December 31, 2015

FT, again you just talk about banks and stability, not caring about whether banks serve the real economy well.

Sir, I refer to your “New normality for banks leaves system exposed” December 31.

You write: “The US balance of corporate finance, with three-quarters of funding scured through markets and only a quarter through banks is seen as a model for Europe, where the current structure is the inverse” and yet you seem not to care one iota whether Europe’s banks are allocating their credit efficiently to the real economy… only that “the world urgently needs to develop more effective financial stability policies.”

Though you know very well that the credit risk weighted capital requirements for banks are what distorts bank credit the most, you just mention “the distortive effect of extended low interest rates”.

Again you behave like a pensioner with a not too long life expectancy, begging banks “please be stable and do not take any risks”, while not caring about whether your young can afford such risk aversion. That is a far faraway from “Without fear and without favour”.

Sir, what happened with your “Banking cannot prosper within a culture of fear” editorial of September 24? Did someone reprimand you about it being too fearless?

@PerKurowski ©

December 30, 2015

Europe’s economists and politicians fail to see the risk of economies growing with carbohydrates and without proteins

Sir, Stephanie Flanders writes “Growth is not nearly strong enough in the eurozone at the moment and it is unlikely to be a lot faster in the coming year. With consumption and consumer confidence picking up and unemployment continuing to fall, however, the recovery does now have its own momentum.” “There is no pressing economic crisis confronting the continent in 2016, thank goodness” “Risks to Europe that economists fail to see” December 30.

Not so, there is a huge crisis in the making. While the risk adverse credit risk weighted capital requirements for banks remain in force, Europe’s economy will grow obese from an excessive intake of safe carbohydrates. In order to grow muscular and sustainable it needs a lot of proteins and exercise.

Ask ECB to perform a new stress test of the banks, and this time not about what is on their balance sheets but about what should be there. I am sure ECB would find that new loans to those who on the margin provides the economy with the real strength to move forward, like SMEs and entrepreneurs, are highly insufficient. 

And those loans to "the risky" they could find, will probably have interest rates that are larger than what the transaction cost and risk premiums merit... as the risky need to compensate for the fact that banks are not allowed to leverage as much with them as what they can leverage with "the safe". 

When you finance the purchase of houses more than the creation of the jobs that will allow buyers to pay utilities and service mortgages that will not end well.

@PerKurowski ©

December 28, 2015

Eurozone needs regulations that do not distort the allocation of bank credit much more than a full banking union.

Sir, I refer to your “A strong eurozone needs a full banking union” December 28.  In it you mention “The launch of the EU’s so-called single resolution mechanism, a significant expansion of the European Central Bank’s powers, and discuss the need “of a common deposit insurance scheme in the 19-nation Eurozone”… “in order to minimise the risk that fresh crises will erupt in the future and, if they do, to limit the consequences”

But what did that “financial whirlwind that tore through the bloc after 2008, destabilising Europe’s banks and putting into question the survival of its monetary union” really carry?

The answer is that which was perceived or deemed to be safe, and with which therefore banks were allowed to leverage immensely… like 60 to 1.

You seem to be partly waking up to this fact when mentioning “the potentially lethal connection between sovereign debt and overstretched banks that was amply illustrated at the height of the Eurozone crisis”. I am curious about what FT opined about the Basel Accord in 1988 (Basel I), that which set a risk weight of zero percent for sovereigns and of 100 percent for the private sector.

And if because of credit risk weighted capital requirements banks continue to allocate credit inefficiently to the real economy, this not only guarantees a new crisis but also that its cost would be higher than the cost of any fresh bank crisis that could result from totally unsupervised banks.

That is why getting rid of the regulatory distortions should have a much higher priority than the creation of any full banking union in the Eurozone, and that by the way could only help to increase dangerous moral hazards


How do you come up with a good bank strategy knowing current regulations are unsustainable and will change?

Sir, I refer to your reporters’ article on the fate of new chiefs grappling with problems at Barclays, Deutsche Bank and Credit Suisse “Banking trio seek clean sweep with investors” December 28.

For that capital that is supposed to allow banks cover for some unexpected losses, the regulators have imposed credit risk weighted capital requirements; more risk, more capital – less risk, less capital.

But, the excessive exposures that could endanger the bank system are never created with assets perceived as risky and always with assets perceived as safe.

But, the safer something is perceived, the larger is its potential to deliver unexpected losses.

But, to base some requirements for the unexpected on the expected credit risks, makes absolutely no sense.

But, since credit risk is about the only risk that is already cleared for by banks, with interest rates and size of exposure, clearing for it again in the capital, signifies that credit risks are given too much consideration and, any risk, no matter how well it is perceived, leads to wrong actions if excessively considered.

And so now we suffer from a catastrophic distortion in the allocation of bank credit to the real economy. Way too much credit to what is perceived or deemed to be safe, like in mortgages and to Greece, and way too little credit to what is perceived as risky, like to SMEs and entrepreneurs.

I am absolutely sure that this trio of bank chiefs, or at least some of those surrounding them, know that this kind of regulations are unsustainable and will be changed, hopefully sooner than later. Since any new regulations would most certainly entail holding more capital against all assets, something unwelcomed by their shareholders, the chiefs can’t even address this issue openly. It must certainly be no easy task to prepare for the ground moving beneath you.


December 23, 2015

Was the US Office of Strategic Services’ “The Simple Sabotage Field Manual” used by the Basel Committee?

Sir, John Kay refers to “The Simple Sabotage Field Manual — produced in the second world war by the US Office of Strategic Services, a forerunner of the Central Intelligence Agency — was designed to illustrate how, at little risk to themselves, saboteurs in occupied territories could damage organisations.” “Absurd roots of modern regulatory practice” December 23.

When we see how some few bank regulators, apparently with absolutely no risk for themselves have, by means of credit risk weighted capital requirements, managed to distort the allocation of bank credit to the real economy in most of the world, we could ask whether that field manual fell into the hands of the Basel Committee for Banking Supervision, and about that committee’s intentions.

And when Kay refers to FM Cornford’s procedural rules as an instrument to silence any objection and to “obscure troublesome considerations… and relieve the mind of all sense of obligation towards society”, then we might understand better the continuous rule expansion in Basel II, Basel III and those Basel’s still to come.

Frankly, nothing has sabotaged more our economies than Basel Accord's Basel I’s risk weights of zero percent for the sovereign, and 100 percent for the private sector. To me that was an act of statist regulatory terrorism. I am sure most members in the Basel Committee did it unwittingly… but, frankly, all of them?

@PerKurowski ©

For Greece (and other) to have a chance, it must free itself from the distortions of Basel bank regulations

Sir, Martin Wolf writes: “If the eurozone made it possible for Greece to borrow on triple-A terms forever, the debt would be sustainable. Otherwise, it probably would not be.” “Hope and fear in the endless Greek crisis”, December 23.

That entirely ignores that the origin of the Greek crisis was precisely that regulators allowed Greece to borrow on almost triple-A terms, something that proved to be irresistibly tempting for Greek governments.

What does Greece (and Europe, and America, and most of the rest of the world) need more than anything? As I have explained in thousands of previous letters to you, that would be the total annihilation of regulations that make the lending to SMEs and entrepreneurs less attractive for banks than the lending to what is supposed to be safer from a credit point of view.

In November 2004 in a letter published by FT I wrote: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits. Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost - even at the cost of growth.”

When Wolf refers a reform package that does not include freeing the economy from Basel regulation distortions, and is capable of mentioning the possibility of it being able to generate a virtuous circle of reform and growth, I can only conclude Wolf is also a member of that mutual admiration club of technocratic statists.

@PerKurowski ©

December 22, 2015

One problem of Europe (and others) is that bank regulators have placed its real economy on an early retirement mode.

Sir, I refer to Tony Barber’s “Europe’s decline is a global concern” December 22.

Barber writes: “EU may not disintegrate but slip into a glacial decline, its political and bureaucratic elites continuing faithfully to observe the rites of a confederacy bereft of power and relevance. It is not an outcome that any European with a grain of common sense should wish for. But it is no longer inconceivable”

Of course it is not inconceivable. Just the silence of FT on one of the most important issues of our times, that of how regulators have distorted the allocation of bank credit to the real economy, is proof enough.

I have explained it many times before to you, and to Tony Barber, but since on this issue I have no problems being deemed as obsessive, here it goes again:

The regulators, with their credit risk weighted capital requirements for banks, created incentives that allow banks to make much higher risk adjusted returns on profits when lending to what is ex ante deemed safe than when lending to what is perceived as risky.

And doing so they in essence doomed the economy into an early retirement, in which it will live on for as long as possible on what it has already created, while avoiding taking the real risks needed in order to move forward.
Barber refers to “three hugely expensive financial rescues of Greece”, but says not a word about that in Greece, banks can still lend to their government against much less capital than what they need when lending to their SMEs and entrepreneurs. 

@PerKurowski ©

Robert Jenkins, we can do with just good bankers, though we are in urgent need of more statesmanlike regulators.

Sir, Robert Jenkins, a senior fellow at Better Markets and former member of the Financial Policy Committee of the Bank of England writes about “The long wait for a statesmanlike banker” December 22.

And in it Jenkins refers to Deutsche Banks’ recently appointed chief executive Mr John Cryan, as “part of a new breed of competent, no-nonsense executives who understand how to run a business. They know that risk and reward must be linked; that senior staff must be held accountable, and that their institutions must have sufficient loss-absorbing capital to take the hits when things go wrong, as they inevitably will. Why not insist that their peers in the industry take the same approach and visibly support regulators in this quest?”

What? “Support the regulators in this quest”? It is precisely the current regulators who, with their capital requirements for banks based on perceived credit risk, have utterly distorted the links between risk and rewards.

We can do with just good bankers, but we sure need much more statesmanlike regulators who care much more about the purpose of our banks, than about the survival of our banks.

@PerKurowski ©

December 19, 2015

Let’s call on the Ghosts of Economies Past, Present and Yet To Come, to illuminate our central banks and regulators.

Sir, Tim Harford showing good Christmas spirit praises both the miser deflationist and the spending inflationist. “In praise of Ebenezer Scrooge”, December 18.

Harford writes: “In a deep recession, one might be concerned that Scrooge was failing to support aggregate demand but in normal economic times the effect of his skinflintery was to ensure that everyone else was able to enjoy a little more.”

Does Harford mean by that that the messaging by the three Ghosts of Christmas needs to be harmonized with central bankers? I ask because I am not really sure central bankers have enough of an intelligent Christmas spirit to be able to cooperate.

For instance, with respect to bank regulations, by agreeing with that banks should be able to leverage more when lending to the “safe” than when lending to the “risky”, central banks don’t mind that the risk adjusted net margins paid by the safe, are worth much more than those same margins paid by the risky. I am absolutely sure Ebenezer Scrooge would never discriminate like that, he would always lend to whoever paid him the highest exorbitant credit risk adjusted rate, no matter who paid it.

Perhaps we need to invoke the Ghosts of Economies Past, Present and Future in order to enlighten our bank regulators that good economies are never ever the result of credit risk aversion since they always come as a result of embracing risk. Hopefully the risks taken by banks are based on reasoned audacity. But, even if that’s not the case, and some banks fail, it is still much better when bankers dare jump and finance the risky future, and do not stay in bed, like now, just refinancing the safer past… developing constipation, bedsores, weak bones and muscles and other illnesses, like that which produces a chronic lack of job for our young (and old).

Finally Harford does well reminding central bankers who think the economy will respond to their ultra-low interest rates and QEs, that Scrooge, when finally embracing the Christmas spirit, “didn’t waste his money on demonstrative extravagances for people whose desires he didn’t really understand.

@PerKurowski ©

December 18, 2015

Dare ask bank regulators: Why do you think that what is perceived as risky is riskier than what is perceived as safe?

Sir, Philip Stephen writes: “The crash and the subsequent depression broke the confidence of a generation of political leaders. All the guff they had learnt about a new financial capitalism, self-equilibrating markets and the end of boom and bust was shown to be, well, guff… bankers by and large got off scot free. Not so politicians who believed their own propaganda and embraced the laissez faire Washington Consensus as the end of history. Capitalism survived the crash, but at the expense of a collapse of trust in ruling elites” “Politicians are paying the bill for the crash” December 18.

What “laissez faire Washington Consensus”? That which with the Basel Accord prescribed a risk weight of zero percent for sovereigns and 100% for the private sector? That which with the risk-weighted capital requirements for banks completely distorted the allocation of bank credit?

The problem is that the trust of politicians in the ruling regulating technocrats did not collapse. As I have said many times, neither Hollywood nor Bollywood would have been so dumb as to allow the producers of a box office flop like Basel II to proceed, with the same scriptwriters, to produce Basel III.

I have a feeling politicians, Fed’s policy makers and perhaps even some FT journalists start to suspect that something is making the Fed and the ECB stimulus fail; and would therefore want to ask regulators: Why do you think that what is perceived as risky is riskier for the banking system than what is perceived as safe?

Why don’t they ask? Perhaps the explanation is one that John Kenneth Galbraith gave in “Money: Whence it came where it went” 1975, namely that “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

PS. Sir, now when the credit quality of EM markets is deteriorating, banks holding such debt are required to put up more capital against positions taken up during sunnier days, putting a squeeze on bank lending, and so everything will become darker yet. Vive la procyclicité!

@PerKurowski ©

December 17, 2015

What? “Historic gamble for Yellen as Fed makes quarter-point rise” Has the world gone bananas?

Sir, “a quarter-point increase in the target range for the federal funds rate to 0.25-0.5 percent”… and that is what you title a “Historic gamble for Yellen”? Unbelievable, it sounds like a something taken out of a Bird & Fortune sketch, or a Lilliput vs Blefuscu war.

Sam Fleming writes that the “Move comes amid lacklustre global growth”. Of course, as I have explained to FT in more than 2.000 letters, there is no way to achieve anything different than lackluster global growth, if you allow banks to earn much higher ROEs on assets perceived as safe than on assets perceived as risky. Risk-taking is the oxygen of any forward movement of the economy.

As is banks are mostly refinancing the safer past and safer houses, and staying away from financing the riskier future and job creation.

@PerKurowski ©

December 16, 2015

COP21: Bank capital requirements based on sustainability and job-creating ratings would have been a major step forward

Sir, Martin Wolf commenting on the Paris COP21 agreement on limiting the risks of climate change writes “The provision of needed finance is an aspiration, not a bankable commitment” “One small step forward for humankind” December 16.

Indeed, sadly the agreement missed something I have been proposing for quite some time.

Our banks, one of our most important agents to bring us forward, have been told by their regulators that if they hold assets perceived as safe from a credit point of view, they will be allowed to leverage their equity and the support they receive from society much more than if they hold assets perceived as risky.

Since bankers with interest rates and size of exposures already clear for credit risks, it is quite nutty to require that perceived risk to be cleared for again in the capital.

The net result of it is permitting banks to earn higher risk adjusted returns on equity when financing the safe than when financing the risky. And expected credit risk is an expected credit risk that should be managed by the banks if they want to stay open, and has not one iota to do with whether a borrower has something that is worthy to be financed.

In general terms, and since it requires hubris, I am opposed to any type of distortion of bank credit allocation to the real economy. But, if I had to distort, I would only do that in pursuit of a good purpose, like helping the sustainability of our planet and creating jobs for our youth.

I am absolutely sure that if COP21, in Paris, had come up with an agreement that instructed bank regulators to forget credit ratings and use sustainability and job creation ratings to set the capital requirements for banks instead – more sustainability and more job creation less equity and therefore higher ROE - then Wolf could have written about “A major step forward for humankind”

Of course that would have required explaining how purposeless and useless current bank regulations are, and there are many who do not want that to be understood. Regulators because they might be held accountable, bankers because that would signify having to give up a dream come true, making their big profits on what they think (or can make out to be) safe.

@PerKurowski ©

December 15, 2015

Regulators make banks earn higher risk adjusted ROE’s lending out the umbrella to those in the sun than to those in the rain

Sir, in 2003 as an Executive Director of the World Bank, in a formal statement I wrote: “The financial sector’s role, the reason why it is granted a license to operate, is to assist society in promoting economic growth by stimulating savings, efficiently allocating financial resources satisfying credit needs and creating opportunities for wealth distribution. Similarly, the role of the assessor –in this case, the Bank– is to fight poverty, and development is a task where risks need to be taken.

From this perspective the Financial Assessment Program Report might revolve too much around issues such as risk avoidance, vulnerabilities, stress tests and compliance with international regulations, without referring sufficiently to how the sector is performing its social commitments.

We all know that risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones. In this respect the Bank has the responsibility of helping developing countries to strike the right balance between risks and growth possibilities.

In this respect let us not forget that the other side of the Basel [Committee’s regulatory] coin might be many, many developing opportunities in credit foregone.”

And I had started this fight against senseless credit-risk aversion already in 1997 with the first Op-Ed I had ever published “Puritanism in banking” 

And in 2009, in Martin Wolf’s Economist Forum, I prayed “Free us from imprudent risk aversion

So you can imagine how much I agree with Nobuchika Mori when he, as Japan’s regulator of financial markets and institutions now writes: “too much emphasis on stability can be harmful, especially in the long run. It may prolong and even perpetuate stagnation. Based on this experience, a shift to supporting finance for growth is needed now”, “Too much 'medicine' could make the system sicker” December 15.

Think of it. Mark Twain is quoted with saying “Bankers want to lend you the umbrella when the sun is out and take it back when it rains”. With credit risk weighted capital requirements, the regulators now also give our banks higher risk adjusted returns on equity when lending out the umbrella to those in the sun than when lending it to those in the rain.

@PerKurowski ©

December 12, 2015

For the good of the real economy, let’s pray the day of the so much needed bank regulatory enlightenment arrives soon.

Sir, Caroline Binham and Laura Noonan informs that “The Basel Committee on Banking Supervision said yesterday it had dropped a plan to ban banks from relying on rating agencies when they calculate risks in their portfolio” And with that “The banking lobby has beaten back a global reform plan that it claimed would result in a “substantial” increase in capital”, “Lenders win Basel U-turn on assessing risk” December 11.

I am not sure because the Basel Committee recently issued a Consultative Document on the issue and we should wait what could come out of it.

Anyhow, what is completely missed is that banks already look at credit ratings when setting their risk premiums and the amounts of exposure. And so when also having to use the same credit rating to set their capital requirements, means that the credit risk info contained in those ratings is excessively considered. And any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

The day the Basel Committee wakes up to the dangers of distorting the allocation of bank credit to the real economy based on credit risks, something that has not one iota to do with whether borrowers pursue objectives that deserves fair access to bank credit, that day everything will change.

For the good of the real economy and of the perspectives for our young to find good jobs in the future, let us pray that day of regulatory enlightenment arrives soon.

@PerKurowski ©

December 11, 2015

Gillian Tett, the origin of banks’ reluctance to lend to SMEs is to be found before the post-2008 financial reforms

With Basel II of June 2004 bank regulators determined that bank equity, and the support banks received from society, could be leveraged by bank borrowers’ offers of net risk adjusted margins in the following way, depending on their credit risk.

If offered by sovereign borrowers rated AAA to AA, then there was no limit.

If offered by sovereign borrowers rated A+ to A, then 62.5 times to 1.

If offered by sovereign borrowers rated BBB+ to BBB-, then 25 times to 1.

If offered by private sector borrowers rated AAA to AA, 62.5 times to 1.

If offered by private sector borrowers rated A+ to A, then 25 times to 1

And if offered by those unrated or rated BB+ to B-, then 12.5 times to 1. 

Clearly the offers of net risk adjusted margins provided by the usually unrated SMEs and entrepreneurs, had the lowest value to the banks.

Sir, that is why I do not understand when Gillian Tett now writes: “Small business also requires a wider range of financing channels, particularly since one very unfortunate consequence of the post-2008 financial reforms is that banks are now very unwilling to provide funding for smaller companies” “New York steals Silicon Valley’s crown” December 11.

Of course the financial crisis made a huge dent in bank capital, and therefore banks are very averse to lending to those who generates them the highest capital requirements, but which are the post-2008 financial reforms that have made banks more unwilling to lend to SMEs?

In fact it was that kind of discrimination that drove banks excessively into the arms of what was perceived as safe, like AAA rated securities, loans to Greece and all other “safe” exposures, which caused the 2007-08 crisis. 

We must get to the heart of the problem since if SMEs and entrepreneurs are denied fair access to bank credit there is no future for our economies. God make us daring!

@PerKurowski ©

December 10, 2015

When regulators told banks: “Stop chancing on the future and just safeguard the past”, they doomed the middle class

Sir, I refer to Sam Fleming’s and Shawn Donnan’s FT’ Big Read. “America’s Middle-Class Meltdown: Changing fortunes” December 10.

To explain why the middle class and those who aspire to be middle class, those who are doing fine and growing when the economy grows in a balanced way are currently doomed, let me quote two passages from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

First: “For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]”

Second: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And so Sir, when bank regulators introduced credit risk weighted capital requirements for banks; which allow banks to leverage more their equity with the net risk adjusted margins provided by those perceived as safe, than with those provided by the “risky”; which allows banks to earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky; then they effectively instructed banks not to take a chance on the more risky future, but to concentrate on safeguarding the safer past… and that was, and currently is, the beginning of the end of the middle class… and the increase of inequality.

Let us be clear, in the Home of the Brave, the Trojan Horse of the Basel Committee, helped cement a dangerous sissy aversion to credit risks.

​@PerKurowski ©

December 09, 2015

Martin Wolf insists on covering up for the bank regulators by blaming the bankers for the credits to Greece.

Sir, on December 9, you republished an article Martin Wolf wrote in January “Greek debt and a default of statesmanship”, and on which I have already commented.

Though I agree with most of its conclusions I must firmly repeat my objection to one of its arguments. Especially since by appearing again it seems to imply no repentance by Mr. Wolf.

Wolf writes: “[A] proposition is that the Greeks borrowed the money and so are duty bound to pay it back, how ever much it costs them. This was very much the attitude that sustained debtors’ prisons. The truth, however, is that creditors have a moral responsibility to lend wisely. If they fail to do due diligence on their borrowers, they deserve what is going to happen. In the case of Greece, the scale of the external deficits, in particular, were obvious. So, too, was the way the Greek state was run”

And with that Wolf shamefully turns a blind eye to that it was the bank regulators who, with their shamefully insignificant capital requirements for banks when lending to Greece, created a temptation extremely hard to resist for bankers who all compete in terms of the return on equity they can produce for their shareholders… and in terms of the bonuses they can receive for themselves.

For instance, if a banker wanted to lend to a Greek SME it could only leverage its equity and the support it received from society about 12 to 1. But if the bank lent instead to the Greek government, then it could leverage 60 times to 1 and more. In such circumstances what banker could explain to his board that it was better to lend to unrated Greek SMEs than to the Greek government… and especially when Greece was rated A at the time it was awarded all the big credits?

@PerKurowski ©

When final history on the bank crisis is written, it is going to be about stupid regulations, and the silencing of it

Sir, I refer to Patrick Jenkins’s and Martin Arnold’s “BEYOND BANKING: Tempestuous times” November 11 and December 9.

Therein Philipp Hildebrand, former head of the Swiss National Bank is quoted with: “The banking model is in many ways getting more like we’re turning the clock back to the early 1990s…When the history books are written, the aberration will not be the past crisis but the 15 years running up to 2007.”

Indeed, when history is written it is going to be about the regulatory aberration of allowing banks to hold so little of that capital that is to be there for unexpected losses, because the expected credit risks seemed low.

Indeed, when history is written it is going to be about how bank regulators never understood that, by allowing different capital requirement for different assets based on perceived credit risks, something which allowed different leverages of bank equity and of the support given to banks by the society, they completely distorted the allocation of bank credit to the real economy.

Indeed, when history is written it is going to be about that regulatory aberration of setting a zero risk for sovereigns, while assigning a 100 percent risk weight to the private sector.

But when final history is written, it is also going to be about how expert papers like the Financial Times turned a blind eye to all of the above. And this even when someone like me sent it thousands of letters explaining the problems, and this even though they knew that in previous letters they had published, I had correctly alerted on many of the risks.

@PerKurowski ©

To engage in ‘bank bashing’ while leaving the regulators unaccountable for their own mistakes is dangerously wrong.

Sir, I refer to Doyne Farmer’s, Alissa Kleinnijenhuis’ and Thom Wetzer’s letter “Prudent policymaking is not ‘bank bashing’” in which they discuss stress testing of banks. December 9.

They conclude: “As long as a “clean bill of health” for the financial sector remains a mirage, resilience should be further improved and stress tests should be made more credible. This is not bank bashing, but prudent policymaking.”

Right so, the problem though is that current stress testing does not test whether the banks are performing adequately their vital function of allocating credit efficiently to the real economy. And from that perspective what is not on a bank’s balance sheet could be more important that what is on in order to give it a “clean bill of health”.

And the reason that part is not included in the stress test, is that it would show that the credit risk weighted capital requirements for banks utterly distort credit allocation, and regulators would not like that to be known.

@PerKurowski ©

December 08, 2015

John Kay, is ignorance a defense for regulatory misconduct?

Sir, I refer to John Kay’s “Ignorance is no defense for financial misconduct”, December 9.

Mr Kay, if ignorance stops regulators from understanding how their portfolio invariant credit risk weighted capital requirements for banks dangerously distort the allocation of credit to the real economy; and pushes banks into creating dangerous excessive financial exposures to what s perceived as safe, would that be a defence for regulatory misconduct?

The regulators, with their regulations, rigged the access to bank credit in favor of sovereigns and those perceived as safe and against those perceived as risky, like SMEs. This had disastrous consequences for everyone, except for some bankers who earned big bonuses by being able to leverage bank equity immensely when dealing with what was perceived as safe, or could at least be made out as being safe. 

But we have not even seen the beginnings of holding the regulators responsible for what they did. On the contrary many of them have been promoted.

@PerKurowski ©

Europe, trash the distorting credit risk weighted capital requirements for banks.

Sir, Martin Wolf writes: “If the monetary policy that stabilises supply and demand in the real economy destabilises the financial system, the problem lies in the latter. It must be dealt with forcibly and directly” “The challenges of central bank divergence”, December 9.

Absolutely, in general terms the good functioning of the real economy is more important than the good functioning of the financial system.

But I wonder then why, if the regulatory system of the financial system distorts credit allocation to the real economy, Wolf does not see a similar urgent problem. Or is it that he still does not believe credit risk weighted capital requirements for banks do distort?

Wolf writes: “The unnecessary weakness of the eurozone economy has gone on too long” 

Indeed Mr Wolf, it is high time to trash current bank regulations that impede the risk-taking that supports the future and only fosters excessive financial risk-taking on the past.

@PerKurowski ©

Until Europe trashes risk-weighted capital requirements for banks, ECB’s QE liquidity will not go where it should.

Sir, Alberto Gallo writes: “Against the ECB’s [QE] bazooka lies an wall of obstacles. The first is an impaired banking system, muddling through €1tn of bad loans with balance sheets still three times as large as the eurozone economy. The second problem is a lack of corporate investment, despite lower interest rates. The third is shallow capital markets, a “bottleneck against ECB liquidity trickling down to small and medium-sized businesses, responsible for 80 per cent of job creation.” “More QE on its own will not unblock the eurozone bottleneck” December 7.

Gallo suggests: “There are three ways to make QE work. One is to boost monetary stimulus with public investment. Governments have little fiscal ammunition for large-scale stimulus. A credible co-ordinated plan could provide the right signal to kick-start private investment, coupled with QE.” 

No! Since Gallo works for RBS, which must be interested in leveraging its equity as much as possible, especially with what is perceived as “safe”, he does not want to see, or does not dare to disclose the most important obstacle for getting liquidity to the SMEs… those he calls “responsible for 80 per cent of job creation.”

I will repeat it again, for over the thousand time, to see if FT finally dares to wake up. The biggest obstacle, is the risk-weighted capital requirements for banks, those that cause banks to earn much less risk adjusted returns on equity when lending to “The Risky” than when lending to “The Safe”.

It is as easy as that! The problem is that ECB’s Mario Draghi, as the former chair of the Financial Stability Board, does not want it to be known that he shares in the responsibility for the biggest cock up in regulatory history.

@PerKurowski ©

December 07, 2015

Let a hundred SRIs blossom. It is not socially responsible to introduce new systemic investment risks.

Sir, Chris Flood writes that “Autorité des Marchés Financiers, the French regulator… analysed all the public documents from a sample of 100 French and non-French Socially Responsible Investment (SRI) funds… and found that the funds’ regulatory documents and marketing materials varied considerably in quality, leading to confusion” “Standards for socially responsible investment too sloppy” December 7.

So what? Is it not much more dangerous if all SRI’s are too regulated, too equal, too compatible with conventional correct political thinking, too much potential generators of systemic risks? No! Vive la confusion!

@PerKurowski ©

Stupidly distorting bank regulations are inhibiting lending to small and medium sized businesses

Sir, Lawrence Summers writes: “regulatory pressure is inhibiting lending to small and medium sized businesses.” “Central bankers do not have as many tools as they think” December 7.

In other words he is referring to that the stimulus of QEs and ultra low interest rates is not reaching fundamental economic agents, such as small and medium sized businesses. I wonder is this not a major issue?

As I have been writing for over a decade (and more than 2.000 letters to FT) current credit risk weighted capital requirements for banks utterly distort the allocation of bank credit to the real economy.

In November 2004, in a letter published by FT I wrote: “our bank supervisors in Basel are unwittingly controlling the capital flows in the world. We also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

When are supposed experts on bank regulations face up to the fact that supposed experts on bank regulations do not know what they are doing… among others because they have so shamefully neglected to even define the purpose of our banks before regulating these.

@PerKurowski ©

Sissy and dumb credit-risk weighted capital requirements for banks, make it impossible for Europe to stand tall

Sir, I refer to Wolfgang Münchau’s “Europe will stumble before it learns to stand tall” December 7.

Münchau opines that the problems of some European countries resulting from the inability to devalue and the influx of workers from abroad, in order to conclude in that “if there is to be another stage of integration [for Europe] there will have to be a phase of disintegration first”

Sir, independently from those two important problems, let me assure you that no country can learn to stand tall, with regulators who give banks huge incentives to make their profits with what is perceived as safe, and to stay away from what is perceived as risky.

If you keep allowing crazy bank regulators to respond to their own small minded risk apprehensions when regulating your banks, Europe will not only stumble, it will fall.

Risk-taking is what keeps economies moving forward… and banks are in the frontline of that risk-taking. Do not now require the widows and orphans to substitute for the banks.

Again I dare anyone associated with the Basel Committee for Banking Supervision and the Financial Stability Board to debate publicly my ever-growing list of issues and concerns.

Why the thundering silence on the distortion in credit allocation the credit risk weighted capital requirements cause? John Kenneth Galbraith suggested an answer with his “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

@PerKurowski ©

There are social leftwing reformers and statist leftwing reformers. In banking currently only the latter exist.

Sir, John Dizard, referring to Senator Bernie Sanders and Senator Elizabeth Warren writes “The US financial industry should listen to leftwing reformers” December 7.

Frankly, if by leftwing he refers to someone defending the small and poor, then I do not know of any real leftwing reformer. John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And current credit risk weighted capital requirements, to which I have heard none from the supposedly left raise objections, hinders precisely “the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

And, it is only going to get worse. That “Fed’s total loss-absorbing capacity… will require an estimated additional $120bn in equity and debt” Dizard refers to, that one is also based on credit risk weighted assets.

But of course, if it is leftwing reformer as in being statists, then they must be plentiful of them, as very few have raised objections to that in 1988, with the Basel Accord, the risk weight of sovereign (government) was set at zero percent, while the risk weight for the private sector was defined as 100 percent.

No Sir, whether leftwing or rightwing, I would not like to have anyone who fails to state in very clear terms what he believes to be the purpose of the banks, and I agree with that purpose, to have anything to do with regulating banks.

@PerKurowski ©

December 06, 2015

Keep bank regulators like FSB’s Mark Carney out of global warming or we’re all toast

Sir I refer to Pilita Clark’s “Carney urges ‘net zero’ company strategies” December 5.

In Basel II a corporate asset that is rated AAA to AA carries a 20% risk weight, while a similar asset rated below BB- is risk weighted 150%. That means that the capital a bank has to hold against a corporate asset rated AAA to AA is 1.6% (8%x20%), while against an asset rated below BB- it needs to hold 12% in capital… 7.5 times more.

Anyone who believes that assets rated below BB- are more dangerous to the banks than assets rated AAA to AA, even a mind-blowing 7.5 times more dangerous, has not the foggiest idea about risk-management.

The safer an asset is perceived, the larger is its potential to deliver unexpected losses, those losses that bank capital is to help cover.

And that is why Mark Carney, the chair of the Financial Stability Board, instead of appointing “Michael Bloomberg, media billionaire… to head a task force aimed at helping investors judge how companies are managing the risks that global warming poses to business”, should better see that himself and all his colleagues take a Risk Management 101 course.

Sir, as I have said many times before... if climate change/global warming regulations is to be handled by a task force in any way similar to how the Basel Committee and the Financial Stability Board handle banks… then we're all toast.

PS. If bank regulators want to help out then they should scrap the capital requirements based on credit risks that are anyhow cleared for, and make these based on sustainability (and job creation) ratings

@PerKurowski ©

Bank regulators’ magnificent pro-cyclical machine is fueled by credit rating downgrades

Sir, Eric Platt writes: “US corporate downgrades soar past $1tn as defaults gain pace” December 5.

He discusses several of its implications but forgets one of the most important, namely its impact in the capital requirements for banks. As is, because of the risk weighted capital requirements for banks, these will be required to hold more capital, meaning they will be able to lend less, or even have to dispose of assets, meaning everything will get worse, all the courtesy of dumb and useless pro-cyclical regulations.

The moment a bank puts an asset on its books, that is the moment when it needs to have sufficient capital, and that sufficiency should obviously include the possibility of a future downgrading.

How is it bank regulators cannot understand that the safer something is perceived the larger the potential for bad news?

@PerKurowski ©

December 04, 2015

A pro-regulation mindset blinds leftwing economists from understanding how anti-egalitarian bank regulations are.

Sir, Gillian Tett writes “Rightwing economists tend to blame government regulation for lower growth” and since she does clearly not think so, I guess she identifies with the left, “A puzzle Yellen cannot solve with a rate rise” December 4.

I blame regulations for lower growth and especially the credit-risk weighted capital requirements for banks that distort the allocation of bank credit to the real economy.

Favoring bank lending to what is perceived as safe de facto discriminates against the fair access to credit of those perceived as risky. And so inasmuch as it fosters inequality, and inasmuch as the left professes to hate inequality, leftwing economist should also oppose that regulation.

In “Money: Whence it came where it went” 1975: John Kenneth Galbraith, wrote “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

The problem with leftwing economist is that their mind set is so pro-regulation they cannot fathom regulators doing any wrong, and also so against the bankers, that they blind themselves to that credit-risk weighing is as anti-egalitarian as regulations come.

@PerKurowski ©

Risk weighted TLAC intensifies the irresponsible regulatory distortion of bank credit allocation to the real economy

Sir, I refer to Eric Platt’s and Ben McLannahan’s “S&P downgrades 8 US lenders on support fears” and to Lex’s “US banks: losing their safety harness”, December 4.

It is mentioned: “Since the financial crisis of 2008-09 regulators have launched a succession of measures designed to ensure that taxpayers will not be burdened again in the event of another Lehman-like crisis, forcing banks to hold more capital and liquid assets while limiting the amounts they can return to shareholders through buybacks and dividends” “Banks are expected to hold total loss absorbing capacity — TLAC — of at least 18 per cent of their risk-weighted assets.” “S&P on Wednesday pronounced the US Federal Reserve’s latest capital rules as up to the task”

So, on top of the distortions produced by the risk weighted capital requirements now regulators want to add this.

18 percent of risk weighted assets means that normal unrated creditors, and those rated between BBB+ to BB-, will generate the bank an 18 percent TLAC requirement, while for example private sector assets rated AAA to AA will only generate a 3.6 percent requirements TLAC. Those unlucky to have a rating below BB- they will generate a 27 percent TLAC requirement, which of course will not make their plight any easier to solve.

I am so amazed at how bank regulators seem to not care one iota about whether their regulations distort the allocation of bank credit to the real economy. Might it be that they have still not defined the purpose of those banks they are regulating? God, save us from this type of irresponsible regulators.

@PerKurowski ©

Forcing banks to play it safe is a very dangerous game that dooms Europe and other

Sir, you argue that “Super Mario is doing what he can” and that “The politicians cannot expect him to achieve a sustained recovery on his own”, but yet again you fail to mention the need for bank regulators to stop distorting the allocation of bank credit, “Draghi and the challenge of great expectations” December 4.

When you allow banks to leverage more with assets perceived as safe than with assets perceived as risky, you give what is perceived as safe an unfair advantage when it comes to access to bank credit, which results in denying a fair access to bank credit to what is perceived as risky. And that kind of dumb playing it safe causes of course a very dangerous distortion in the allocation of bank credit.

European and other banks have been given by the Basel Committee the incentives to act scared of credit risks, which means the real economy will not get the bank credit it needs; and which means that the banks exposure to what is perceived as safe will be dangerously big.

And I am truly amazed this is not even an issue for the Financial Times. When and why did you decide to make bank regulators your protégées? Martin Wolf has told me in clear terms he does not believe those capital requirements distort. He is completely wrong and I find it hard to believe that the whole FT has to follow his lead.

PS. Your Super Mario does not understand this either or, as a former chair of the Financial Stability Board, he is doing whatever it takes for not having to admit a mistake.

December 03, 2015

We’ll soon need a Sovereign Debt Restructuring Mechanism SDRM for most countries of the word. Especially for the “safe”

Sir, Chris Giles writes: “Three times in four weeks, BoE has opted to provide more economic stimulus” “The Bank of England is a dove with clipped wings” December 3.

And reading it, all stimuli had, one way or another, to do with facilitating governments to have easier access to credit so as to be able to run larger deficit spending schemes. It is truly scary stuff.

Add to that, that for the purpose of setting the capital requirements for banks, the sovereigns have been assigned a zero percent risk weight while those who most generate the strength of a sovereign, the private sector, have been assigned risk weights from 20 to 150 percent, and it should be clear to all that we are heading towards the mother of all sovereign debts crises… especially that of those sovereigns perceived as the safest.

@PerKurowski ©

December 02, 2015

ECB, the virus of pernicious “seeping pessimism” infected our banks, courtesy of the Basel Committee (and FSB)

Sir, Claire Jones writes: “Mr Peter Praet, ECB’s chief economist, sees evidence of seeping pessimism in a reluctance to invest. While businesses contend that they are operating close to full capacity, the ECB contends that resources are being vastly underused. His worry is that without a pick-up in confidence and productivity-enhancing structural reforms by governments, the region will remain plagued by anaemic growth and high unemployment. A vicious cycle will develop, with economic weakness reinforcing the negativity”, “ECB to confront ‘seeping pessimism’” December 2

Mr Praet should dare to research the pernicious pessimism with which credit risk weighted capital requirements have infected the banks.

Banks are allowed to leverage more their equity with assets perceived as safe, than with assets perceived as risky; and are therefore able to earn higher risk adjusted returns on equity when financing what is ex ante perceived as safe, than when financing what is perceived as risky. That causes banks to avoid financing the always more risky future than the, at least for a while, safer past. And if that is not the sort of pessimism that causes a vicious cycle to develop what is?

Why do I suggest that Mr. Praet needs a dose of courage look at that? His boss, Mario Draghi, as the former chair of the Financial Stability Board, shares much blame for having allowed such regulatory stupidity.

@PerKurowski ©

Do current debates on climate change consider sufficiently demographic projections?

Sir, I refer to the different opinions expressed in FT on the UN Climate Change Conference in Paris.

IMF, in a Staff Discussion Note of October 2015, “The Fiscal Consequences of Shrinking Populations” writes: “Declining fertility and increasing longevity will lead to a slower-growing, older world population... This, in turn, contributes to a more sustainable pattern of development and reduced pressures on the environment.”

And the World Bank, in its advance of the “Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change” mentions: “Demographic trends and related policies will have implications for the global environment and for the effectiveness of adaptation and mitigation strategies. Family planning and reproductive health policies may help mitigate the negative effects of climate change by reducing population growth, especially in pre- and early-dividend countries. Education is not only likely to lower fertility, it can also have a major impact on the effectiveness of measures aimed at tackling the negative effects of climate change…”

And so Sir, it looks clear that if we have an aging world with falling population our economical challenges will increase but our climate change challenges might lessen. And vive versa if we have a world with growing population it might be easier on the economy but climate change challenges might worsen.

Is the current debate on climate change considering sufficiently this relation?

What if in 40 years the world has to explain to its pensioners that there is no money for them, because it was quite unnecessarily spent on problems derived from a climate change scenario that did not include demographic projections? 

@PerKurowski ©

November 30, 2015

COP21 Paris, do not let a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

Sir, Narendra Modi is walking on a very fine and dangerous line between the “it is all humans’ obligation to encounter any global threat that could result from affecting the environment of our planet” and it is the responsibility of the rich. “Do not let the lifestyles of the rich world deny the dreams of the rest” November 30.

Of course, when it comes to assigning financial resources to mitigate or combat climate change, the rich countries have more to give. But I would always hold that the starting point of all these efforts must be that the poor and the rich, as humans, have an equal right to participate in fighting anything that threatens humanity… and that the right and duties of the poor are not lesser because they are poor.

Let not a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

PS. Narendra Modi would benefit from understanding that bank regulators' credit risk aversion is much worse for the opportunities of India to develop than any coal aversion by self appointed climate change regulators.

PS. You want to see some real anti-climate change action? Throw out credit risk capital requirements for banks and adopt SDG weighted capital requirements for banks.

PS. And a renewed warning. If anything like a Basel Committee for Banking Supervision takes over the worldwide regulation on climate change… we are toast.

@PerKurowski ©

November 28, 2015

And the winner of the denovation prize is… The Basel Committee for its risk weighted capital requirements for banks!

Sir, I refer to Tim Harford’s discussion of the role of prizes in fostering innovations “Eyes on the innovation prize” November 28.

Personally I have often argued for establishing a prize for promoting innovative ideas about how to regulate banks, without interfering with their purpose of allocating credit efficiently to the real economy.

As is, current bank regulations that so much favor what is safe from a credit risk point of view, usually what already exists, over that which is risky, usually that of which the future is built of, is as a powerful blockage of innovations that one could think of.

In this respect, bank regulators would no doubt be declared winners of any denovation prize, if it existed. They would in fact be the unchallenged denovation champs ever since Basel II of 2004, most probably, no certainly, already since Basel I of 1988.

@PerKurowski ©

Gillian Tett, Anthony Bourdain and Selena Gomez might not explain it all in the “The Big Short”

Sir, I refer to Gillian Tett’s discussion of “The Big Short”, a film based on Michael Lewis’s bestselling book. “Finance gets the Hollywood treatment” November 28.

Tett writes: “We have Anthony Bourdain, the famous chef, standing in a kitchen, describing how a CDO is similar to fish stew (bankers resold old mortgages by mixing them up into fresh broth, just as chefs conceal old fish by turning it into soup). We also see the actress Selena Gomez elaborating the principles of synthetic derivatives while sitting in a casino, placing chips on a table, as groupies mimic her bets.”

I have not seen the film yet but, if Anthony Bourdain did not include mentioning the fact that the quality of the fish stew was to be determined by some very few fish-stew rating agencies; and that the casino in which Selena Gomez placed bets had abandoned the traditional payout scheme in which all bets have exactly the same expected economic value, in favor of one where the safer bets, black or red, pay more than the risky bets, a number, then the film does not fully explain what happened.

Gillian Tett writes “a decade ago [she] was alarmed by the bubble brewing in complex finance…” and indeed in January 2007 she wrote “The unease bubbling in today’s brave new world”

Myself, as an Executive Director of the World Bank, in a formal statement I delivered in October 2004, have also done my fair share of warning writing: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”. And in January 2003 in FT I had warned about allowing credit ratings to become a systemic risk.

@PerKurowski ©

November 27, 2015

What blocks Martin Wolf from understanding risk-weighted capital requirements for banks is a dangerous distortion?

Sir, I refer to Martin Wolf’s “The fantasy of Britain as ‘most prosperous economy’” November 27. Of course it is a fantasy! There is an obstacle to that. Though in truth, that is an obstacle for most economies becoming or remaining prosperous. And I refer of course to the risk-weighted capital requirements for banks.

Our society lends the banks a lot of explicit and implicit support. And then regulators, on behalf of the society, now allow banks to leverage that support many times more on their equity for assets perceived as safe from a credit point of view than for assets perceived as risky.

And, since being perceived as safe from a credit point of view, has not one iota to do with whether that credit is more important for the real economy than a credit awarded to someone perceived as risky, the result is pure distorting credit-risk aversion.

The problem is that too many are incapable to understand how dangerous those distortions are. For instance Martin Wolf, with respect to these capital requirements once explained to me: “there is no coercion: if the risks are high, [banks] should not, in their own interest, make the loans. Nor is it the case that risk weighting prevented banks from lending to small enterprises. The reason that they did not (and do not) do so is that it IS ACTUALLY risky to do so, relative to the perceived return.”

It is there, right in front of him, and yet he does not see it. If banks could leverage as much when lending to these “actually risky” than what they are allowed to do when lending to “the safe”, then their perceived risk adjusted return on equity would be much higher and they might indeed lend to the risky.

But no! That leverage advantage is only awarded to “The Safe”, those who already get lower interests, those who already get much larger loans, those who when they turn out ex-post to be risky, are precisely those who cause major bank crisis.

@PerKurowski ©

Bank regulators make sophisticated remarks about the need of countercyclical regulations and design pro-cyclical ones.

Sir, I refer to Joe Leahy’s “Rating agency pressure on BTG Pactual” November 27.

Downgrading… depending on whether it crosses some regulatory thresholds, could mean banks are required to hold more capital against loans assets so affected. Were it to happen, this could, in a pro-cyclical fashion, only help to increase the resulting problems.

And what would usually trigger such a credit degrading? Mostly some unexpected events, like in this case the arrest of BTG Pactual’s chief executive, André Esteves.

And this evidences, for the umpteenth time, the dangers with using ex ante perceived expected credit risks to define the capital banks should hold against unexpected losses.

When the outlook is rosy and so many could be perceived as safe then the capital requirements go down, so bank can leverage even more, so bank can give even more credit, and everything will look even rosier.

When the outlook is darker and many could be perceived as risky, then the capital requirements go up, so bank can leverage less, so banks have to contract the credit they have awarded, and so everything will look even darker yet.

Regulators fill their mouths with sophisticated remarks about the need of countercyclical regulations but manage somehow, with a little help from silent FT, to avoid being held accountable when they design pro-cyclical nonsense.

@PerKurowski ©

Bank regulations should be a prime issue discussed during UN’s Paris conference on climate change. Will it be?

Sir, I refer to FT’s Special Report “Managing Climate Change” November 27.

If a bank is allowed to hold less capital against Good assets than against Bad assets, then the bank will be able to earn a higher risk adjusted return on equity on The Good than on The Bad. And then banks will lend more, and on better terms, to The Good than to The Bad.

Currently bank regulators have defined The Good to be those whose perceived credit risks are lower than that of the Bad. That is dumb, serves no purpose and is unjust.

Dumb because banks, by mean of interest rates and size of exposures already clear for credit risks, and so perceived credit risk gets to be considered excessively, which is something that seriously distorts the allocation of bank credit.

Purposeless because perceived credit risk has nothing to do with the usefulness for the economy and the society of a bank credit being awarded.

Unjust, because by favoring more than ordinary the access to bank credit of those perceived as safe, impede those perceived as risky to have fair access to the opportunities that bank credit provides.

If I had the opportunity in Paris I would suggest that we urgently redefine The Good bank assets. The Good should be those that help us to achieve the two things we would most love for our banks to help us out with, namely the creation of the many new jobs we need, and to make our planet more sustainable.

Could that happen? I am not sure. That requires many to understand what the credit-risk capital requirements for banks have done to our real economies, and that is not a pretty sight bank regulators likes the world to see.

Sir, would it not be nice if suddenly banks earned higher risk adjusted returns on equity doing something we like them very much to do? Of course it would. Hey, we could perhaps even see some huge bank bonuses paid in a quite very different light.

@PerKurowski ©

November 26, 2015

Martin Wolf, the government’s favorable borrowing terms come at extremely high costs, especially for our young.

Sir, Martin Wolf insists again in that the government should take advantage of very “favourable terms” to borrow so as to invest [in infrastructure]. "The same destination but a gentler route" November 26.

Again Wolf simply cannot understand (or does and turns a blind eye to it) that those “favorable terms” do not come cheap. 

The low interest rates result much from favoring the government’s access to bank credit over that of the private sectors, and especially over that of those perceived as risky, like SMEs and entrepreneurs. Therefore its cost is a road littered by private initiatives that never got the bank credit these needed to be tried out. Our young, who forever will see their employment opportunities seriously diminished by this, will, when they discover what has been done, not look favorably on those responsible for it, and on those silencing it. 

To think, as Martin Wolf obviously must do, that a government bureaucrat is more capable of efficiently using bank credit that he is not personally responsible to repay than citizens, can only be explained from an ideological point of view. He surely must be a statist, one of those who want austerity to be imposed on banks, but decries it when it touches the government.

Does that mean I disapprove governments investing and financing infrastructure? No! But, when evaluating projects, governments should not use the currently subsidized public borrowing rate as their reference.

@PerKurowski ©

A globalized harmonized regulatory approach, imbeds the greatest potential of producing truly fatal systemic risks.

Sir, Rick Lacaille, of State Street Global Advisors concludes with “Only a globally harmonised approach — where regulators and asset managers work together to scrutinise and overcome issues linked to systemic risk — will assure global financial stability.” “Regulators must keep tabs on twin risks of leverage and liquidity” November 26.

I find myself on exactly the opposite side. In 1999 in an Op-Ed I wrote “the possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

Let me just here quote from a list of regulatory mistakes, some relevant principles that are ignored by the current meddling scheming regulators. These are in much perfectly applicable to regulations of asset managers.

To allow bank equity to be leveraged with net margins of assets differently, distorts the allocation of bank credit.

The scarcer the bank capital is, the greater the distortions produced by the risk weighted capital requirements.

Bank capital is to cover for unexpected losses, yet regulators base the requirements on expected credit losses.

The safer something is perceived the greater is its potential for unexpected losses.

The risk of a bank has little to do with perceived risk of assets, and much to do with how the bank manages risks.

Any perfectly perceived risk causes the wrong actions if the risk is excessively considered.

The undue importance given to few information sources, credit rating agencies, introduced a serious systemic risk.

Regulators ignored that imposing similar and specific regulations on a system stiffens it and increases its fragility.

Any regulatory constraint that can be gamed will be gamed benefitting those gaming the most, in detriment of other.

Lacaille writes: “In our view, leverage should remain the guiding indicator of systemic risk. Regulators particularly need to look for managers that operate leveraged strategies, with a focus on identifying and closing loopholes for disguised leveraging.”

The best way of avoiding disguised leveraging is of course not allowing the costumes. One simple capital requirement for all assets would be the most transparent and the least risky way to go.

Will that lead to more risk-taking? Yes, but not to excessive systemically important financial exposures to what is risky. The dangers will, as always, remain being that of excessive financial exposures to what ex ante is perceived as safe, but that ex post can turn out to be risky.

@PerKurowski ©

November 21, 2015

Tim Harford, non-transparent taxes disguised in clothes of bank regulations, is that not statist sadism?

Sir, I refer to Tim Harford’s discussion of taxes from the perspective of economists, “The pillar of tax wisdom”, November 21.

If companies could like governments print money so as to repay their debts with money worth less, or if companies, like governments do when they increase taxes, could when in need force shareholders and strangers to pay in additional equity to help repay its debts, then companies could be as “good-credits” as governments.

In 1988, the overall important G10, with the Basel Accord, sprang the risk weighted capital requirements for banks on the world. In it bank regulators amazingly decreed the risk weight of the sovereign, meaning the government, was to be zero percent, while that of the private sector was set at 100 percent.

From that moment on, banks of G10 would be able to leverage their equity more with loans to the sovereign than when lending to the private sector. And that meant banks would earn higher expected risk adjusted returns on equity when lending to the government than when lending to the “risky” private sector. Of course, implicitly it also meant that regulators believe that governments could use bank credit more efficiently than the private sector. In other words an expression of statist sadism!

That translated into a non-transparent subsidy for the government, just another different type of tax revenue, payable by all the extra interest rates or lesser access to bank credit the private sector would have as a result of it.

How much would that tax be? It is hard to say but, if we consider that the most important part of its cost is the foregone opportunities of fair access of bank credit to SMEs and entrepreneurs, then we could be talking about some truly mindboggling amounts.

Sir, would you ask Tim Harford whether he, as an economist, has any opinion about taxes disguised as regulations?

PS. That subsidy also implies that the usual proxy for risk-free rates, like US Treasury, now indicates a subsidized risk free rate

​Per Kurowski


@PerKurowski ©

November 20, 2015

A ‘light touch’ does not distort. Risk weighted capital requirements for banks was pure ‘heavy-handed dumb touch’

Sir, commenting on “Bank of England’s damning report on the 2008 failure of HBOS — seven years since the financial crisis” you write: “A [drawback] is that the regulators themselves — and the politicians who established the “light touch” regulatory regime for the City of London that encouraged the HBOS failure — do not face similar action… Meanwhile, the FSA, which was supposed to ensure that the UK’s biggest banks did not run aground and put the taxpayer at risk, was broadly deficient in its job. It operated within the prevailing political assumption of the time that the FSA “had to be ‘light touch’ in its approach and mindful of the UK’s competitive position”, “Better late then never for banking discipline”, November 20.

Twice you reference ‘light touch’. Wrong! A ‘light touch’ does not distort. The portfolio invariant credit risk weighted capital requirements for banks was pure and unabridged ‘heavy handed dumb hugely distortive touch!

I have explained it to you and your columnists and reporters a thousand of times, in hundreds of different ways, and so here comes a reprise of some of my arguments:

Bank capital is to be a buffer against unexpected losses. To base them on expected credit losses does not make any sense.

Any risk, like credit risk, even if perfectly perceived, causes the wrong actions if excessively considered.

All major bank crises have resulted from excessive exposures to assets perceived ex ante as safe, never from excessive exposures to what was perceived as risky.

To allow banks to hold less capital against some assets allow the banks to earn higher risk adjusted returns on equity on these. And that distorts the allocation of bank credit to the real economy.

To allow some banks to use their own risk models to determine the capital requirements is like allowing kids decide how much ice cream and chocolate to eat that leaves out the spinach and the broccoli.

Without these regulations banks would never ever have been allowed to leverage as much as they did.

To regulate banks without considering their purpose, like allocating bank credit efficiently to the real economy, is utterly irresponsible.

To allow some few credit rating agencies to have such importance for the capital banks needed to hold was to invite systemic risk.

Sir, it was clear that with this piece of regulations banks would dangerously overpopulate safe havens and, equally dangerous for the real economy, underexplore risky, but potentially very rewarding, bays. And that is what happened, and still you have difficulties of seeing it, I do not understand why. Is the difference between ex ante risks and ex post realities too much to handle?

Not understand the role of risk-taking in keeping the economy moving forward so as not to stall and fall, shows lack of vision and wisdom.

And you know I could go on and on.

You write: “By naming [some] who ran HBOS “without due regard to basic standards of banking” and recommending that several face possible bans from working in the industry, it clarifies responsibility.

I wish that would be valid for failed bank regulators too. Most of them have been promoted and are busy hiding or ignoring their own responsibilities.

@PerKurowski ©