentive to if Collier gave the film “How the West was won” or John Kenneth Galbraith’s “Money; whence it came, where it went”, or something similar, any consideration when writing this book. That because risk-taking is the oxygen of any development and current regulators, having imposed on banks loony and dangerous risk adverse risk weighted capital requirements, have helped set the west on a downward path.

Wolf does tell us that Collier is for some “updated Henry George type taxation of rent on land, [arguing] we need to tax more forms of rent, including that from agglomeration, which now goes to lucky individuals and businesses.”

I assume “agglomeration” refers here to land and other assets? Of course, if that agglomeration produces higher cash-rents then those rents should be, and already are, mostly taxed, but, if land and assets are taxed on their value, if taxed, land and assets would have be sold, at ever lower and lower prices. How would that asset value deflation solve any problems?

Wolf writes that Collier’s starting point is one on which surely everybody agrees: “Deep rifts are tearing apart the fabric of our societies.” 

Indeed, but as I feel it, much of it is the result of polarization and redistribution profiteers having been so empowered by social media to merchandize their products of hate and envy.

Sir, I’ll stop here until I have read the book.

@PerKurowski

If elites do not socially sanction those they should sanction, there’ll be no society left to sanction.

Sir, Laura Noonan writes “Goldman Sachs is considering a special surveillance programme to monitor higher-risk employees in far-flung locations so the bank can demonstrate that “lessons have been learnt” from the 1MDB scandal” “Goldman eyes monitoring of high-risk staff after 1MDB”, December 3.

Great, but they should also monitor high-risk bosses in home office locations, like Mr. Lloyd Blankfein. And I here refer to that lending by him and Goldman Sachs to a notoriously inept, notoriously corrupt, notoriously human rights violating regime of Venezuela’s Maduro.

Do I want Goldman Sachs’ Lloyd Blankfein to be punished by the justice? No! I much prefer the elite; universities, media among others should do that, shaming him, by socially sanctioning him, by for instance not inviting him to anything.

Sir, do not give Lloyd Blankfein, or an unrepentant Goldman Sachs, one inch more of space in the Financial Times, they do not deserve it.

PS. To this date Lloyd Blankfein has not been able to find in himself to utter the slightest “I’m sorry Venezuelans”.

PS. But perhaps justice might also have a bone to pick with Blankfein.

@PerKurowski

Why is it not obvious that what bankers perceive as safe must, by definition, be more dangerous to our bank systems than what they perceive as risky?

Sir, Jonathan Ford writes, correctly, “One concern with using risk-weighted assets is that bank bosses can influence the calculation by tweaking the asset number”, “Money to burn at the banks? It all depends on how you count it” December 3.

But you really do not have to go there to be very concerned, it suffices to ask yourself: What is more dangerous to our bank systems, that which bankers perceive as risky, or that which bankers perceive as safe?

And then you do not have to use bankers models, it suffices to know that in the standardized risk weights of Basel II, the regulators themselves assigned a meager 20% risk weight to the rated AAA to AA, that which really could be dangerous (like in 2008) and a whopping 150% weight to the innocous below BB- rated, that which bankers won’t like to touch even with a ten feet pole.

I agree with those wanting a straight equity requirement for banks, a leverage ratio, like Mervin Kings’ 10% or Professor Anat Admati’s 15%, but much more than for the safety of our banks, I want that so as not distort the allocation of bank credit to the real economy. 

Sir, I am convinced that, a 0% bank capital requirement, with no supervision of banks, with no deposit guarantees to its depositors, would be much better for our real economies, and much safer for our banks systems, than the current dangerous regulatory nonsense… which only guarantees especially big crisis, resulting from especially big exposures, to something perceived as especially safe, against especially little bank capital.

Unfortunately, you seem to believe our bank regulators really know what they’re doing… or is your motto “Without fear and without favour” just a marketing ploy?

http://subprimeregulations.blogspot.com/2018/08/risk-weighted-capital-requirements-for.html

@PerKurowski