July 30, 2016

When raising carbon taxes, let’s try to keep the war against climate-change and the redistribution profiteers at bay

While the crude oil price index fell from 100% in 1980 to 18% in 1998, the products price index on the consumer level increased in the UK in constant terms from 100% to 247%; a result of that taxes on petrol went from 85% added value in 1980 to a confiscatory 456% in 1998. And the tax increase, similarly applied in other European countries was predicated on environmental reasons… even though for instance Germany and Spain, were simultaneously subsidizing coal. And when consumer protested the increase of petrol prices the blame was laid on the sheiks.

And now Tim Harford argues for the need to “raise the price of carbon-dioxide emissions, using internationally coordinated taxes or their equivalent [because] such a tax would make renewable energy sources more attractive – as well as encouraging energy-efficient technologies and behaviour”, “Alternative energy’s power struggle” July 30. 

Sir, even though I come from an oil extracting nation, Venezuela, that is something with which I could agree, but only under two conditions.

First that all the taxes and subsidies in the energy sector need to be absolutely transparent so that there is no hanky-panky going on.

And second, so that this do not just enrich many of the war against climate-change profiteers, all those tax revenues should be distributed equally to all citizens by means of a variable universal basic income. The beauty of it all is that doing so, would equally help, somewhat, to keep the many redistribution profiteers at bay.

Per Kurowski

We do not believe that the Venezuelan military can contemplate sending their compatriots to the starvation ovens.

My deceased father arrived on the first train to Auschwitz in 1940 as a Polish prisoner, and had number 245 tattooed on his arm. Freed in 1945 by the Americans, in 1947 he moved to Venezuela where he lived for over 30 years, worshipping that country all his life. And now I find Andres Schipani’s “Venezuela army tightens grip as food riots grow”, July 30, coincidentally published next to an AP brief “Silent pilgrim” and that reports on a visit of Pope Francis to Auschwitz.

And so I just must say the following Sir: My father would never ever have believed, as neither do I believe, that the Venezuelan military are capable of sending their compatriots to the starvation ovens. And, in this respect, we would both firmly believe that something has to happens to put a stop to the runaway craziness of the current Venezuelan realities, more sooner than later.

@PerKurowski ©

July 29, 2016

Banks, to get out of their dead-end street, must make a convincing case they can prosper holding much more capital.

Sir, James Shotter, Laura Noonan and Martin Arnold write: “At yesterday’s close, investors were implying that the biggest bank in Europe’s most stable economy [Deutsche Bank] is worth €17.7bn, just a quarter of the book value of its assets.” And then we read of efforts to better that by reducing operations and cutting down on risk weighted assets. In other words being placed in an Incredible Shrinking Machine. “Big Read: Deutsche Bank: Problems of scale” July 29.

Because of the risk weighted capital requirements, banks were set on a road of increasing returns on equity by diminishing the capital they needed. And, on that road they lost many opportunities, like lending to “risky” SMEs and entrepreneurs. And they also ended up in dangerously over-populated safe-havens that, when compared to the “risky”, suddenly offer lower real-risk adjusted returns. They now are in a dead-end street.

So, if it was me, I would try to make the strongest case possible to my shareholders that there are good and safe returns on equity to be obtained by ignoring Basel regulations. “Give us 12 percent in equity, against all assets, so as to allow us pursue the undistorted highest risk-adjusted returns out there.”

Sir, I have of course no idea if that is a viable strategy for any individual bank, such as Deutsche Bank. Most banks are caught between a rock and a hard place. They need to ask for much capital, but that much capital might be so much, that they could scare away everyone. Anyhow, I would not like to work in a bank that is going to stretch out the suffering by asking for more capital, again and again, little by little. To get it all and get over it would benefit everyone, including current shareholders.

Is that impossible? Not really, here “one of the bank’s top 20 investors” is quoted with “The problem for Deutsche is that it has got to the stage where if it continues to cut assets, it is going to lose a significant amount of revenues”.

And on a different issue, the litigations and fines banks face, I repeat what I said over the years. 

When we all know that for the banks’ good and for our economies’ good banks need more capital, to extract fines paid in cash is irresponsible and masochistic. All those fines should be paid in shares.

@PerKurowski ©

July 28, 2016

Any central banker that distorts, just as he likes, the allocation of bank credit to the real economy, is not to be trusted

Sir, John Authers writes: “If I report that government bonds are selling for unprecedented low yields, because investors are looking for safe places for their money — both of which are undeniable and unexceptional propositions — abuse follows. Markets are fixed! Yields aren’t really that low!” “Central banks are not the enemy: Monetary policy has stayed too loose for too long: that is a failure of politicians” July 28.

In this context am I abusing when I hold that markets are to a very important extent fixed, only because banks are looking for places for their money that does not require them to hold much capital? I don’t think so!

And Authers writes: “Markets are not efficient, and are often wrong…But they are not part of a political process, and ignoring them is not an option. When they set the price at which we can borrow, or at which we can exchange currency, they create truths we have to live with”

Absolutely, but in this case bank regulators, most from central banks imposed their truths on the market.

Sir, though regulators would love you to do so, do not forget what assets caused the 2007-08 crisis.

Those were what was ex-ante perceived, decreed or concocted as very safe, and which, for that reason only, the regulators allowed banks to hold these assets against very, very little capital.

Assets perceived as risky do no set off major bank crises, that distinction belongs to what is perceived as safe, and that is what our dumb regulators ignored

And what has much stopped the economy from recovering in the face of enormous injections of liquidity? That the liquidity, because of bank regulations, central banks, are not allowed to flow freely by means of bank credit to the “risky”, the SMEs and entrepreneurs.

Of course I would love to trust central banks, but I just can’t. Anyone who comes up with an idiotic and statist idea like that of assigning a risk weight of 0% to the sovereign and 100% to us We The People, is not to be trusted.

@PerKurowski ©

Basel risk-weights: Sovereign 0% - We The People 100%. How on earth did we fall into that idiotic statist trap?

Sir, David Stubbs discusses accurately many risks with sovereign debt, risks that are not new, have never been, but that are appearing more clearly now. “Sovereign bonds can steady a ship but their anchor days are over” July 28.

But what Stubbs leaves out is the amazing fact that, for the purpose of risk-weighing the capital requirements for banks, the Basel Accord, Basel I, in 1988, set the risk-weight for the sovereign at 0% and that of “We The People” at 100%... and no one said a damn word about it. The only discussions thereafter were promoted by some shadier sovereigns that also wanted to be risk-weighted at 0%.

Sir, you can be sure of one thing, Greece, independently of how much it hid information, would never have been able to get so much credit, had there not been for the minimalistic bank capital requirements against its loans.

Runaway statism is what was, and is, behind it all. By allowing banks to leverage their equity so much more with sovereigns’ debts than with citizens’ debts, they allow banks to earn much higher “expected” risk-adjusted returns on equity when lending to sovereigns than when lending to citizens, so banks will favor lending to sovereigns over lending to citizens.

And that means de facto that bank regulators are acting as believing government bureaucrats know better what to do with bank credit than citizens. How on earth did we fall into that trap?

Would the actual level of sovereign debts around the world be sustainable without the regulatory subsidies? That is indeed a nasty question.

PS. A letter in FT November 2004 “How many propositions will it take before the Basel Committee, the bank regulators, start realizing the damage they are doing by favoring so much bank lending to the public sector.”

@PerKurowski ©

July 27, 2016

Just you wait till the young discover what the Basel Committee for Banking Supervision has been doing to their future

Sir, Anne-Sylvaine Chassany tells us that “Océane, a 21-year-old Nice resident with purple hair, tattooed forearms and stretched earlobes would love to move to London and open a tattoo parlour” “A waitress with tattooed arms opens my eyes to the youth vote” July 27.

Well that would quite likely require Océane to get a bank loan. But what would Océane say if she understood that her chances of getting a loan at reasonable rates, which might never have been that great to begin with, are now much smaller, because of the regulators.

The risk-weighted capital requirements favors the lending to what is perceived, decreed or concocted as safe, that which always have had ample access to bank credit, over the lending to the risky… and by favoring it unfairly discriminates against the access to bank credit of those ex ante perceived as risky. 

One day, some researcher will calculate the number of loan applications by SMEs and entrepreneurs that have been denied, or approved at much higher interest rates, as a direct consequence of these regulations. When those figures are published and the young realize discovers that banks stopped financing their risky future, and are only now refinancing the safer past, like placing a reverse mortgage on the economy, then, as long as the young are able to look up from their iPads, all hell could and should break lose.

Hear the young: “Baby-boomers why did you do that to us? The banks of your parents did take the risks needed for your future!”

And nothing can foster inequality as much as denying opportunities of fair access to credit… with “fair” meaning here, a not-distorted free-market based risk evaluation process.

@PerKurowski ©

July 26, 2016

If banks want to keep the society’s support, they must again become efficient allocators of credit to the real economy.

Sir, Simon Samuels, a banking consultant, writes that “the priority of regulators and policymakers in Europe…should be developing financing solutions other than banks from which customers can borrow” and one way he suggests is “to give borrowers an incentive to shun banks and so deepen Europe’s capital markets.” That sure does not sound like a consultant working for the long term interest of his clients. Does Samuels really believe banks will keep the huge taxpayer support they now have, if they abandon lending to all in the real economy? “Bank regulators, be careful what you wish for” July 25.

But then Samuels dutifully defends the profitability of banks by warning against increased capital requirements. He writes: “If the return on equity from mortgage lending or corporate lending falls by more than half — as has been widely estimated under the proposals as drafted — then banks will either ration lending in these areas or try to raise prices.”

But Samuels also keeps mum about the fact that, for the purpose of the capital requirements for banks, the risk-weight for mortgage lending is 35%, while the risk weight for any corporate rated BBB+ or below is 100% or more. Which means that banks already earn much higher risk-adjusted returns on equity when financing houses, or investing in other perceived, decreed or concocted safe assets, than when financing those “risky” SMEs and entrepreneurs, those that could create the jobs needed for house owners to service mortgages and pay the utilities.

Of course, as someone interested in the well-being of the real economy, I would also tell the regulators to go very easy on the increase in any capital requirements for banks. But, much more than that, as I have done for soon two decades, I would beg regulators to eliminate that regulatory risk-aversion that has stopped banks from financing the risky future and now have these only refinancing the safer past.

If the banks and bankers forget that their role is to allocate credit efficiently to the economy, and that that is the only reason why society supports them, they will very soon be out of business… and out of bonuses.

@PerKurowski ©

“Climb every mountain”? No way! The sissy Basel Committee instructs banks to “Climb only safe hills”.

Sir, Mohamed El-Erian refers to issues (such as Brexit) that “could change longstanding economic and financial relationships, affect the way economic agents interact with each other, fuel political anomalies and, in the case of unusual asset class correlations and valuations, undermine some of the institutions and basic tenets of the capitalist system.” “Period of artificial calm distracts from potential for storms” July 26.

And El-Erian writes: “These issues share a potential for fuelling so-called jump conditions in which there is a leap to a different set of circumstances, rather than a smooth and incremental evolution.”

Well let me remind El-Erian, and you Sir too, that one of the most impacting “jump-conditions”, was the introduction of the risk-weighted capital requirements for banks. These allowed banks to earn higher risk-adjusted returns on equity on assets perceived, decreed or concocted as safe, than on assets perceived as risky. And, of course, much of what was ex ante safe, became ex post dangerous, when too many went there.

Much contrary to Mother Abbess’ inspirational “Climb ev’ry mountain”, which in Sound of Music encourages people to take every step towards attaining their dreams, the Basel Committee for Banking Supervision, has de facto instructed banks to “Climb only safe mountains”.

@PerKurowski ©

July 25, 2016

Pray the Paul Romer/World Bank union realizes the dangers of regulatory risk-aversion and the benefits of risk-taking

Sir, I refer to the appointment of Paul Romer, one of the pioneers of “endogenous growth theory”, as the new chief economist of the World Bank, “The World Bank recruits a true freethinker” July 24.

Hopefully the Paul Romer/World Bank link could help both sides realize that risk-taking is the oxygen of any development, and so that then they could both push against the silly risk-aversion of bank regulators, that which only causes safe-havens to become dangerously populated, and risky-bays dangerously unexplored.

From what I have read the vital willingness to take risks is not included in Romer’s vision of endogenous growth; and I myself have failed miserably in convincing the World Bank, the world’s premier development bank, to stand up against bank regulators, the Basel Committee and the Financial Stability Board, as well as the IMF… though God knows how I tried… even as an Executive Director of the World Bank 2002-04.

“A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

@PerKurowski ©

July 23, 2016

Most economists do still not understand the current regulatory distortion of the allocation of bank credit to the real economy.

Sir, Tim Harford, when analyzing and questioning the economic arguments on Brexit writes of “the low reputation of economists, the result of a global financial crisis that only a few in the profession warned us against”, “Metropolitan myths that led to Brexit” July 23. And among “the four articles of centre-left faith” Harford brings up that of the “economists are reliably wrong”.

Yes, the economists did not warn, as they should have done, had they been interested, as they should have been. But so much worse is it that, after all the evidence of a crisis that breaks out because of excessive exposures to “safe” assets, those assets against which banks were allowed to hold very little capital, most economists do still not understand how the risk-weighted capital requirements for banks distorts the allocation of bank credit to the real economy. Or is it they just do not care? Or is it that they just do not dare to criticize?

I am just going through “Progress and Confusion: The State of Macroeconomic Policy” edited by Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff and Lawrence Summers; recently published by IMF and MIT. The book has its origin in a conference organized by IMF in April 2015 titled “Rethinking Macro Policy”, the third one.

In it only Anat R. Admati refers to “distortion” and writes: “The presence of overhanging debt creates inefficiencies… In banking such distortions may result in biases in favor of speculative trading or credit card or subprime lending and against creditworthy business”.

Good for her, Admati is one of the few on the right track. Unfortunately, she has not yet fully grasped the fact that allowing banks to leverage their equity, and the support they receive from society differently, depending on ex ante perceived risks, produces a totally different set of expected risk-adjusted ROEs than those that would result without such regulatory distortion.

And the confusion between ex ante perceived risks and ex post realities persists. When Admati mentions “subprime lending” she refers to it as something risky, forgetting the risk-weights for those operations was (and is) 20 to 35%; and when she writes about “creditworthy business”, most of it was (and is) risk weighted at 100%

Frankly, all those economists who regulate banks without clearly defining the purpose of the banks, are putting a very black mark on our profession.

All risk management must begin by clearly identifying those risks we cannot afford not to take… and, in banking, we cannot afford the banks not to take the risks the real economy needs.

@PerKurowski ©

July 22, 2016

​​FT, without fear and favour, take a long hard look at the incentives regulators dangle before banks

Sir, while discussing some possibly very shady FX operations, you correctly suggest that “the whole banking industry should take a long hard look at the incentives it dangles before traders” “HSBC case is another blow for trust in banks”, July 22.

But, why do you so steadfastly refuse to take a long hard look at the incentives the regulators dangle before banks?

By allowing banks to hold less capital against what is perceived decreed or concocted as safe than against what is perceived risky, banks can leverage more their equity, and the support they receive from the society, with the “safe” than with the “risky”.

And that incentive means banks can expect higher risk adjusted returns on what’s “safe” than on what’s “risky.

And so that incentive means banks will lend too easily to what’s safe and too little to what’s “risky”

And so because of that incentive the “safe-havens”, like lending to the sovereigns, the AAArisktocracy and financing houses will, sooner or later, become overpopulated, and therefore very risky.

And so because of that incentive the “risky-bays”, like SMEs and entrepreneurs, will be less explored and, in order to compensate for the discrimination, will have to pay more for credit, which makes these riskier yet.

And so because of that incentive, today billions in bank credit will be awarded in too favorable terms to those who do not deserve it, and thousands of SMEs and entrepreneurs will see their applications refused.

And so because of that incentive the real economy is mostly fed with carbs that makes it obese, and does not receive enough proteins to remain muscular.

Sir, what incentives do someone dangle before FT to have FT being so mum about these so horrible incentives that so distort the allocation of bank credit to the real economy… and all for nothing!

@PerKurowski ©

​​Global disorder: Meddling bank regulators make both what’s safe and what’s risky riskier, and hurt the real economy.

Sir, Philip Stephens writes about “Events that map a path to global disorder” July 22. He does not include the distortions in the allocation of bank credit to the real economy produced by those mindless risk-weighted capital requirements for banks.

By allowing banks to hold less capital against what is perceived safe than against what is perceived risky, banks can leverage more their equity, and the support they receive from the society, with the “safe” than with the “risky”. And that means banks expect higher risk adjusted returns on what’s “safe” than on what’s “risky. And that means banks will lend too easily to what’s safe and too little to what’s “risky”

And so the “safe-havens” like sovereigns, AAArisktocracy and houses will sooner or later become overpopulated and risky.

And so the “risky-bays”, like SMEs and entrepreneurs, will be less explored and, in order to compensate for the discrimination, will have to pay more for credit, which makes these riskier yet.

And so today billions in bank credit will be awarded in too favorable terms to those who do not deserve it, and thousands of SMEs and entrepreneurs will see their applications refused.

And so the real economy is mostly fed with carbs that makes it obese, and does not receive enough proteins to remain muscular.

And that brings on much more poverty than some of that to which Stephens refers to, like a Trump presidency or Brexit.

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” They sure did!

But yet no one denounces regulators offering to make our banks safer with their meddling as being incompetent and dangerous populists.

@PerKurowski ©

July 21, 2016

​​Too many, FT included, approve of postponing all cleansing, even knowing that will make the après nous le deluge so much worse.

Sir, as an Executive Director of the World Bank, 2002-04, in a Risk Management Workshop for Regulators I argued: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises”

And in 2006 in a letter published by FT in 2006 I argued for the “Long-term benefits of a hard landing”.

And so you should be able to understand how much I agree with Roger Blitz’s “Central bank medicine risks creating addicts”; subtitled “Regulators’ desire to treat all ills is storing up problems for the future” July 21

@PerKurowski ©

July 20, 2016

Had regulators left their desk and soiled their shoes, our banks and our economies would be in much better shape.

Sir, Sarah O’Connor is right on spot writing: “What we really need is experts with dirty shoes” “The best economist is one with mucky soles” July 20.

The first Op-Ed ever I wrote Puritanism in Banking was the result of suddenly having a feeling that many of my clients who, because they were perceived as “risky” always found it harder to access bank credit, were suddenly faced by even larger difficulties, as a result of new bank regulations coming out of Basel.

The “expert” bank regulators there, scared to death of banks failing, from their desks declared that more-perceived-risk more-capital and less-perceived-risk less-capital, and believed that should take care of it all.

They did not walk history to understand that what is ex ante perceived as risky never ever has created those excessive exposures that crises are made of, those have always resulted from excessive exposures to what was perceived as very safe when incorporated on the balance sheets of banks.

And they did not walk main-street so as to understand that banks already clear for perceived risks, with size of exposures and risk premiums, and therefore, when they cleared for the same perceived risk again in the capital, they over-sensitized the system to perceived risk. And even though they stayed at their desks the experts blithely ignored that any risk, even if perfectly perceived, causes the wrong actions, if excessively considered.

And here we are and even in the face of failure, the regulators still refuse to walk and soil their shoes. Let’s take away their desks!

@PerKurowski ©

Martin Wolf, good risk management begins with knowing what risks one can least afford not to take.

Sir, Martin Wolf writes “The main explanation for the prolonged stagnation in real incomes is the financial crises and subsequent weak recovery…The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives… Our civilisation itself is at stake”, “Populist rage puts global elites on notice” July 20.

And I have in thousands of letters argued that one of the major problems we face, are the current misconstrued risk weighted capital requirements for banks, those which allow their equity, and the societal support received, to be leveraged much more with what is perceived as safe than with what is perceived as risky.

Though these regulations allowed banks to earn very high risk adjusted returns on equity for quite some time, it caused banks to dangerously overpopulate “safe” havens, like AAA rated securities backed with mortgages to the US subprime sector and loans to sovereigns like Greece… thus the 2007-08 crisis.

And as these impede the “risky”, like SMEs and entrepreneurs, to access sufficiently bank credit… thus the weak recovery.

These regulations were the result of putting our banks in the hands of regulators who did not care, and still do not care, one iota about whether banks allocate credit efficiently to the real economy. And that is of course the risk we can least afford our banks to take.

As a result, our banks no longer finance the riskier future, that which feeds the proteins our economies need to remain muscular, but only refinance the safer pasts, that which only provides the proteins that can cause economic obesity.

And Wolf concludes: “Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. Those who reject chauvinist responses must come forward with imaginative and ambitious ideas aimed at re-establishing that balance”

Mr. Wolf, that has to start by recognizing the mistakes, and holding those responsible for these, clearly accountable… “without fear and without favour”.

So dare to speak out! The risk-weighted capital requirements for banks is pure regulatory populism. If allowed to continue it condemns our civilization to that hardship and mediocrity that will surely be exploited by other dangerous populists who thrive on hardship and mediocrity.

PS. On December 31, 2009, wishing all a happy decade, in a letter titled “The monsters that thrive on hardship haunt my dreams” and that was published by FT I wrote: “As to the banking system, there is nothing that could not be solved by asking ourselves the simple question about what our banks are supposed to do for us, because, unfortunately, that is the question our current very poor set of regulators have never asked themselves.” Now, July 2016, that question is still not being asked, much less responded.

@PerKurowski ©

July 19, 2016

To save the banks the regulators must admit their huge mistakes, and rectify these urgently and intelligently

Sir, Philippe Bodereau, the global head of financial research at Pimco writes: “To prevent… equity volatility [to] temporarily destabilise a large institution the European Central Bank must convince the equity market that rates will not go deeper into negative territory, capital requirements will not spiral higher in perpetuity and regulators will not move the goalposts on asset quality again.” “European banks’ crisis of earnings cries out for a quick Italian job” July 19.

I disagree because that is at best a very temporary solution. The banks and their shareholders in general, though specially the European, cry out for a real explanation of what is happening, and so that they can regain the trust in the future of banking.

This because the truth is that the current risk weighted capital requirements, those which allow banks to leverage their equity and the societal support they receive more with what is perceived as safe than with what is perceived as risky, are entirely unsustainable, for two reasons.

First, though they might allow banks to earn high risk adjusted returns on equity on what’s safe for quite some time, in the long run they will cause banks to dangerously overpopulate “safe” havens, which is precisely the stuff major bank crises are made of.

Second, as they impede the “risky”, like SMEs and entrepreneurs, to access sufficiently bank credit, the real economy will begin to suffer, and there is not a chance banks can expect to survive with a real economy in tatters.

Substituting a significant leverage ratio for the risk weighting, would eliminate the distortions.

That said it has to be done intelligently, so that the economy does not suffer an excessive credit squeeze. One way could be allowing banks to hold the capital originally required on all their current assets and have the new ones apply solely to any new assets.

Since that would, on the margin, reduce the demand of banks for safe assets such as loan to sovereigns, that would, on its own, help to avoid getting deeper and deeper into negative territory.

I would also suggest European finance ministers to look at Chile’s intelligent way of extricating its banks from very similar difficulties in 1981-1983

@PerKurowski ©

July 18, 2016

Gordon Brown, in order to defend globalization, you need to stand up against dumb rulers of it, like the Basel Committee

Sir, Gordon Brown writes: “Leaders must make the case for globalisation” July 17. Absolutely, but in the same vein, leaders must make the case against dumb globalization, and nothing so dumb has been globalized as the pillar of the Basel Committee’s regulations, the risk weighted capital requirements for banks.

Sir, what’s more to say, you clearly do not agree with my assessment, or there is some other factor in play. Anyhow, I refer you again to a brief memo on what I consider to be so mind-blowing wrong.

PS. I just discovered a Deutsche Bundesbank paper in which they now try to deduct from research some self-evident conclusions. 


Banks “throw yourselves back into life” and dare visit the risky bays that our grandchildren need explored.

Sir, Philip Delves Broughton writes: “Economists often miss all the peripheral activity that might actually answer their questions. Professor Robert Gordon, the American economist, has been arguing recently that the US is in an innovation lull… an age of innovative trivia such as Facebook and Pokémon Go. Add the headwinds of poor demographics, a fouled-up education system, debt and inequality, and America is headed for an era of low growth.” “Let facile optimism change the world”, July 16.

Indeed the economists have entirely missed the distortion in the allocation of bank credit to the real economy produced by the risk weighted capital requirements for banks. These, by favoring the access to credit of those ex ante perceived as safe, de facto discriminate against the access to bank credit of those perceived as risky, like SMEs and entrepreneur; and so they have completely overlooked one of the main causes of innovation and economic lull. How this serious oversight has happened remains a great mystery to me. But, then again, since FT has been able to ignore the thousands of letters I have send it over the years to FT on this, there might be some dark forces at work.

Delves Broughton ends with: “The problem is that you cannot write “throw yourself back into life” on a prescription pad” Yes you can! You could at least write: “Banks throw yourself back into life, don’t dangerously and uselessly overpopulate safe havens, and dare explore the risky bays that our grandchildren need explored. 

@PerKurowski ©

July 15, 2016

An Inclusive Growth Commission has a much more important thing to do than pushing public investments.

Sir, Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management, and the chair of the Inclusive Growth Commission, holds that “when the government’s cost of borrowing has fallen down to below 1 per cent [that] the best response to Brexit would be to boost demand [with] public investments”, “Britain’s chance to show the world how to do stimulus” July 15.

Let me ask the Inclusive Growth Commission chair the following:

What would happen to the already more expensive health insurance premiums of the old or sick, if regulators decided that in order to make insurance companies safer these needed to hold more capital when insuring these “risky” than when insuring the “safe” young and healthy? In relative terms, and compared to the premiums before, the old and the sick would then face even higher premiums than the young and healthy.

And that is what the risk weighted capital requirements for banks do. The ex ante perceived, decreed or concocted as safe will, in relative terms and when compared to “risky” SMEs and entrepreneurs, now pay much lower interest and have much more access to bank credit. In other words regulators  decreed inequality.

And that is bad for growth, and of course bad for inclusion. And since the sovereign, the government, has been decreed infallible, the least risky, and given a risk weight of zero percent, these regulations, paid by the risky, have given statism a great boost.

And so the chair of an Inclusive Growth Commission, would do much more for growth and inclusion fighting for the removal of these regulations, and that so distort the allocation of credit to the real economy.s
Most monetary and fiscal stimulus begins or ends up flowing through the banks and so the real question should be: What would be the borrowing rates of the Sovereign if banks needed to hold as much capital against loans to it, than what they have to hold against loans to unrated citizens?

This regulatory subsidy of public sector borrowings will catch up on us all, sooner or later, as it already did in Greece. When that happens our children and grandchildren will not accept our argusment “Oh but it was so cheap”.


July 13, 2016

A mindless structural reform of regulations castrated the banks and helped to kill the dynamism of the economy.

Sir, Martin Wolf quotes Robert Gordon with “Ours is an age of disappointing growth because the technological breakthroughs are relatively narrow”, and then dicusses what could be done. Wolf concludes “The tendency to believe that some “structural reforms” will fix this is, similarly, an act of faith. It is essential for policy to promote invention and innovation, so far as it can. But we must not assume an easy return to the long-lost era of dynamism”, “An end to facile optimism about the future” July 13.

But “structural reforms” can kill dynamism too. And as you Sir and Wolf already know, in my opinion, nothing has done more harm to the economy than the risk weighted capital requirements for banks introduced with Basel I in 1988, and applied much more intensely with Basel II in 2004.

By allowing bank to leverage more their equity, and the support they receive from society with “safe” assets, regulators made it harder for those perceived as risky, like the SMEs and the entrepreneurs, to compete for access to bank credit.

Since perceived risks were already cleared for with the size of the exposures and the risk premiums charged, having bank clear again for those same perceptions in the capital, basically castrated our banks.

Now banks no longer help provide the “risky” proteins the economy needs in order to grow new muscles, they just finance the “safer” carbs that only makes the economy more obese.

Sir, when compared to what is needed to give the future a fair chance to deliver something good, it is clear that never ever before has a generation consumed so much borrowing capacity to sustain its own current consumption.

PS. And with their zero risk weight to sovereigns, and 100% of citizens, bank regulators de facto stated that government buracrats make the best use of bank credit. If that is not runaway loony statism what is?

@PerKurowski ©

July 12, 2016

#BoE #FSB Mark Carney why do you bank regulators discriminate so much against us SMEs and entrepreneurs?

Sir, Mitul Patel with reference to that “The Bank of England’s Monetary Policy Committee will formally meet on Thursday for the first time since the EU referendum result” expresses many valid concerns. “Question marks remain as BoE grapples with monetary policy poser” July 12

But the following question is in my mind of much larger importance:

Mr. Mark Carney, you as the chair of the Financial Stability Board must be well versed on the subject of bank regulations, and so could you please explain to us SMEs and entrepreneurs the following?

We, who are usually perceived as risky, usually perceive much less bank credit and pay much higher risk premiums than those perceived as safe. And so, why do banks, when compared to the capital they need to hold against those perceived as safe, need to hold much more capital against loans to us.

Since banks can then leverage their equity, and the support they receive from taxpayers much more with assets perceived as safe, than with loans to us, we now have a much harder time to provide the banks with competitive risk adjusted ROEs. And so we get even less bank credit or have to pay even higher interest rates.

And to top it up we cannot understand where you all got the idea that banks could build up the excessive and dangerous exposures that could threaten the bank system, with small and high interest rate loans to borrowers like us.

So Sir, can you explain it all for us? Why should our access to bank credit be curtailed? Are we not useful to the real economy?


Will Mark Carney dare to take that question, or will he as I once heard Robert McNamara recommend: “If they make you a question you don’t like just answer the question you wanted to hear”?

@PerKurowski ©

July 10, 2016

All awful on the pension front

Sir, John Authers responsibly puts his finger where it hurts, the issue of whether there will be sufficient resources to provide those pensions that so many take for granted will be there, “Hunt for the middle ground to avert pension poverty” July 9.

And doing so Authers discusses the implications of defined benefit and defined contribution plans, especially in times of extraordinary low interests. His suggestion to find an in-between plan that takes a little from both, sounds very logical, though of course, unfortunately, that cannot guarantee either there will be enough to meet the needs and much less the aspirations.

But the state of the economy at the time of any drawdown of a pension also matters tremendously and, if bank regulators are allowed to continue distorting the allocation of bank credit, that state of the economy will be very bad.

The risk weighted capital requirements for banks are causing a dangerous overcrowding of the safe havens, like public debt to which a risk-weight of zero percent was decreed; and for the economy an equally dangerous lack of exploration of the risky bays, SMEs and entrepreneurs, and which got hit with a risk weight of 100%.

As a consequence banks are now mostly refinancing our safer past and not financing sufficiently our riskier future. And that bodes very badly for the future pensioners, and very badly for the future prospects of the pensioners’ last reserve and hope, their children.

@PerKurowski ©

July 09, 2016

Bank regulators, and FT, should learn backgammon, in order to understand what risk we cannot afford not to take

Sir, Anita Sethi “rolls the dice” and DBC Pierre says about Backgammon: “It’s about defence and offence…it reflects life. How and when to play it safe and how and when to take a gamble – we have to do both things to live well”, “FT Masterclass backgammon… with DBC Pierre” July 9.

Of course! In all risk management the most important question for me is: what risks can we not afford not to take?

As an Executive Director of the World Bank, in 2003, sensing what bank regulators were up to in a formal statement I held: “In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth”

But no, all to no avail, regulators did not care one iota about whether banks allocated credit efficiently to the real economy, only about banks not taking risks. And, to top it up, while seeing to the latter, they completely ignored that what is risky for the bank system is not what is perceived as risky, but what is perceived as safe, since that is the only type of assets with which banks build up dangerous excessive exposures.

But if regulators could therefore benefit from taking up backgammon to learn more about risks and risk-taking, so would FT. By how FT has avoided my arguments on this issue in thousands of letters I can only suspect Sir that you all there perfectly agree with regulators’ more ex ante perceived risk-more capital, less risk-less capital.

@PerKurowski ©

Might economists have spent too much time at their desks and too little on Main-Street to understand risks?

Sir, Tim Harford discusses how economists could have presented their case against Brexit more effectively. In doing so Harford refers to Dan Kahan, a Yale law professor, when arguing that “Giving people evidence that threatens deep beliefs is often counterproductive, because we start with our emotions and trim the facts to fit them”, “Economists face up to Brexit fail” July 9.

Interesting because that is very similar to what I have been asking myself:

How can I get my fellows economist colleagues to understand that, in banking, what is ex-post more dangerous, is what has ex ante been perceived as safe, and which therefore signifies that bank regulators are basically 180 degrees off the charts with their current risks weighted capital requirements for banks?

And how can I get my fellows economist colleagues to understand that if you allow banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived risky, the banks will dangerously overpopulate the safe havens and, equally dangerously, under-explore the risky bays our real economy needs to be explored in order to move forward, so as to not stall and fall?

What deep beliefs do economists hold that block them from understanding risks? Might it only be they have spent too much time at their desks and too little on main street?

@PerKurowski ©

Where would Philip Tetlock or Robert Armstrong forecast the next bank system-threatening crisis to appears

Sir, I refer to Robert Armstrong’s lunch with Philip Tetlock, ‘It doesn’t matter how smart you are’, July 9.

How I would have loved being at that table and be able to ask them:

Gentlemen, where do you think the next major bank crisis resulting from excessive exposures to something really bad is going to happen, between something that was perceived as safe when incorporated to bank’s balance sheets, or between something that was ex-ante perceived as risky?

And applying simple common sense, and looking at empirical evidence, I would absolutely forecast the first, that what’s perceived ex-ante as safe is, ex-post, the much riskier.

And I ask this because our current regulators, with their risk weighted capital requirements for banks, forecast that what is ex-ante perceived as risky, is ex-post, what is truly dangerous.

In my mind they never heard of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”

And the biggest problem now is that, though the regulators were clearly proven wrong in 2007-08, they do not admit their mistake and they keep on forecasting the same.

Sir, if artificial intelligence is to help us, we must keep it free of weak human egos.

@PerKurowski ©

July 08, 2016

As an interested Venezuelan, when lending to a Zimbabwe, should there be no ethical considerations?

Sir, David Pilling and Andrew England report that “Zimbabwe is close to putting the final touches to a debt-arrears package that could see it receive an emergency injection of funds from the International Monetary Fund and other multilateral institutions”, “Cash-starved Zimbabwe closes in on deal to clear debt arrears” July 8.

And for that Zimbawe is receiving the advise of Lazard in order to arrange a seven years loan of $986m from the African Export-Import Bank (Afreximbank), in order to pay back arrears to the World Bank and IMF sin order to access more credit.

That sounds so rational, so hygienic, but should there not be a small question about whether if lending to Zimbabwe is ethical? I mean its government has not behaved too well, and there is no guarantee it will, and any new credit might just help to postpone any urgently needed change.

And so, independently of how juicy the risk premiums or the commissions might be, do the lenders really believe these loans will help Zimbabwe, and not only help some criminals, some technocrat or some bureaucrats?

Because if the lenders decide to bet on the government, and the government does not deliver, should they anyhow have the right to hold the citizens or any future government to repaying their non-earned winnings?

Sir, as a Venezuelan, I am naturally very interested in hearing your opinions on this.

And Sir, I have for decades argued that the world needs a Sovereign Debt Restructuring Mechanism but, for that SDRM to work in the best interests of us citizens, it needs to begin by identifying clearly what should be classified as odious credits or odious borrowings.

@PerKurowski ©

July 07, 2016

The access to bank credit manipulation costs us infinitely more than Libor and all other manipulations put together

Sir, Michael Skapinker, referencing a traders working conditions, gives a well reasoned and heartfelt explanation of why he feels sorry for at least one of those recently found responsible for manipulating the Libor rate. I sure hope it will be read before any sentencing, “The Libor trial and how to deal with a bullying, dishonest boss” July 7.

But let me add to that the following:

I am absolutely convinced that the risk weighted capital requirements for banks, introduced by the Basel Committee in 1988 signifies an outright manipulation of the access to bank credit. By favoring what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential housing, these sectors have received way too much bank credit on way too easy terms. And, as a consequence, those perceived as risky, like SMEs and entrepreneurs, those upon much of the future economic growth and job creation depends, have received way too little credit, in way too harsh relative terms.

If we add the costs of having dangerously overpopulated safe havens like AAA rated securities and Greece, and around the world hindered millions of small loans to be given to those who most needed it, the costs of this distortion for the society are mind-blowing. These exceed thousand fold whatever damages might have been produced by all other recent manipulations put together.

And what has happened to the bank credit access manipulators? Absolutely nothing, in many ways they have even been promoted.

And what has happened to whistle blowers like me. Not much, except for having to suffer seeing my arguments ignored, while being sure this will affect negatively the future of my own constituency, my children and grandchildren; as well as the future of those of the baby-boomer generation about to retire.

The costs of a Libor manipulation, winners and losers, these net out.

The costs of distorting the access to bank credit do, medium and long term, only produce losers, and so they are boundless.

And even though all that access or bank credit manipulation implies absolutely no criminal act, I believe it was done unwittingly and with only good intentions, and only pure innocent stupidity prevailed, it sure help to put all other manipulations in a different perspective. 

@PerKurowski ©

July 06, 2016

The two you know what on bank regulations that Martin Wolf and so many more believe should never be names

Sir, Martin Wolf, holds that the sackluster results of the s between 2007 and 2016, is “the product of a misdiagnosis of the crisis as mainly fiscal, of asymmetrical macroeconomic adjustment, and of obscurantist opposition to fiscal stimulus, even at a time of negative real interest rates on long-term borrowing.” And he argues, “making the eurozone prosperous is indispensable... [and that] The priority is a practical plan for widely shared economic growth”, How Europe should respond”, July 6.

But, again, not a word about the fact that what created the crisis was excessive bank credit exposures to what was perceived or decreed safe, like AAA rated securities, and sovereigns, like Greece. And not a word about the impossibility of achieving prosperous shared economic growth, with regulations that provide banks serious disincentives to lend to “risky” SMEs and entrepreneurs.

Clearly in Wolf’s world, on bank regulations, there are two things that shall not be named.

One are the distortions in the allocation of credit to the real economy risk weighted capital requirements for banks produce; and the other is that those requirements do not make bank systems safer, as what is perceived ex ante as risky never ever causes the build up of dangerously excessive bank exposures.

Wolf argues that the best way to preserve the EU is by making it a desirable place of refuge and not a prison.

I agree but, if such desirable refuge is based on offering safety, to the exclusion of daringness, then it will not remain a safe refuge for very long.


July 04, 2016

What makes me most nervous about Brexit is seeing how so many of the expert’s elite have gotten the willies.

Sir, you can all count yourself lucky at FT for having coolheaded Lucy Kellaway as a colleague. When she indicates, “The 10 minutes we debated high heels on the radio were the sanest minutes I’ve had since the referendum” she is telling the world that there still are some reserves of “stiff upper lip” in Britain, "My advice is to carry on, whether you are calm or not", July 4.

Thank God for that. If you are to handle the Brexit process reasonably well, the last thing you need is for that to be done by those who seem to have gotten down with some serious heebie-jeebies.

@PerKurowski ©

July 03, 2016

To bring back broad-based and growing prosperity we must get rid of current blind and dumb bank regulators

Sir, Tim Harford, economist, concludes his discussion of the whys of Brexit, with “Those of us who are committed to openness and prosperity for everyone… now have a long campaign on our hands. We should start by accepting that, if we cannot bring back broad-based and growing prosperity to the advanced economies, Brexit will not be the last political shock we must face”, “We’re all winners or losers now” July 2.

That is the correct attitude. Do the best with what you have.

And so let me once again remind Harford that long before Brexit, in 1988, there was the Basel Accord, something never subjected to a referendum. With its risk weighted capital requirements for banks, it introduced the nutty concept that banks should hence on earn higher risk adjusted returns on equity on assets ex ante perceived as save, than on assets perceived as risky.

And that regulatory risk aversion, when layered on top of bank’s natural risk aversion, guaranteed, especially after Basel II in 2004, that banks would only be refinancing the (for the time being) safer past, and ignore the financing needs of the riskier future.

And so of course our economies stopped moving up and began their descent.

And now, because of that, and assisted by QEs and similar, our safe havens are already becoming dangerously overpopulated… so much that we must even accept negative interests as the price for anchoring there.

To bring back broad-based and growing prosperity requires getting rid of current blind and dumb bank regulators… and have our bank’s help finance the “risky” SMEs and entrepreneurs, in their exploration of the risky bays where a good future for our young could be found. .

Let’s see if committed Harford helps out, or prefers to remain undercover on this issue that makes Brexit signify chicken-shit.

PS. And the regulatory aversion of ex ante perceived credit risk, does not lead to more bank stability, much the contrary. Voltaire prayed “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]” 

@PerKurowski ©

July 02, 2016

But why do some, like Gillian Tett, insist on trusting some totally failed experts?

Sir, Gillian Tett writes on “Why we no longer trust the experts” July 2.

But one could also ask: “Why do some keep trusting totally failed expert?” or “Why are not experts questioned more?”

Those responsible for Basel I and II regulations, they allowed banks to leverage equity especially much with those assets perceived ex ante as safe, precisely those assets to which bank could create excessive exposures; and which could result very dangerous if ex post, as indeed happened, these assets turned out to be very risky, like the AAA rated securities and sovereigns like Greece.

And by imposing higher capital requirements on what was perceived as risky, like SMEs and entrepreneurs, they made it even harder than usual for these extremely important economic agents to access bank credit.

And yet, basically the same experts, using basically the same although much more complicated script, are allowed to keep on regulating with Basel III.

That would never happen in Hollywood or Bollywood after a major box-office flop.

Here is an aide memoire on the egregious mistakes of current bank regulations.

So why is it so hard for FT that so proudly announces a motto of “Without fear and without favour”, to shame the failed regulators, as they should be shamed. There is nothing o dangerous as experts not duly sanctioned. Frankly, from the looks of it, we should not trust many expert journalists either.

PS. I believe it is much more important to make sure our banks are regulated by adequate persons than picking a good restaurant… but perhaps some would disagree.

@PerKurowski ©

Kenneth Rogoff, a referendum on well explained bank regulations, would do the world immense good

But he also refers to Professor Bruno Frey, who “for example, argues that the threat of referendums helps break up coalitions of entrenched politicians engaged in monopoly behaviour inimical to public interests [and] that referendums produce healthy debate and a more informed electorate.

And how I wish we could hold a referendum on our current bank regulations. Here the questions:

“Do you agree with that those who already find it hard to access bank credit because they are perceived as risky, like SMEs and entrepreneurs, should find that even harder because bank are told to hold more equity when lending to them than what they must hold against assets perceived as safe?”

Or: “Do you agree with that those who already find it easier access to bank credit because they are perceived as safe, like governments and the AAArisktocracy, should find it even easier when banks are allowed to hold much less equity when lending to them than what they must hold against assets perceived as risky?

And the against campaign would remind the electorate that the most important social function of banks, the reason why we taxpayers support them, is to allocate credit efficiently to the real economy, which includes lending to those “risky” that can help the economy to move forward so that it does not stall and fall.

And the against campaign would remind the electorate that all major bank crises have always resulted from excessive exposures to what was ex ante perceived as safe and never from exposure to what was perceived as risky.

And the against campaign would force the for forces to answer many questions. Like these

PS: UK’s decision to enter EU, 1975, was also subject to a Brexit type referendum. The result 67% * 65% = 43.5% for YES

@PerKurowski ©

Are the systemic risks, derived from many or all cars being on autopilot, ignored by regulators? Like in banking?

Sir, Brooke Masters, with respect to the recent Tesla accident that caused a death, writes: “the more a car’s autopilot does, the less experience drivers will have — and the less watchful they will become. It is madness to expect them to seize the wheel and work a miracle in a moment of crisis” “Tesla tragedy raises safety issues that can’t be ignored”, July 2.

That sounds a lot like banking now becoming more and more automatically responsive to regulations, which could be faulty, and less and less reponsive to bankers’ diverse senses.

And Masters holds that “US regulators, who are in the midst of writing new guidelines for autonomous vehicles, need to take this into account before they give blanket approval to partially self-driving cars”. 

That sounds a lot like when our bank regulators are concerned with the risk of individual bank and not with the risks for the whole banking system. If those regulators are just evaluating how autonomous vehicles respond to traffic where humans drive all other vehicles, they will not cover the real systemic dangers. 

Masters informs: “Tesla noted that this was the first death to occur in 130m miles of driving on its autopilot system, versus an average of one death per 60m miles of ordinary driving.”

And to me that is a quite useless and dangerous information considering the possibilities of the mega chain reaction pile up car crash that could result when all or most cars are on autopilot, responding or trusting in similar ways… like when the very small capital requirement against what was AAA rated caused the mega bank crisis.

I can hear many arguing that if all cars are controlled then no accidents could occur. Yes that might be so but for it to occur, as a minimum minimorum, we would need to control all hackers to absolute perfection.

July 01, 2016

When compared to how risk adverse bank regulation help overcrowd safe havens, Brexit is but a small blip.

Sir, Gillian Tett writes about how the negative-yielding sovereign bond pile keeps swelling and argues that as a consequence “asset managers and insurance companies will see their earnings slide unless they start buying more risky debt — which will bring dangers of its own” “Now watch the shift in interest rates” July 1.

It is not “risky debt” that poses the largest risks, it is excessive exposures to what is perceived as safe that does. Just as Voltaire meant with his “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”

The current risk weighted capital requirements for banks, which drive banks out of what is ex ante perceived as risky, and into what is ex ante perceived as safe, only guarantees the safe havens to, ex post, become dangerously overpopulated; and the risky bays, equally dangerous to the real economy, to remain unexplored.

How many letters have I not written to FT over the years explaining that?

@PerKurowski ©