12 years since, and yet the true cause of the 2008 crisis shall seemingly not be told

Sir, John Flint a former Before chief executive of HSBC writes: “Before 2008, regulators’ approach to conduct risk in banking was what they called “principles based” — deliberately light touch. It relied too much on banks’ abilities to govern themselves and it failed.” “Warning lights are flashing for Big Tech as they did for banks” November 30.

“principles based”? Yes, but tragically with risk weighted bank capital requirements based on a very wrong principle, namely that what’s perceived as risky is more dangerous to our bank system than what’s perceived as safe.

“It relied too much on banks’ abilities to govern themselves and it failed.”? No, it relied way too much on some very few human fallible credit rating agencies, a systemic risk.

“deliberately light touch”? If as Basel II allowed​, ​ banks could leverage a mindboggling 62.5 times their capital with assets rated AAA to AA, I would not call that a “light touch”, I would call it putting Minsky Moments on steroids.

“This time it is the technology sector rather than the financial that is leaving us all exposed.”

Sir, current bank capital requirements, 12 years since the 2008 crisis, are still mostly based on the expected credit risks banks clear for on their own; not on misperceived credit risks, 2008’ AAA rated MBS, or unexpected dangers, like COVID-19. Therefore, banks will again stand there with their pants down. A good job Sir?

@PerKurowski

Here a formal statement in 2003 as an Executive Director of the World Bank 

Here my brief explanation of the 2008 crisis

And here the 2019 letter I sent to the Financial Stability Board

FT you have the manpower to analyze how risk weighted bank capital requirements distort the allocation of bank credit.

Sir, Megan Greene writes: “Stubbornly low interest rates have failed to generate significant aggregate demand. That suggests the world has been stuck in a prolonged liquidity trap.” “Financial policymakers are right to fight the last war”, November 24.

FT would do all a favor if it sends out its savvy journalists to investigate bank rates given the current different capital requirements. That should cover assets risk-weighted 20%, 50%, 100% and 150%. And then they should try to analyze how these rates relate to each other and how this compares the relation of interest rates for similar assets, before the introduction in 2004 of the risk weighted bank capital requirements for private sector assets.

That would allow FT to understand how these regulations distort the allocation of credit in favor of those who being perceived as safe are favored anyway, and against those who perceived as risky are anyhow disfavored.

But what fighting the last war is Greene talking about? The 2008 crisis was caused by AAA rated securities turning out risky but our bank regulations still are mostly based on the expected credit risks banks should clear for on their own; not on misperceived credit risks or unexpected dangers, like COVID-19. As a consequence, banks will now stand there with their pants down. Good job!

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

@PerKurowski

By not asking all the questions that need to be asked, journalists also fail society.

Sir, Henry Manisty writes “financial journalism plays a vital role in upholding the integrity of financial markets”, “EU regulators have form on obstructing journalists” November 9.

Indeed, but in many respects, financial journalists have often failed society by not doing that. For instance, here are just three examples of questions that should have been posed directly to the regulators, long ago.

We know that those excessive bank exposures that can be dangerous to banks and bank systems are always created with assets perceived as safe, never ever with assets perceived as risky. Therefore, can you please explain your risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous than what’s perceived as safe?

Before risk weighted bank capital requirements credit was allocated on the basis of risk adjusted interest net margins and a view on the portfolio. After that it is allocated based on risk adjusted returns on equity; which obviously those that banks can leverage less with, e.g. “risky” SMEs and entrepreneurs. Explain how this does not distort the allocation of bank credit?

Even though none of Eurozone sovereigns can print euros on their own, for your risk weighted bank capital requirements you decreed a zero-risk weight for all of their debts. What do you think would have happened in the USA if it had done the same with its 50 states?

Sir, paraphrasing Upton Sinclair one could say that “It's difficult to get a journalist to ask something, when his salary, or being invited to Davos, depends on his not asking it.”

PS. My 2019 letter to the Financial Stability Board (FSB)

The most dangerous underlying condition of the US, is that like so many other nations, it has been hit by the Polarization Pandemic.

Hannah Kuchler writing about her FT lunch with Atul Gawande on the battle to beat Covid-19, writes: “The US is polarised over its priorities, between those arguing in favour of putting the economy first, and those who want to concentrate on saving lives.”. It also states “People are more at risk of Covid-19 if they have underlying conditions such as diabetes and hypertension.” 

Sir, when compared to age, diabetes and hypertension read like truly insignificant underlying conditions. In USA, as of October 14, those older than 70 years comprise 89% of all those dead from Covid-19 in USA, those under 45 years, 3%. Yet, in terms of who will have to pay the economic/ mental health/ societal costs of any top down imposed responses to the virus that favors saving lives, the reverse percentage is to be expected. 

Sir, with those kinds of figures, don’t you think one could develop a response to Covid-19 that could better consider both priorities?

Of course, one could. Just look at Sweden keeping schools up to 9th year open while asking grandfathers to refrain from hugging their grandchildren.

Why has that not happened in the US? The answer to Hannah Kuchler’s “Is the US as a country more at risk because of the underlying condition of its healthcare system?” Is YES! It also suffers the polarization virus, and way too many polarization profiteers just don’t want harmony vaccines to appear.

Communications in a polarized world

@PerKurowski

Risk taking is the oxygen of all development. God make us daring

Sir, I refer to Arvind Subramanian’s “Developing economies must not succumb to export pessimism” October 16.

In October 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York I presented a document titled “Are the Basel Bank Regulations Good for Development?”

Let me quote just two paragraphs from it:

“Credits deemed to have a low default or collection risk will intrinsically always have the advantage of being better perceived and therefore being charged lower interest rates, precisely because they are lower risk. But, the minimum capital requirements of the Basel regulations, by additionally rewarding "low risk" with the cost saving benefits resulting from lower capital requirements, are unduly leveraging the attractiveness of "low risk" when compared to "higher risk" financing.

It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

Risk taking is the oxygen of all development. God make us daring!

The risk weighted bank capital requirements represent a monstrous “intellectual dereliction of duty” and so is the continued silence on it by “Western economists, academics and policy advisors”

@PerKurowski

Let’s be very wary of Big Tech and Governments forming Big Brother Joint Ventures

Marietje Schaake holds that “regulators should be able to assess all sectors for harms done to democracy, using specified skill sets… Empowering them to probe, investigate, discover and assess companies’ respect for democratic principles would ensure broader and more explicit accountability” “Weakened democracy is another harm caused by Big Tech”, October 15.

That sounds very reasonable but it behooves us citizen to know that about the worst thing that could happen to our democracies, is the formation of Big Brother Joint Ventures between Big Tech and politician/government bureaucracy.

In the same vein, on October 13 Chris Giles in “Rich nations draft blueprint for $100bn revolution in corporate tax” reported on the large appetite that exists when it comes to taxing “the likes of Google and Amazon”. Sir, do we really want to see the taxman having financial incentives in the exploitation of our personal data? We do not.

Now, if all advertising revenues generated by exploiting such data was shared 50-50 with us who supply the data, for instance by means of helping to fund an unconditional universal basic income, that would much better align the incentives of all participants.

But Sir, this does not mean I see no role for regulators when it comes to Big Tech. On the top of my mind I can list:

That they help guarantee we’re always receiving messages from parties that we can easily and accurately identify.

That they help us to be targeted as precisely as possible, so that our scarce attention span is not wasted in irrelevant/useless advertising/information.

That they do their utmost to keep out all those redistribution or polarization profiteers who, with their messages of hate and envy, destroy our societies.

Sir, one last question. If an author can get a copyright for a book, should we not be able to get a copyright on our preferences, that which we include in our book of life?

PS. Sir, since soon I’ve written you 3.000 letters on the topic of the incredibly mistaken bank regulations that cause so much societal harm, you must understand that the whole topic of regulations makes me nervous. 

@PerKurowski

Though meteorologists announce rain, regulators allow banks to operate as if the sun shines.

Sir, Tommy Stubbington writes: “A coronavirus-linked credit rating downgrade by Fitch prompted speculation that Rome was headed for ‘junk’ territory” and “Italy is the most heavily indebted major eurozone country, and yet it can fund itself for free”; “Italy’s interest-free bonds enjoy strong demand as buyers bet on ECB support” October 14.

Mark Twain (supposedly) said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it looks to rain” and, if now revisiting banking, Twain could just as well opine: “A bank regulator is a fellow that allow banks to hold little capital when the sun is shining, so banks can pay high dividends and buy back stock, but wants banks to hold much more capital, the moment it starts to rain”

But, Twain, in the case of Italy, or any other Eurozone over-indebted sovereign, would not be entirely correct, because even though credit rating meteorologists now warn about heavy rains, EU authorities still decree sunshine, and even though Italy cannot print euros on its own, they allow their banks to hold its debt against zero capital.

Sir, does Stubbington ignore this? I’m not sure, but Upton Sinclair also held that “It's difficult to get a man to understand something, when his salary depends on his not understanding it.” That could perhaps apply to him… and, sorry, perhaps to you too Sir.

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

Where would the City of London be if in the 19th Century it had been placed under the thumb of a Basel Committee?

Sir, I refer to your “The City must not be forgotten in Brexit talks” September 29. In view of the City’s real existential problem, I find it a bit irrelevant 

Creative financial engineers tricked or ably lobbied bank regulators into accommodating their wishes for leverage maximization/equity minimization, by introducing risk weighted bank capital requirements nonsensically based on that what’s perceived as risky is more dangerous to bank system than what’s perceived as safe.

That caused loan officers to allocate credit not as it used to by means risk adjusted interest rates but to allocate it by means of risk adjusted returns on equity. If the City of London is to survive as one of the prime banking centers of the world it needs to get rid of that distortion.

FT, without fear and without favor dare to think what would have been of the City of London if in the 19th Century it had to operate under the thumb of Basel Committee inspired risk adverse regulations?

PS. And if in 1910 that savvy loan officer George Banks had been asked about risk-weights, Tier 1 capital and CoCos, I am sure he would have gone to fly a kite.

Thou shall not sell environmental crimes indulgences

Sir, albeit a bit late, I refer to David Sheppard’s Big Read “Carbon trading: the ‘one-way’ bet for hedge funds” FT August 23.In his Encyclical Letter 'Laudato Si’ of 2015, Pope Francis wrote:

"171. The strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors."

With “permits” Pope Francis was here de facto referring to some type of “indulgences”, which help pardon environmental sins. 

It was Martin Luther’s attacks on the Catholic Church’s sale of indulgences for the remission of temporal punishment for forgiven sins, which caused the rift that led to the creation of the Protestant Church. Therefore, more than 500 years since Luther in 1517 (supposedly) nailed his “Ninety-five Thesis” on the door of Old Saints' Church in Wittenberg, I found it curious (and equally correct) to read a Catholic Pope accusing many protestants who favor carbon trading, for sort of a similar procedure.

As a protestant belonging to the Swedish church, ser wife and catholic children, I do not like carbon trading, as I previously explained in a letter you published, I much prefer high carbon taxes shared out equally to all, as that would align the incentives in the fight against climate change and the fight against poverty. 

http://ourpiedaterre.blogspot.com

@PerKurowski

Inflation has already returned

Sir, I refer to your editorial “The economy is too weak for inflation to return” August 14, 2020.

No! The inflation has already returned, it is just not being measured yet. 

The Consumer Price Index (CPI) market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought, and there is a time lag between the expenditure survey and its use in the CPI.

The consumption basket in a weak economy differs considerably from that of a strong economy. Ask anyone who on a tight budget has recently gone to the grocery store, and you can be sure he will complain about rampant inflation. 

PS. TIPS (Treasury Inflation-Protected Securities) are based on CPI while the Fed targets PCE. Does this have any implications?

PS. In these in real time information times, I am amazed there’s still a long time lag between the expenditure survey and its use in the CPI.

PS. What if the CPI market basket was developed from detailed information provided by families and individuals about what they would have wanted to be able to buy if its prices had not gone up?

Not the first time I have questioned CPI/Inflation

PS. The truth, in theory and in practice, is that everybody's inflation, might be nobody's inflation.

@PerKurowski

The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

One day future historians will recount, and Paris’ Musée de L’Homme exhibit: “1988 Basel I: When Regulators introduced Financial Communism”

Free markets were set up to go bad, because of bad bank regulations.

John Thornhill writes: “The global financial crisis of 2008 exploded the ideology that markets always deliver the goods” “Three game-changing ideas to shape the post-pandemic world” Life and Arts, May 30.

Sir, that is the problem, because that is exactly what all those against free markets want us to believe. 

The 2008 crisis resulted from huge exposures to securities collateralized with mortgages to the subprime sector in the USA, turning out risky. 

And those huge exposures were a direct result of: Regulators allowing European banks and US investment banks to hold these securities, if these were rated AAA to AA, which they were, against only 1.6% in capital; meaning banks could leverage their equity an amazing 62.5 times. 

Securitization, just like making sausages, is the most profitable when you pack the worst and are able to sell it of as the best. If you can sell someone a $300.000 mortgage at 11 percent for 30 years, which was a typical mortgage to the subprime sector, and then package it in a security that you could get rated a AAA to AA, so that someone would want to buy it if it offered a six percent return, then you would pocket an immediate profit of $210.000. 

The combination of those two temptations proved irresistible.

The doom loop between government and banks was created by regulators.

Sir, I refer to Martin Arnold’s “Soaring public debt poised to heap pressure on eurozone, ECB warns” May 27

For the risk weighted bank capital requirements, all Eurozone sovereigns’ debts have been assigned a 0% risk weight, and this even though none of these can print euros on their own. Would there be a “doom loop” between governments and banks if banks needed to hold as much capital when lending to governments as they must hold when lending to entrepreneurs? Of course not!

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, in May 2011 Sharon Bowles, the then European Parliament’s Chair Economic and Monetary Affairs opined:

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

In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:

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

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

I trust that the report will help to foster a discussion which, in my view, is long overdue.

Mario Draghi, ESRB Chair"

Six years later, and now even more “long overdue”

Does Martin Wolf’s “The tragedy of two failing superpowers” conform with FT’s beautiful motto of “without favour”?

Wolf opines about Donald Trump in terms of “a malevolent incompetent” and for this looks for the support of that totally unbiased Jeffrey Sachs who writes about “devastatingly of the ill will and ineffectiveness on display”. “The tragedy of two failing superpowers” April 1.

Sir, if this is what it comes down to, let me be clear that I much prefer the support of a highly incompetent but more principled Donald Trump, against our evidently thousand times more malevolent incompetents, like Hugo Chavez and Nicolas Maduro, than the support given to them by “extremely competent” Barack Obama and Jeffrey Sachs.

Wolf then writes: “For those of us who believe in liberal democracy” Really? Are we to believe that anyone who, for purposes of bank capital requirements, agrees with assigning a risk weight of 0% to his sovereign’s debt and 100% to fellow citizen’s debts, something which de facto implies that bureaucrats knows better what to do with credits for which’s repayment they're not personally responsible for than for example entrepreneurs, could be defined as a believer in a liberal democracy? I don’t think so, to me he would just be a disguised communist.

@PerKurowski

British Museum’s “Currency in crisis: German emergency money 1914 – 1924”

British Museum’s “Currency in crisis: German emergency money 1914 – 1924”

“Notgeld”

Do we have a banking system with banks as they are supposed to be?

Sir, I refer to your “Non-bank lenders will bear brunt of credit crisis”, March 25

John Augustus Shedd (1859–1928) opined: “A ship in harbor is safe, but that is not what ships are for”

But bank regulators paid banks with lower capital requirements to stay safe, thereby overcrowding “safe” harbors. As a result, those who had real reasons to stay in safe harbors, like many non-bank lenders, and were less prepared to do so, like many non-bank lenders, had then to take to the risky oceans.

You opine “we are in a better place today because regulators forced greater protections on the banking system” What greater protection? A measly 3% leverage ratio supposed to cover for misperceptions of risks, like 2008’s AAA rated, and unexpected dangers, like coronavirus? You’ve got to be joking.

You quote Ben Bernanke “If you do not have a banking system, you do not have an economy.” Sir, do we really have a banking system with banks as the bank’s we used to know, or as banks are supposed to be?

I mean, with zero bank capital requirements against loans to the government and eight percent against loans to citizens you do not have a free market economy, you have financial communism.

With lower bank capital requirements for residential mortgages than for loans to the entrepreneurs or SMEs, those who can create the jobs needed in order to service utilities and mortgages, you will not have a functional economy, and houses have morphed from being affordable homes into being the main risky-investment of way too many families.

Sir, for the umpteenth time the Basel Committee’s risk weighted bank capital requirements: guarantees especially large bank crisis, caused by especially large exposures held against especially little capital to assets perceived as especially safe, but one of which suddenly one turns out as especially unsafe.

If John A. Shedd was alive today he might have opined: “A ship is safer on the oceans than staying in  a safe harbor, which might become dangerously overcrowded.”

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

The coronavirus will unleash a horrific Minsky moment in our bubbled-up debt overextended economies

Sir, I refer to Martin Wolf’s “The virus is an economic emergency too” March 18. 

Indeed, more than a week ago I tweeted: “The world is prepared somewhat for the expected, but not enough for the unexpected. That’s why, worldwide, coronavirus will cause larger number of deaths because of its economic consequences, than because of its health implications”.

And for years I have also tweeted, “The current fake-boom, put on steroids by huge central bank liquidity injections, low interest rates, and Basel Committee’s pro-cyclical risk weighted bank capital requirements, will end in a horrific Minsky moment bust, equally put on steroids.”

Sir, bank capital requirements used to be a percentage of all assets, something which to some extent covered both EXPECTED and UNEXPECTED risks. But currently Basel Committee’s risk weighted bank capital requirements, those that operate over the silly low 3% leverage ratio, are solely BASED ON EXPECTED credit risks. So even if Wolf can write “The pandemic was not unexpected”, for banks and its regulators it sure was completely, 100%, unexpected. And all the banks will now soon stand there completely naked.

And what help can banks be expected to give entrepreneurs and SMEs when they are required to hold much more capital when lending to these, than when holding “safe” sovereign debts and residential mortgages? Will banks be able to raise the needed 8% in capital or will regulators lower that requirement?

Wolf writes, again, “Long-term government debt is so cheap”. Sir, when will Wolf dare think about what those rates would be, for instance in Italy, if its banks needed to hold the same amount of capital against loans to their government than against loans to their Italian entrepreneurs?

“Governments can just send everybody a cheque”. Yes, a perfect moment to build up an unconditional universal basic income scheme; but it needs to be well funded, not with public debts expected to be repaid by our grandchildren. Possible sources are high carbon taxes, something which would align the incentives in the fights against climate change and inequality; another possibility is to tax those advertising revenues generated by exploiting our personal data.

PS. As to USA it should immediately eliminate of all health sector discrimination in price, access or quality, between the insured and the uninsured.

PS. As to education all professors and administrative personal should have their salaries reduced, something which should be compensated by participating somewhat in their students’ future income streams.

http://subprimeregulations.blogspot.com/2020/03/the-basel-committee-for-banking.html

@PerKurowski

The seeds of the next debt crisis are to be found in the kicking of the 2008 crisis can forward, without correcting for what caused that crisis.

Sir, I refer to John Plender’s “The seeds of the next debt crisis” March 4.

Plender writes: “From the late 1980s, central banks — and especially the Fed — conducted what came to be known as “asymmetric monetary policy”, whereby they supported markets when they plunged but failed to damp them down when they were prone to bubbles. Excessive risk taking in banking was the natural consequence”

Not exactly “risk taking”! The risk weighted capital requirements caused excessive dangerous bank exposures, not to what was perceived risky, like loans to entrepreneurs, but to what was perceived safe, like residential mortgages; or decreed as safe, like the sovereign; or concocted as safe, like what banks’ internal risk models produced.

Plender asks: “Has the regulatory response to the great financial crisis been sufficient to rule out another systemic crisis and will the increase in banks’ capital provide an adequate buffer against the losses that will result from widespread mispricing of risk?”

No, it has not been sufficient. That because the incoherent response to a crisis caused by AAA rated securities backed with mortgages to the US’s subprime sector, was to keep on using risk weighted bank capital requirements based on perceived EXPECTED losses, and not on UNEXPECTED losses.

Plender writes: “The central banks’ quantitative easing since the crisis, which involves the purchase of government bonds and other assets, is, in effect, a continuation of this asymmetric approach”

Indeed, in 2006, when an upcoming crisis was slowly being detected by some, FT published a letter in which I argued for “The long-term benefits of a hard landing”. Sadly, central bankers and regulators wanted nothing of such thing, on their watch, and kicked the 2008 crisis can forward to our children and grandchildren, as hard as they could, and here we are… with world borrowings up to the tilt, and lenders waiting to be blown away by a coronavirus.

PS. At this moment, this letter not included, in my TeaWithFT blog, there appears 2.948 letters sent to you over soon two decades on the issue of “subprime banking regulations”.

@PerKurowski

Any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.

Sir, I refer to Patrick Jenkins “In our warming world, stranded energy assets are a growing concern” March 3. It evidences the difficulties in understanding how bankers adjust to risks, before and after the introduction of risk weighted bank capital requirements.

The current risk weighted bank capital requirements, which are based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived safe, only guarantees too much exposures to what’s “safe” and too little to what’s “risky”. So now banks, while “goose herds and whaling ships” are perceived as safe, run the risk of building up too large exposures that are harder to manage when these begin to look risky. 

Therefore, in the old days, before these regulatory distortions, banks were able to handle much better than now any slowly becoming apparent perceived risks, like with “goose herds and whaling ships”. 

What was more dangerous then, and MUCH more dangerous now, is of course the unexpected… like coronavirus.

Again Sir, for the umpteenth time, before, for around 600 years, banks cleared for perceived risk by means of interest rates and size of exposures. But then the Basel Committee instructed banks to clear for exactly those same risks, in the capital too. Sadly Sir, any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.

@PerKurowski

Do we need bankers, as in good loan officers, or bankers, as in creative financial engineers?

Sir, I refer to your “Europe’s banks are losing the global race for talent” February 25. In general terms, and most especially with “Banks, like the best football clubs, should nurture their young talent”, I agree completely. That said my concern with respect to all banks, not just European, is about what banks would benefit us the most.

For around 600 years banks allocated their credit to what bankers thought would produce the highest risk adjusted net profit margins, something which required them to consider interest rates and operation costs. In those days good loan officers were of utmost importance.

After the introduction of risk weighted bank capital requirements, banks now allocate their credit to what bankers think will produce them the highest risk adjusted net profit margins adjusted to capital requirements, something which now, besides interest rates and operation costs requires them to consider leverage possibilities. In this new kind of banking creative financial engineers have an important role to play.

I am convinced traditional banking not only satisfied much more efficiently the credit needs of our economies but was also much less dangerous in terms of financial stability than “modern” banking. 

But Sir, you don’t have to take my non-PhD opinion on that. In his 2018 autobiography “Keeping at It” late Paul Volcker wrote: “Over time, the inherent problems with the risk weighted bank capital-based approach became apparent. The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011.”

Yes, Europe and the world, of course needs a new generation of bankers, but before that, for our own good, let’s make sure they have the right type of banks to lead.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

Never create a dependency on something that might not be able to deliver.

Sir, this would be my response to Poland’s prime minister Mateusz Morawiecki’s “Setting an EU budget is about more than arithmetic” February 20.

Prime minister I would agree with most here stated but, if I were a prime minister of Poland, the first question I would make before any budget discussion would be:

Eurozone, how do you intend to disarm that bomb of all Eurozone sovereign’s debts, for purposes of bank capital requirements, having been assigned a zero percent risk weight, even though none of these can print euros on their own will? 

If that bomb is not disarmed, EU might sadly end up as a failed intellectual fantasy, something which could have horrible consequences.

Or Prime Minister, let me put it like this: 

A budget does wittingly or unwittingly always create some kind of dependency, and the last thing a government should do, for the nation or for its citizens, is to create a dependency on something that might not be able to deliver. 

PS. Just think about all that dependency on pensions and social security people have, and that will not be delivered.

PS. I am a Polish citizen who does not speak Polish because of a gender issue. My mother tongue, which I speak fluently, is Swedish.

@PerKurowski

Should financing human rights’ violators help fund US pensions?

Sir, I refer to Colby Smith’s “Year began with ‘hardcore fear of missing out’ but now holders of Caracas debt have lost hope” December 21

I wonder how one can discuss the chances of creditors collecting on Venezuela’s debts, ignoring that their funds have all gone to finance a notoriously corrupt and inept government that has and is evidently committing crimes against human rights?

Odious debts is mostly the direct result of odious credits…

With respect to the sanctions of Venezuela by the US Treasury’s Office of Foreign Assets Control, an international bondholder is quoted. “These sanctions were just a disaster, and all this has done is damage holders of the bonds, many of which manage money for US pensioners.” Really in these days when financing of good social purposes is promoted, like to finance the sustainable development goals, SDG’s, should financing human rights’ violators really help fund pensions?

Frankly, “Fidelity, T. Rowe Price, BlackRock and Pimco” as well as Goldman Sachs should all be shamed; and tell us the name of that “one bondholder group holding $8bn of Venezuela’s debt”, because such exposures do not happen without very close and incestuous contacts with the government.

@PerKurowski

Sir FT, do you, or our dear The Undercover Economist Tim Harford, have an explanation for what is a monstrous regulatory mistake?

Sir, I refer to Tim Harford’s “The Changing Face of Economics” December 19.

As an economist, if I were to regulate or supervise banks, I would mostly be concerned with bankers not perceiving the credit risk correctly. Wouldn’t you?

That’s why I cannot understand why so many economist colleagues, when acting as bank regulators, can be so dumb so as to bet our banking systems on that bankers will be able to perceive what is safe correctly. 

Let me explain it having bankers answering the four possible outcomes.

If the ex ante risky, ex post turns out safe = “Great News we helped an entrepreneur to have success”

If the ex ante risky, ex post turns out safe = “You see, that is why we lend them little and charge them high risk adjusted interest rates.”

If the ex ante safe, ex post turns out safe = “Just as we expected”

If the ex ante safe, ex post turns out risky = “Holy moly what do we now do? We lend it way too much at way too low interest rates”

But the regulators in the Basel Committee, in their Basel II of 2004, assigned risk weights of only 20% for what is so dangerous to our bank systems as what human fallible credit rating agencies have rated AAA, and a whopping 150% for what has been made so innocous, by being rated below BB-?

Sir, so do you, or our dear The Undercover Economist Tim Harford, have an explanation for what is clearly a monstrous regulatory mistake? 

Or is it that you, and our dear The Undercover Economist Tim Harford, out of sheer collegiality solidarity, both agree with such dumb regulations?

If so, let me assure you that when I studied economics, it was to learn and understand economics, not to join an economists’ union/mutual admiration club.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

PS Tweet: I can understand a child believing that what’s rated below BB- is more dangerous to our bank systems than what’s rated AAA, and therefore assigning a bank capital requirement of 12% to the BB- rated assets, and only 1.6% to those rated AAA. But mature professionals?

@PerKurowski

The bank capital requirements for Greek banks when lending to its government, should be the same as when lending to Greek entrepreneurs.

Sir, Kerin Hope reports: “Christos Staikouras, the finance minister, told the Greek parliament the Hercules scheme would boost the stability of the country’s financial system and open the way for increased lending to fund the real economy”

In my opinion removing non-performing loans do not guarantee increased lending to fund the real economy. For that to happen the bank capital requirements for holding Greek public debt should be the same as when lending to the real economy. As is, all it will do is to allow banks to easier continue funding the Greek government, all in accordance with that implied Basel Committee principle that government bureaucrats know better what to do with bank credit they’re not personally responsible for, than for instance Greek entrepreneurs.

For having assigned Greece’s government a zero risk weight, even though Greece cannot print euros on its own, if I were a Greek citizen, I would try to haul the European Commission in front of the International Court of Justice. That caused and still causes the excessive borrowing by Greek governments not especially known for resisting temptations, something which has mortgaged the future of all Greek grandchildren.

https://teawithft.blogspot.com/2018/09/in-case-of-greece-eu-violated.html

@PerKurowski

Sovereign borrowings are never “for free”. There are always opportunity costs, especially when there’s so much distortion favoring it.

Sir, you hold that “Fiscal stimulus can relieve monetary policy if invested wisely” “Governments must learn to love borrowing again” December 9.

“If invested wisely”, what a caveat, but so could private borrowing and investment help do. That is if they were allowed to access bank credit in a non-discriminatory way. As is much lower statist bank capital requirements when lending to the sovereign, has banks basically doing QEs acquiring sovereign debt, and this also implies bureaucrats know better what to do with bank credit they’re not personally responsible for, than for instance entrepreneurs.

It surprises when you state: “Central banks should not be blamed for loose monetary policy. As long as governments are not willing to expand on the fiscal side, central bankers are legally obliged to make up the shortfall in demand support” Legally obliged? Are you constructing a defense for all those failed central bankers that FT has so much helped to egg on? Because, as you yourself argue, “ultra-loose monetary policy has inflated asset prices and may be slowing productivity growth by keeping uneconomic businesses alive”, they sure have failed.

I also find it shameful to argue: “When governments can borrow for free there is little reason not to invest to the hilt.” What “for free”? The current low cost of government borrowing is the direct result of QEs and regulatory discrimination against other bank borrowers, and that distortion results in huge opportunity costs for the society. Also each new public debt contracted eats up a part of that borrowing capacity at a reasonable cost, which is an asset that should not be squandered away. Reading this editorial, which in summary begs for kicking the crisis can forward by any available means, makes me feel inclined to suspect you have no grandchildren.

Sir, finally, with governments borrowing to tackle “green transition challenges” you are opening up great opportunities for climate change profiteers, which will be exploited, you can bet on that. The more concerned you are with climate change the more concerned you should be with keeping all climate-change-fight financial/political profiteers far away. If not we will not be able to afford the fight against climate change, or to help mitigate its consequences.

Financial communism... that's what we have

@PerKurowski

Bank regulators rigged capitalism in favor of the state and the “safer” present and against the “riskier” future.

Sir, Martin Wolf with respect to needed financial sector reforms mentions “Radical solution: raise the capital requirements of banking intermediaries substantially, while reducing prescriptive interventions; and, crucially, eliminate the tax-deductibility of interest, so putting debt finance on a par with equity.” “How to reform today’s rigged capitalism” December 4.

What has rigged capitalism the most during the last decades is the introduction of risk weighted bank capital requirements which rigs the allocation of credit in favor of the sovereign and that which is perceived, decreed or concocted as safe, and against the credit needed to finance the riskier future, like SMEs and entrepreneurs.

That distortion is no eliminated with general higher capital requirements like the leverage ratio introduced with Basel III, but only by totally eliminating the credit risk weighting.

Wolf expresses great concern “over the role of money in politics and way the media works” I agree. The reason why media in general, and FT in particular, have refused to denounce the stupidity with credit risk weighted bank capital requirements based on that what bankers perceive risky being more dangerous to our bank systems than what bankers perceive safe, is most probably not wanting to trample on bankers’ toes. As is, bankers are allowed to leverage the most; to earn the highest risk adjusted return on equity, on what they think safe. Is that not a bankers dream come true? As is, we are facing the dangerous overpopulation by banks of all safe havens, while the rest of us are then forced out to the risky oceans in search of any returns. 

“A ship in harbor is safe, but that is not what ships are for.” John A. Shedd.

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

@PerKurowski

Artistic inheritance does not cause excessive centralized powers, as too often natural resources do...though intellectual inheritance could

Sir, Janan Ganesh discussing the possible effect on Europe of its “intellectual and artistic inheritance” refers to the natural“resource curse” in terms of retarding development, as “The temptation is to coast on the proceeds from the natural assets.” Clive James and Europe’s culture curse” November 29,

Indeed, that could play a role but the by far worst part or the “resource curse”, is the fact that its revenues are way too often way too much centralized in way too few hands. 

Take my homeland Venezuela. Had its (geographical) liberator Simon Bolivar not accepted to impose in Venezuela in 1829 Spain’s mining ordinances, which deemed all natural resources under earth to be the property of the King/state, our destiny would have been quite different. As is, as someone from another oil cursed nation mentioned to me years ago, “we do not live in a nation, we live in somebody else’s business”, the redistribution profiteers’.

And this does not apply to the artistic inheritance’s culture curse. The Museum of Louvre might centralize a lot of cultural treasures, but it does not remotely benefit as much from it, as do the citizens of Paris.

Of course, when it comes to an “intellectual culture curse”, which could result from handing over too much influence to too few intellectuals, like to Ph.D.’s and opinion makers, that can contain all the inheritance in a silo, in a mutual admiration club, all bets are off, in Europe and everywhere.

https://theoilcurse.blogspot.com/2016/05/the-last-thing-venezuela-needs-is-to.html

@PerKurowski

Beware when issues, no matter how important, like climate change, become mostly discussed because of their distraction value

Sir, Martin Wolf, after taking on a history tour argues: “A positive-sum vision of relations between the west, China and the rest has to become dominant if we are to manage the economic, security and environmental challenges we face”. That said Wolf frets our chances our small “given the quality of western leadership, authoritarianism in China and rising tide of mutual suspicion”, “Unsettling precedents for today’s world”, November 27.

Indeed, use history to illuminate the present, but never allow it to hide it. In the same vein let’s also include the caveat of not using any of those challenges to distract us from other just as important issues, like the very delicate state of our financial system.

Consider the following facts: 

1. As a response to the 2008 (AAA securities) and the 2011 (Greece) crises, by means of QEs and similar, there were/are huge injections of liquidity. 

2. Since the distortions produced by the risk weighted capital requirements were not eliminated, our banks have dangerously overcrowded all “safe” harbors, like sovereigns and residential mortgages.

3. As a result the rest of market participants had to take to the risky oceans like highly leveraged corporates debts and lending to emerging countries.

4. To top it up plenty of other high debt exposures abound, e.g. student and credit card debts.

5. Finally there are huge unfunded social security and pension plans all around the world.

And I refer to ”distraction” because everywhere we turn, we find regulators and central banks frantically looking for excuses to talk about other things, so as not have to answer some basic questions like:

Why do you believe that what bankers perceive as risky, is more dangerous to our bank system than what bankers perceive as safe?

Do you understand that allowing banks to leverage differently different assets distorts the allocation of credit to the real economy?

Do you understand that the other side of the coin of decreeing a zero risk to sovereigns, just because they can print the money to repay, is that it implies bureaucrats know better what to do with bank credit they are not responsible for, than for instance entrepreneurs?

EU you assigned a zero risk to all eurozone sovereigns’ debts even though none of these can print euros. What do you think would have happened to the USA’s union, if it had done the same with its 50 states, even though none of these can print US$ on their own?

Sir, when an architect takes on a project, he usually signs a contract by which he assumes personal responsibility “for the facility and its systems' ability to function and perform in the manner and to the extent intended” Should not bank regulators sign similar contracts?

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

https://www.stimmel-law.com/en/articles/architect-responsibilities-and-disputes

@PerKurowski

Current bank regulations are evidence free rather than evidence based

Tim Harford suggests, “Pick a topic that matters to you”, “How to survive an election with your sanity intact” November 16.

Ok. Bank regulations. And Harford argues, “Politics… is now evidence-free rather than evidence-based”. Indeed but so are current bank regulations. 

What has caused all big bank crises was something ex ante perceived very safe that ex post turned out very risky… in other words incorrect risk assessments.

But instead of basing the capital requirements based on this empirical evidence, regulators concocted risk-weighted capital requirements based on credit risks being correctly perceived. And so they assigned a meager 20% risk-weight to dangerous AAA rated, and 150% to the so innocous below BB- rated. 

If I were a regulator I would consider my role to guard against the possibility that bankers could perceive risks incorrectly, instead of, like the Basel Committee has done, betting our bank systems on bankers always being correct. Sir, wouldn’t you too?

Harford suggests, “When someone expresses an opinion, whether you agree or disagree, ask them to elaborate. Be curious.”

Unfortunately, when thousand of times I’ve asked the question “Why do you believe that what’s perceived as risky by bankers is more dangerous to our bank systems than what they perceive as safe?” that has not generated much curiosity. What it has generated is a lot of defensive circling of the wagons. “There again goes Kurowski with his obsession”

Harford also reminds us of Alberto Brandolini’s “bullshit asymmetry” principle, “The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it.” With soon 3.000 letters to FT on the topic of “subprime banking regulations”, I can sure attest to that being true.

https://teawithft.blogspot.com/search/label/subprime%20banking%20regulations

@PerKurowski

If Brexit goes hand in hand with a Baselexit, Britain will at least do better than now.

Sir, Martin Wolf titles, [and I add], “Irresponsible promises will hit brutal economic reality" November 15.

Just like the irresponsible and populist promise of “We will make bank systems safer with our risk weighted bank capital requirements" and that is based on that what bankers perceive as risky is more dangerous than what they perceive as safe, brutally hits our real economies.

Wolf quotes the Institute for Fiscal Studies with, “over the last 11 years [before any Brexit], productivity — as measured by output per hour worked — has grown by just 2.9 per cent. That is about as much as it grew on average every 15 months in the preceding 40 years.”

And I ask, could that have something to do with that Basel II that introduced capital requirements that allowed banks to leverage their equity much more with the “safer” present than with the “riskier” future, for instance 62.5 times with what has an AAA to AA rating while only 12.5 times with a loan to an unrated entrepreneur? Of course it has. With it regulators gave banks the incentives to dangerously overpopulate safe havens, and to abandon their most vital social purpose, which is to allocate credit efficiently to the real economy.

So compared to the damage done by the Basel Committee for Banking Supervision any foreseen negative consequences of Brexit seem minuscule.

And with respect to obtaining financial resources for financing the investments in infrastructure that Wolf so much desires, and which would cause larger fiscal deficits he argues “a necessary condition would be the confidence of the world’s savers and investors in the good sense, self-discipline and realism of British policymakers.”

Indeed, what if British policymakers stated. “We abandon the Basel Committee’s regulations. Not only are these with their 0% risk weight to the sovereign and 100% the citizens outright communistic, but these also introduced a risk aversion that truly shames all those British bankers who in past times daringly took risks and with it bettered Britain’s future”. 

Sir, I hold that would be a much-needed example for the whole world of good sense, self-discipline and realism. “A ship in harbor is safe, but that is not what ships are for.” John A. Shedd.

Sir, Wolf seemingly thinks that remaining in a EU in which its authorities assigned a 0% risk weight to all Eurozone’s sovereign debts, even though none of these can print Euros is better for Britain. As I see it, that is a reason for running away from it even more speedily.

PS. Should not bank supervisors be mostly concerned with bankers not perceiving the risks correctly? Of course! So, with the risk weighted capital requirements, what are they doing betting our bank system on that the bankers will perceive credit risks correctly?

@PerKurowski

If US’s 50 states had been assigned a 0% risk weight, as was done in the Eurozone, where would America and the US dollar be?

Sir, Gyorgy Matolcsy opines: “Two decades after the euro’s launch, most of the necessary pillars of a successful global currency — a common state, a budget covering at least 15-20 per cent of the Eurozone’s total gross domestic product, a eurozone finance minister and a ministry to go with the post — are still missing.”, “It is time to recognise that the euro was a mistake”, November 4.

Bad as that is, it’s still much worse. Even if all those “necessary pillars of a successful global currency” were present the euro would still be in serious trouble. This a result of the sovereign debt privilege of the 0% risk weight that for purposes of bank capital requirements was assigned to all Eurozone nations, even though none them can really print euros on their own.

Sir, if all USA’s 50 states had been assigned a similar 0% risk weight, as was done in the Eurozone, where would America and the US$ be?

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

@PerKurowski

Who is going to fact check the political ads on social media fact checkers? Big Brothers?

Sir, you opine: “The spread of political advertising on social media requires companies fact-check political ads in collaboration with trusted, independent organizations”, “Online political ads are in urgent need of regulation” November 1.

“Trusted, independent organizations”, does that not ring a bell with respect to trusting the human fallible credit rating agencies with so much power to decide on the risk weighted bank capital requirements?

I am reminded of an Op-ed I wrote in 1998 in which I argued, “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared” 

And in it I opined “in matters of financial regulations, the most honest, logical and efficient is simply alert to alert about the risks and allow the market, by assigning prices for these, to develop its own paths”

Sir, if I was concerned then, how much more concerned should I not be with the possibility of social media, fact checkers and Big Brothers entering joint ventures. 

So no Sir! Much better is a continuous reminder that: “Nothing advertised here has been fact checked and so even though it sounds interesting and correct, it is quite possible that it is all fake, even an outright shameful lye”

@PerKurowski

Well-invested small savings surpluses are better than big ones thrown away at fluffy sovereign spending projects.

Sir, Martin Wolf correctly points out “Without the shelter of the eurozone, the Deutschmark would have greatly appreciated in a low-inflation world” “How Germany avoided the fate of Japan” October 30.

Indeed it would have appreciated, but that does not necessarily mean that it would have been bad for Germany… or for the rest in the eurozone.

Wolf holds that Germans need to realize “that the euro is already working to their benefit, by stabilising their economy, despite its huge savings surpluses.”

Q. Without the euro would those huge savings surpluses exist? A. No!

Q. Without the euro could not whatever smaller saving surpluses have resulted much better invested? A. Yes!

Wolf points out: “Even at ultra-low interest rates, domestic private investment in Germany fell far short of private savings. [And] since the government too ran fiscal surpluses, in Germany, capital outflows absorbed all the private surplus [much through] German financial institutions, with their huge foreign assets”

And that’s their problem. Because of risk weighted bank capital requirements that favors financing the safer present over the riskier future, plus that insane debt privilege of a 0% risk weight assigned to all Eurozone’s sovereign debts, even though none of these can print euros, most of those German saving surpluses ended up financing mediocre eurozone governments… and building up such unsustainable huge debt exposures, that it will come back to bite all, the euro, perhaps the EU, and of course Germans too.

The day when Germans citizens realize the real meaning of that their banks need to hold around 8% of capital when lending to German entrepreneurs, but need zero capital lending to eurozone sovereigns, and that they will not be able to collect on those loans, those German citizens are going to be very wütend.

.And Sir, again, for the umpteenth time, Wolf returns to his: “The chance to borrow at today’s ultra-low long-term interest rates is a blessing, not a curse.” 

Wolf just refuses to accept that today’s ultra-low long-term interest rates, is an unsustainable artificial concoction that mainly benefits public debts, in other words, pure unabridged statism, based dangerously on that government bureaucrats know better what to do with credit, for which repayment they are not personally responsible for, than for instance the private entrepreneurs. When it comes to bank regulations a Communist Wall was constructed in 1988, one year before the Berlin Wall fell.

PS. The Euro had one characteristic that differentiated it from US$. That made me less optimistic as to its chances of success. The US$ is backed by a solidly unified political entity, USA. The Euro was aimed at creating unity and cohesion, not the result of it.

@PerKurowski

What the Eurozone would need a common budget the most for, is to help rescue many of its members from their huge risky 0% risk weighted sovereign debts.

Sir, Martin Arnold reports that Mario Draghi, “the outgoing ECB boss repeated his call for eurozone governments to create a sizeable common budget that could be used to provide greater economic stability in the 19-member currency zone by supporting monetary policy during a downturn.” “ECB chief Draghi uses swansong to call for unity” October 29.

As I see it the eurozone, unwittingly, already had a sizable non transparent common budget, namely that of, for purposes of risk weighted bank capital requirements, having assigned to all eurozone sovereigns’ debts, a 0% risk-weight, even though none of these can print euros on their own.

Some of these sovereigns used that privilege, plus ECB’s QE purchases of it, to load up huge debts at very low interest rates, so as to spend all that money. Now things are turning hard for many of these. Greece was small and walked the plank, and had to mortgage its future. Italy might not be willing to do so. There is a clear redenomination risk, and it is being priced more and more. 

So when Draghi now says “We need a euro area fiscal capacity of adequate size and design: large enough to stabilize the monetary union” it is clear he is very subtle referring to the dangers of the euro breaking down.

But when Draghi mention that fiscal capacity should be designed as not “to create excessive moral hazard”, then its harder to understand how that moral hazard could be worse than that already present in that idiotic 0% risk weighting.

What is clear is that for a eurozone common budget to serve any real purpose, those privileged 0% risk weights have first to be eliminated.

Just like it is hard to see some states with good credit standing accepting a 0% risk weight of other in much worse conditions, it would be difficult to explain for instance to Germans why their banks need to hold around 8% in capital when lending to German private entrepreneurs, but no capital at all when lending to the Italian or Greek governments.

How to do that? Not easy but my instincts tell me it begins by allowing banks to keep all their current eurozone sovereign debts exposures against zero capital, but require these to put up 8% of capital against any new purchases of it. That would freeze bank purchases, put a pressure on interest rates to go up, and allow the usual buyers of sovereign debt to return to somewhat better conditions.

But, of course, that might all only be pure optimistic illusions, and all eurozone hell could break out. 

@PerKurowski

The dangerous distortions in the allocation of credit that risk weighted bank capital requirements cause, is seemingly something that shall not be discussed.

... not even by those former central bankers who refuse to fade away

Sir, with respects to “the attack on the European Central Bank’s by six former central bankers” you write “Only one thing can match the stature of the complainants and that is the hollowness of their complaint.” “The euro’s guardians face a roar of the dinosaurs” October 7.

In their memo we read: “The negative impact of the ultra-low interest environment extends from the banking system, through insurance companies and pension funds, to the entire financial sector. The re-distribution effects in favour of owners of real assets, create serious social tensions. The young generations consider themselves deprived of the opportunity to provide for their old age through safe interest-bearing investments… and also furthers a ‘zombification’ of the economy”

Of course in the short run low and even negative interest rates benefit those who borrow more than those who save but, hopefully, one always hopes that will be made up in the future, by means of increased productivity and economic growth.

Significantly though the “dinosaurs” left out mentioning the distortions in the allocation of credit produced by the risk weighted bank capital requirements, which benefits especially the borrowings of sovereigns, that which FT does not want to discuss either. 

I ask. Where would the Europe/Eurozone’s interest rates on sovereign be if banks, as it was for around 600 years before 1988’s Basel Accord, needed to hold the same amount of capital against loans to the sovereigns, currently 0%, than against loans to unrated European entrepreneurs, currently 8%? Dare try thinking about that. Ask your own journalists to try to answer that question.

And neither do they discuss the special case of the 0% risk weight assigned to all Eurozone sovereigns’ debts, even though none of these can print euros. Could it be because of a bad conscience?

And with respect to the young generation what it really should be up in arms against, are the much lower capital requirements for banks when financing the safer present than when financing that riskier future on which its good outcome the young really depend on.

@PerKurowski

The Basel Committee jammed banks’ gearboxes… not only in India

Amy Kazmin reporting on India quotes Rajeev Malik, founder of Singapore-based Macroshanti, in that “A well-oiled, well-functioning financial system is the gearbox of the economy”, “Financial system is ‘like a truck with a messed-up gearbox’” September 23.

The financial system’s gearbox got truly messed up when regulators decided that banks could leverage differently their capital based on perceived risk… more risk more capital, less risk less capital… as if what is perceived as risky is more dangerous to bank systems than what is perceived as safe.

And Kazmin writes: “The financial companies that had provided much of India’s credit growth in recent years are now struggling with access to funding themselves after the shocking collapse of AAA-rated infrastructure lender, IL&FS, last year.”

Could that have something to do with the fact that since 2004 Basel II regulations banks needed to hold only 1.6% in capital when human fallible credit rating agencies assigned an AAA to AA rating to a corporation?

And Kazmin writes: “With its own voracious appetite for funds to finance its fiscal deficit, New Delhi is now mopping up much of the country’s household savings through a clutch of small schemes such as post office savings that offer higher rates than commercial banks.”

Could that have something to do with the fact that since 1988 Basel I regulations, banks need to no capital at all against loans to the government of India… but 8% when lending to Indian entrepreneurs.

Sir, risk taking is the oxygen of any development so, with such a dysfunctional gearbox, how is India going to make it? None of the richer countries would ever have developed the same with Basel Committee’s bank regulations… and all their bank crises, those that always result from something safe turning risky, would have all been so much worse, as these failed exposures would have been held against especially little capital. 

Here is a document titled “Are the bank regulations coming from Basel good for development?” It was presented in October 2007 at the High-level Dialogue on Financing for Developing at the United Nations. It was also reproduced in 2008 in The Icfai University Journal of Banking Law. 

@PerKurowski

In banking, the worst worse case scenario by far, is something perceived as very safe turning out to be very risky

Sir, Tim Harford writes “We don’t think about worst-case scenarios in the right way.” “To help us think sensibly about it, Gary Klein has argued for conducting ‘pre-mortems’ — or hypothetical postmortems. Before embarking on a project, imagine receiving a message from the future: the project failed, and spectacularly. Now ask yourself: why? Risks and snares will quickly suggest themselves — often risks that can be anticipated and prevented.” “We need to be better at predicting bad outcomes” September 21.

Indeed and what would that pre-mortem suggest as the worst-case scenario for banks regulated by means of risk weighted bank capital requirements?

1. That what was perceived as risky turned out to be risky? No bankers already knew it was risky and, if they anyhow took a chance on it, that would be with a small exposure and a high risk-adjusted interest rate.

2. That what was perceived as risky turned out to be safe? Of course not! What great news, perhaps the bank had helped a successful entrepreneur.

3. That what was perceived as safe turned out to be safe? Of course not!

4. That what was perceived as safe turned out to be risky? Holy Moly! Like those AAA rated securities.

So since that “hypothetical postmortem” was not done, the risk weighted bank capital requirements, besides seriously distorting the allocation of credit to the real economy, also produce especially large exposures to what’s perceived or decreed as especially safe, and is held against especially little capital, risking thereby especially big crises… Good job regulators!

My 2019 letter to the Financial Stability Board

@PerKurowski

For capitalism to refunction, first get rid of the risk weighted bank capital requirements.

Sir, Martin Wolf quotes HL Mencken with “For every complex problem, there is an answer that is clear, simple and wrong.” “Saving capitalism from the rentiers” September 18.

Indeed, and the most populist, simplistic and wrong answer to how our banks should function, are the risk weighted bank capital requirements. These are naively based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe; and, with risk weights of 0% the sovereign and 100% the citizens, de facto also based on that bureaucrats know better what to do with credit they are not personally responsible for, than for instance entrepreneurs.

And so when that what’s “super-safe”, like AAA rated securities backed with mortgages to the subprime U.S. sector exploded in 2008, this distorted bank credit mechanism, wasted away the immense amount of liquidity that were injected, creating asset bubbles, morphing houses from being homes into being investments assets, paying dividends and buying back shares.

“Tall trees deprive saplings of the light they need to grow. So, too, may giant companies”? Yes Mr Wolf, but so too does these stupid bank regulations.

“A capitalism rigged to favour a small elite” Yes Mr Wolf, but that small elite is not all private sector. The difference between the free market interest rates on sovereign debt that would exist absent regulatory subsidies and central bank purchases, and current ultra low or even negative rates, is just a non-transparent statist tax, paid by those who invest in such debt.

“We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits.” Yes Mr Wolf, but that should start by getting rid of the risk weighted bank capital requirements, so that banks ask savvy loan officers to return, in order to substitute for the current equity minimizing financial engineers.

“Corporate lobbying overwhelms the interests of ordinary citizens” Yes Mr Wolf, but silencing the criticism of current bank regulations could also be the result of some journalists having been effectively lobbied. Or not?

"Capitalism"? No Mr. Wolf, what we really have is Crony Statism

My 2019 letter to the Financial Stability Board
My 2019 letter to the IMF

@PerKurowski