February 26, 2018

Bank regulators could derive valuable lessons from pension scheme difficulties.

Sir, Jonathan Ford while discussing Carillion’s pension schemes writes: “deficit repair should reasonably leave space for the company to foster future growth, and thus preserve the ongoing viability of the sponsor.” “Carillion’s pension crisis defies any magic legal cure” February 26.

Absolutely. But does that not apply to bank regulations too? As is the risk weighted capital requirements give banks huge incentives to stay away from financing the “riskier” future, like entrepreneurs, in order to refinance the safer present, like houses.

And Ford adds: The worst outcome would be one that simply encouraged trustees to “de-risk” schemes further by purchasing highly priced gilts to protect themselves against mechanical increases in short-term liabilities caused by falling market yields — a pro-cyclical practice known as “liability-driven investment”.

In essence that is what the risk-weighted capital requirements do. They doom banks to end up gasping for oxygen in dangerously overpopulated safe-havens against especially little capital, leaving the riskier but perhaps more profitable bays unexplored.

Ford argues: “It’s not clear though what any “tough new” rules could have done to help this messy situation.”

I know too little about Carillion but, what I do know, is that pension funds in general, government’s included, have been way too optimistic when estimating potential real rates of return in the order of 5% to 7%. 3% would be more than enough of an optimistic real rate of return, given the so many unknown factors out there.

@PerKurowski

Rana Foroohar. Please ask yourself a question and, if you cannot answer it, do ponder why.

Sir, I refer to Rana Foroohar’s “Three questions for the Fed’s Powell” February 26.

Ms. Foroohar (and you too Sir) should ask herself: why do regulators want banks to hold more capital against what, by being perceived as risky, has been made quite innocous, than against what, because it is perceived as safe, is so much more dangerous?

And if could not come up with a truly convincing answer, then that should give her a clue on that something very strange is going on in the field of bank regulations.

And if she had gotten to that point, then it should not be too hard for her to begin to understand how those different capital requirements, which allows for some assets to be leveraged much more than others, might distort the allocation of credit to the real economy… and thereby affect its “real non-financialised growth”

And at that point she would surely add, that same question she could not answer, to those three she proposes to ask Powell.

Foroohar also references companies “buying up the higher-yielding bonds of riskier companies at a favourable spread and holding those assets offshore [and that now after] President Donald Trump’s new tax rules… They will simply be able to move their money wherever they want, whenever they want, in cash.”

“Cash”? In order to become cash, all those assets the companies have bought and held offshore must be sold. Would that not have any consequences?

@PerKurowski

February 23, 2018

Where are the occupational licensing requirements when they are really needed, like in bank regulations?

Sir, Simon Samuels writes: “A manufacturing company would not be expected to operate without knowing its cost of production. Not knowing how much capital is needed to lend money is the banking equivalent” “Confusion over bank capital requirements fails us all” February 23.

So there is a banking consultant at Veritum Partners, clearly stating (confessing) that the production cost of credit depends on the capital requirement. Of course, less capital equals lower credit production cost, higher capital higher production cost.

And so again I ask, for the umpteenth time, why on earth should regulators, with their risk weighted capital requirements favor those ex ante perceived as safe with lower cost produced credit, than those ex ante perceived as risky? Do they not understand that dangerously distorts the allocation of bank credit? Do they not know that guarantees, sooner or later dangerously overpopulating a safe haven… against especially little capital?

I have recently read that in forty-one US states license for makeup artists is required and in thirteen states you need a license to be a bartender. So tell me, when are the occupational licensing requirements when we really need them, like for that extremely delicate function of regulating banks? The lack of it has saddled us with regulators who believe that what’s perceived as risky is more dangerous to our bank system that what’s perceived, decreed or concocted as safe! Unbelievable eh?

@PerKurowski

February 22, 2018

How long are you going to allow statist bank regulators subsidize the public sector borrowings with a zero percent risk weighting?

Sir I refer to Kate Allen’s and Chris Giles write “The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year” “Rising tide of sovereign debt to hit rich nation budgets, warns OECD” February 23.

I do not know what the total OECD debt was in 1988, but the US public debt was t$2.6 trillion when then statist bank regulators assigned it a 0% risk weight. At end of 2017, much because of the subsidies imbedded in that 0% weight, US’s public debt was now US$20.2 trillion. It still has a 0% risk weight.

In 2004, in a letter you published 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.

I came then from a development country, Venezuela, but that comment clearly applies to the OECD too.

In December 2009, on the eve of the new decade, FT also published a letter in which I wrote: “My worst nightmare is that unmanageable Versailles-type public debts will become fertile ground for those monsters that thrive on hardships”. That nightmare is only getting worse and worse.

@PerKurowski

February 21, 2018

If with Brexit Britain can break lose from Basel’s bank regulations, then it could come up on top of EU

Sir, Martin Wolf writes: “The recently leaked UK government analysis concludes that with Brexit, under a Canada-style deal, UK gross domestic product might be 5 percentage points lower than it would otherwise be, after 15 years — a loss of about a fifth of the potential increase in output by that time”, “Britain’s road to becoming the EU’s Canada”, February 21.

Has someone in the UK government analyzed what long term impact on UK’s gross domestic product the risk weighted capital requirements for banks have? I mean because since this regulation gives banks great incentives for staying away from financing the riskier future and just keep to re-financing the safer present, that most be causing some serious costs for the future.

Again, any bank regulations that is so stupidly based on the assumption that the ex ante perceived risks reflects adequately the ex post danger to the bank system, has to turn out incredibly costly.

So, if Brexit allows Britain the opportunity to break lose from these regulations, and Britain capitalizes it, while EU stay hooked on it, then Britain could come up over EU, and many in Europe would want to Baselexit too.

Why, when the world is going through so many not entirely understood changes, should Britain limit itself to cry over what it can lose with Brexit, while giving so little consideration to what it has to win, with our without EU?

@PerKurowski

February 19, 2018

Easing it for some bureaucrats, like with munis, does mean, de facto, making it harder for other, like entrepreneurs and SMEs

Sir, John Dizard writes “a bipartisan bank regulation reform bill that has passed a crucial Senate committee would require the entire federal regulatory apparatus to loosen the restrictions on counting munis as part of the high-quality liquid assets pool, and reduce the capital charges on holding muni positions.” “Vix horror show will not deter future suckers” February 19.

Sir, that would lead to more demand for munis, so that local bureaucrats can decide what to do with even more funds derived from debts our grandchildren will have to pay; which will naturally lead to less bank credit for those entrepreneurs and SMEs that could help our grandchildren to access jobs and revenues streams that could assist them in repaying these munis... and having a life. Great bipartisan job Senators! 

@PerKurowski

Universal Basic Income seems to be the most neutral and efficient tool to handle the unknown upheavals the use of artificial intelligence and robots will bring.

Sir, Rana Foroohar writes: “A McKinsey Global Institute report out on Wednesday shows that, while digitalisation has the potential to boost productivity and growth, it may also hold back demand if it compresses labour’s share of income and increases inequality.” “Why workers need a ‘digital New Deal’” February 19.

That sure seems to make the case for a Universal Basic Income, a Social Dividend, both from a social fairness angle and from the perspective of market efficiency.

To preempt that really unknown challenge at hand, Foroohar proposes something she names “the 25 percent solution” based on how Germany tackled an entirely different problem, the financial crisis. What it entails makes me suspect it could risk reducing the growth and productivity that could be achieved, and waste so much of the resources used to manage the consequences, so that only 25 percent, or less, of the potential benefits of having artificial intelligence and robots working for us would be obtained.

I worry sufficiently about a possible new Chinese curse of “May your grandchildren live with 3rd class robots and dumb artificial intelligence”; to also have to add “May your grandchildren have to serve the huge debt derived from technocrats defending your generation from artificial intelligence and robots.

Sir, I had more than enough of besserwissers trying to defend us and when doing so causing much more harm. Like when regulators, full of hubris, promised “We will make your bank system safer with our risk weighted capital requirements for banks”.


@PerKurowski

February 16, 2018

A Universal Basic Income must be a hateful concept for those who profit politically or economically, or both, on conditioned redistribution

When FT at long last allows for a strong defense of a Universal Basic Income Dr. Guy Standing writes: “Most believe the BI should be clawed back from the rich in tax. This is administratively easier, more equitable and efficient than targeting by means-testing. The latter has high exclusion and inclusion errors, low take-up and poverty traps, inducing bureaucrats to use intrusive behaviour tests.” “Universal basic income would enhance freedom and cut poverty

That is a very delicate way to express it, because, as the title of this comment states, there are also some very darkly motivated objections to a Universal Basic Income.

@PerKurowski

February 14, 2018

A Universal Basic Income would be a societal dividend. No one should have the power to decide which shareholders get it and which not.

Sir, in response to Ian Goldin’s “Five reasons why universal basic income is a red herring”, February 12, you today publish 3 letters that are all against the idea of Universal Basic Income. Is that really “Without Favour”?

Lesley Spencer in his “The huge cost to society of every job replaced” correctly describes some of the problems with increased automation, like humans competing disadvantageously with robots and less fiscal revenues. That clearly calls for new sources of fiscal revenues, like taxing robots or, as he writes, “the company picking up the tax shortfall when it replaces a person with a machine.”

But why that should also signify that UBI does not have an important role to play in the adjustments our society must do in order to face these chaplinesque neo modern times beats me.

And Carol Wilcox, in “Some tasks simply can’t be handed to a machine”, states that “Ian Goldin is right to call out universal basic income as snake oil”, but then supports that solely by arguing that Goldin “is wrong to believe that automation is a threat to workers”

And finally Jonathan Berry with “Why are we drawn to the most difficult solutions?”, argues for the much more complicated route of handing out stock-market participation, to some, than a societal dividend to all.

Sir, be aware that the major enemies of the UBI are the redistribution profiteers, scared to death that would diminish the value of their franchise.

But of course even between the UBI defenders there are many disagreements. I for one firmly believe that a UBI should be set at a level in which it helps you to get out of bed, but never ever, as some do, to be set on a level that allows you to stay in bed.



@PerKurowski

To base bank regulations on that ex ante perceived risks reflects the ex post possible dangers, is pure an unabridged naïve over-optimism

Sir, Martin Wolf writes “Over-optimism is the natural precursor of excessive risk-taking, asset price bubbles and then financial and economic crises.” “A bit of fear is exactly what markets need” February 14.

Indeed, and what is more a naïve “Over-optimism” than bank regulator’s risk weighted capital requirements for banks, based on ex ante perceived risks reflect the ex post possibilities?

Wolf writes of “the hope that those who manage systemically significant financial institutions remain scarred by the crisis and are managing risks more prudently than before”. Why should they? The incentives provided by the risk weighted capital requirements for banks still distort the allocation of credit. In this context “prudently” means more banks assets going to perceived, decreed or concocted safe-havens, some of which, as a consequence, are doomed to be dangerously overpopulated. 

Wolf admonishes, “If a policy [quantitative easing] designed to stabilise our economies destabilises finance, the answer has to be even more radical reform of the latter.”

I would argue that the “quantitative easing” was not correctly designed to help the economy, precisely because it ignored the regulatory distortions that impeded the economy to, by way of bank credit, use that liquidity efficiently.

Wolf correctly states “It is immoral and ultimately impossible to sacrifice the welfare of the bulk of the people in order to placate the gods of the financial markets”. But I ask, is that not what is being done by allowing banks to obtain higher expected risk adjusted returns on equity when financing the safer present, than when financing the “riskier” future our grandchildren need to be financed?

Again, I dare Martin Wolf to explain why he believes regulators are correct in wanting banks to hold more capital against what, by being perceived as risky, has been made innocous to the bank system, than against what, precisely because it is perceived as safe, is so much more dangerous?

Bank regulators have the right to be fearful, but they should fear more what is perceived safe than what is perceived risky.

PS. Here a brief aide memoire on the major mistakes with the risk weighted capital requirements

@PerKurowski

February 12, 2018

In year 2018 important issues could be dividing Poles, but Auschwitz and Poland’s treatment of Jews during World War II, around 75 years ago, should not be one of these.

Sir, I am the son of a Polish citizen who was one of the 728 prisoners that in June 1940 arrived on the first train to Auschwitz (#245 on his arm). Though I proudly carry a Polish passport, I have shamefully little knowledge of Poland. That said I am absolutely sure that if my father had heard someone defining “Auschwitz-Birkenau as a “Polish death camps”, he would have punched him. And had he heard of some few Poles not having been complicit in the pursuit of Jews, he would also have asked: “What are you smoking?”

Therefore I was very appreciative off Professor Jan Gross’ comment “Poland’s death camp law distorts history” February 6, and so I wrote to him.

But now Arkady Rzegocki’s “Poland in no way agreed to collaboration” on February 12, confuses me.

Many things could be dividing Poles in 2018, but Auschwitz and Poland’s treatment of Jews during World War II, about 75 years ago, should most definitely be one of those.

Please, for the sanity of Poland (and mine) have them both sit down and urgently resolve their differences… perhaps at an FT Lunch J


@PerKurowski

Universal Basic Income is to help you get out of bed, not to allow you stay in bed

Sir, Ian Goldin first introduces many valid reasons for why we need a Universal Basic Income. But then he writes: “As shown by the OECD, by reallocating welfare payments from targeted transfers (such as unemployment, disability or housing benefits) to a generalised transfer to everyone, the amount that goes to the most deserving is lower. Billionaires get a little more.” “Five reasons why universal basic income is a red herring” February12.

No way! I come from Venezuela. The poor their, got only a fraction, perhaps less than 15%, of what they should have gotten had only the oil revenues been shared out equally to all. Who got the most? The redistribution profiteers and their friends.

And clearly since it would reduce the value of their franchise, these profiteers are the ones who most set out to attack Universal Basic Income.

Goldin bombs UBI with:

“If UBI was set at a level to provide a modest but decent standard of living it would be unaffordable and lead to ballooning deficits”

“Delinking income and work, while rewarding people for staying at home, is what lies behind social decay.”

“UBI undermines incentives to participate”

But he also writes: “There must be more part-time work, shorter weeks, and rewards for home work, creative industries and social and individual care. Forget about UBI; to reverse rising inequality and social dislocation we need to radically change the way we think about income and work.”

And that is when I understand Goldin might not have understood where many of us want the UBI level to be. We want it set at a level that helps you to get out of bed, to reach up to the gig economy, but absolutely not at a level so high that it does allow you to stay in the bed.

@PerKurowski

February 10, 2018

Tim Harford, as an Undercover Statistician, why do you agree with the Basel Committee?

Sir, I refer to Tim Harford’s “Everything you need to know about statistics — on a postcard” February 10.

After reading it, I have one question for the Undercover Economist/Statistician, namely:

Why do you agree with the regulators’ statistics who, with their risk weighted capital requirements, opine that what is perceived as risky is more dangerous to the bank system than what is perceived as safe? Is that not crazy?


@PerKurowski

Like algorithms humans can also produce peculiar and unjust decisions, and be almost just as faceless.

Sir, Gillian Tett writes: “as institutions increasingly rely on predictive algorithms to make decisions, peculiar — and often unjust — outcomes are being produced.” “The tragic failings of faceless algorithms

Indeed, but humans are also capable of producing peculiar and unjust decisions.

What could be more peculiar than regulators wanting banks to hold more capital against what by being perceived as risky has been made innocous to the bank system, than against what, because it is perceived as safe, is so much more dangerous?

And what is more unjust than because of these regulation allowing easier financing to those who want to buy houses, than to those entrepreneurs who are looking for a possibly life changing opportunity of a credit. 

Ms Tett quotes mathematician Cathy O’Neil’s Weapons of Math Destruction with: “Ill-conceived mathematical models now micromanage the economy, from advertising to prisons,” she writes. “They’re opaque, unquestioned and unaccountable and they ‘sort’, target or optimise millions of people . . . exacerbating inequality.”

Well “opaque, unquestioned and unaccountable” that applies equally to the bank regulators who do all seem to follow late Robert McNamara’s advice of “Never answer the question that is asked of you. Answer the question that you wish had been asked of you”

And on “exacerbating inequality”, the regulators de facto decreed inequality



@PerKurowski

Loss aversion has bank regulators looking too much at the cost of the crisis, while ignoring the benefits of the whole boom-bust cycle.

Sir, Tim Harford writes: The concept of “loss aversion” developed by Daniel Kahneman and Amos Tversky…showed that we tend to find a modest loss roughly twice as painful as an equivalent gain… Those who were forced to evaluate and decide at a slow pace were… not intimidated by short-term fluctuations… less likely to witness losses.”, “The languid pleasures of slow investing” February 10.

That is precisely what happens when bank regulators go into action during a crisis; they just look at the losses, and completely ignore what good might have been achieved during the whole boom-bust credit cycle.

And that is why our regulators in the Basel Committee, panicking, imposed risk weighted capital requirements for banks, which pushes debt that relies more on existing servicing capacity, like financing “safe” houses, than debt that hopes to generate new revenue streams, like loans to “risky” entrepreneurs.

And we all know there’s little future in that!

Harford ends with: writes: “Perhaps we slow investors should adopt a mascot. I suggest the sloth” Indeed, and let us send a stuffed one to Basel.



@PerKurowski

February 09, 2018

What if all finance help provided house buyers in Canada, which increases demand, reflects 30% of current house prices?

Sir, with respect to Ben McLannahan’s extensive report on the Canadian house market February 9, “Canada’s home loans crisis”, I would just want to ask:

What if regulatory and all other support developed in order to provide house buyers in Canada easier financing, something that obviously increases the demand for houses, translates into being, let us say, 30% of the current house prices in Canada?

Who has that then benefitted, buyers or vendors?

Does this mean Canada must now help with new financing to house buyers only in order to pay for old financing help?

How could something like that not end in a disaster?



@PerKurowski

Why does the “Without Fear and Without Favour” FT, not ask bank regulators questions I have suggested for a decade?

Sir, Gillian Tett writes: “The financial world faces at least three key issues, with echoes of the past: cheap money has fuelled a rise in leverage; low rates have also fostered financial engineering; and regulators are finding it hard to keep track of the risks, partly because they are so fragmented. “The corporate debt problem refuses to recede” January 9

Sorry, it is much worse than “regulators finding it hard to keep track of the risks”. It is that regulators have no understanding of how they, with their risk weighted capital requirements for banks, have in so many ways distorted the reactions to risks.

And much more than cheap money fueling a rise in leverage, it is the bank regulators who, like with Basel II in 2004, allowed banks to leverage a mind-blowing 62.5 times with assets only because they possessed an AAA to AA rating, started it all. . 

And when it comes to financial engineering, it is the regulators who caused banks to send into early retirement many savvy loan officers, in order to replace these with skilled equity minimizer modelers, who allowed for the highest expected risk adjusted returns on equity (and the biggest bonuses). 

The regulators, by favoring what is “safe” on top of what is perceived as “safe” is usually favored, only guarantee that safe-havens will become dangerously overpopulated, against especially little capital. Great job chaps!

Why has Ms. Tett, or many other in FT, not asked regulators, for instance what I believe I the quite interesting question of: Why do you want banks to hold more capital against what, by being perceived as risky, has been made innocous to the bank system, than against what, precisely because it is perceived as safe, is so much more dangerous?

One explanation that comes to my mind is John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”, “Money: Whence it came, where it went” (1975)

Sir, the Basel Committees’ “With the risk-weighted capital requirements we will make banks safer”… is cheap and dangerous populism hidden away in technocratic sophistications. Sadly it would seem the Financial Times has fallen for it, lock, stock and barrel.

Oops! I guess I will never be invited to a "Lunch With FT" 

February 08, 2018

What does “stored wealth” mean? Is it really redistributable, just like that, without any consequences?

Sir, Edward Luce writes: “America’s elites have stored more wealth than they can consume. This creates three problems for everyone else” “The discreet terror of the American bourgeoisie”. February 8.

What does “stored wealth” really mean? You do not hide your main-street purchase capacity in cash under a mattress; you hand it over to someone else in exchange for an asset or a service.

When some very wealthy recently bought Leonardo da Vinci’s “Salvator Mundi”, he froze, with a sort of voluntary tax, US$450 million on a wall or in a storage room. Those US$450 millions were received and used by some other wealthy or not that wealthy. Should that not have happened? Should he have used his money better? What if those who now have his money know how to put it to much better use?

The war against wealth is raging. Whenever wealth has been obtain by criminal, or by unjustified means, like monopolies or excessive intellectual property rights exploitation, that war makes sense. But, those who preach that all will be well and dandy, if only wealth is redistributed, like from the 1% to the 99%, never explain how one now converts a Salvator Mundi, into fresh main-street purchase power, and the consequences of doing so.

We could assume that much of that lack of explanation is because many of the wealth redistribution fighters are in fact redistribution profiteers interested in increasing the value of their franchise.

PS. Not long ago, visiting the Museum of Louvre, it dawned on me that most of what was exhibited there would not have come into being, were it not for the existence of the filthy rich. Can we really afford, do we really want, to live without them?

@PerKurowski

Should a sanctioned bank like Wells Fargo be allowed to immediately advertise itself as a do-gooder?

Sir, with respect to the recently sanctioned Wells Fargo we can observe that, in order to clean its name, it has now launched, as is typical in similar circumstances, advertising campaigns highlighting its social responsibilities. Should it really be allowed to do so?

Even though Wells Fargo should of course try to do its utmost to compensate their recent bad behavior, I believe it should not be able to advertise itself out of a bad image, for at least two years. A prohibition of that sort would also serve as a great deterrent to others.

And, while being on the subject of modernizing sentences, as a Venezuelan I ask, could the sanctions of those that commit crimes against humanity but have not yet been captured include blocking their presence in social media forever, and perhaps also that of all their immediate families for at least some years?

Of course those criminals could use false names, but who would like to take a (face-recognizable) selfie doing so?

@PerKurowski

February 07, 2018

We humans search for risk-adjusted yields. So did banks, but they now search for risk-adjusted yields adjusted to allowed leverage

Sir, let me comment on three paragraphs in John Plender’s “The global economy looks solid but there are worrying signs” February 7.

First: “there are grounds for concern about a credit cycle in which risk is clearly being mispriced. This is partly a product of the enduring search for yield. When almost every asset class looks expensive, investors tend to respond by taking on more risk”

Ever since risk weighted capital requirements were introduced, banks do not more search for yield, but instead search for yield adjusted by allowed leverage, and so risk has been mispriced.

Second: “A further hint of a return to normality is the reappearance of volatility after a long period in which it has been conspicuously absent — helpful if you worry that low volatility encourages complacency and makes the financial system more vulnerable to crises.”

And why should we not there worry, in precisely the same way, that what is perceived as safe encourages complacency and makes the financial system more vulnerable to crises?

Third: “Applying a higher discount rate to the liabilities while enjoying an uplift in the value of the assets is the answer in today’s low interest world to the pension fund manager’s prayer.”

The so many times repeated opinion that all pension funds should be able to obtain a real return of 5 to 7% annually, is one of the most harmful financial misinformation ever.

@PerKurowski

What if prejudices in India had caused banks having to hold more capital when lending to women than when lending to men?

Sir, Martin Wolf, discussing India’s prospects mentions the “striking structural feature of India, whose significance goes far beyond economics, is social preference for sons.”, “Modi’s India is on course for rapid growth” February 7.

But the western world, by means of their bank regulators, also imposed on India that nutty preference for what is perceived as safe over what is perceived as risky. And that, for a developing country, given as risk taking is the oxygen of any development, is bloody murderous; as I have insisted on during the last two decades, in statements at the World Bank, in statements at the UN republished by an Indian university, in hundreds of Op-Ed and articles, and in innumerable letters to FT and to Martin Wolf.

Before these distorting regulations, banks invested in assets based on their risk adjusted yields; after, they now also adjust for the allowed leverages in order to maximize their returns on equity. That means overpopulating “safe”-havens and under exploring those “risky” bays, like entrepreneurs and SMEs, which all countries need to be explored if they are going to develop, or keep their development from regressing.

To think that what is perceived as safe (cars) is more dangerous to our bank systems than what is perceived as risky (motorcycles), only reminds me of that mutual admiration club of besserwisser experts that defended geocentricity… and of Martin Wolf as one of the inquisitors.


@PerKurowski

We would all benefit from algorithms tempering our bank regulators’ human judgments.

Sir, Sarah O’Connor, discussing the use of algorithms when for instance evaluating personnel writes: “The call centre worker told me the software gives lower scores to workers with strong accents because it doesn’t always understand them.”, “Management by numbers from algorithmic overlords” February 7.

What, should we assume that the capacity of someone in a call center being understood would not be one of the most important factors considered by a human evaluator?

And when O’Connor refers to “the subtle flexibility of human judgment; decisions tempered by empathy or common sense; the simple ability to sort a problem out by sitting down across a table and talking about it.”, I must state that is absolutely not what happens all the time.

Any reasonable algorithm, with access to good historical data, would never ever have concluded, as the human Basel Committee did, that what is perceived as risky is more dangerous to our bank systems than what is ex ante perceived as safe.

PS. Could we envision a world in which more predictable algorithms managed our wives reactions… and, if so, would we then not miss their lovable unpredictability?

@PerKurowski

February 06, 2018

Risk weighted capital requirements for banks guarantee banks will have the least capital when the worst crises occur

Sir, Jim Brunsden and Cat Rutter Pooley write that Mario Draghi “said that speedy work was needed to conclude talks on an overhaul of bank rules that had been under discussion for more than a year. The reforms would introduce the latest international standards aimed at making the financial system more resilient to crises”, “Draghi warns banks of Brexit ‘frictions’” February 6.

Sir, again, for the umpteenth time, the price of being “More resilient to crises” in the way current regulators propose, is only to be more exposed when crises happen? This is because the risk weighted capital requirements for banks that still, quite surrealistically, form part of regulations, by giving banks incentives to stay away from what is perceived as risky, might reduce the number of crisis, but that at the price of banks having especially little capital, right when the worst crises happen, namely those that result from something ex ante perceived, decreed or concocter as very safe turn out ex post to be very risky.

Sir, again, for the umpteenth time, your banking systems are in hands of regulators who cannot answer: “Why do you want banks to hold more capital against what’s been made innocous when perceived as risky, than against what’s dangerous because it’s perceived as safe? Does this not set the world up for slow growth and too-big-to-manage crises?”

But, then again, “Without fear and without favour” FT does not dare ask regulators those questions either.

PS. Brunsden and Cat Rutter Pooley also write that “Michel Barnier, EU chief negotiator visiting London, that “the time has come” for Britain to make a choice about what kind of future relationship it wants.” Does Barnier, know what future relation the EU wants with Britain after Brexit, or is it that he thinks he speaks for all Europe?


@PerKurowski

In order to achieve any real economic and financial normalisation the regulatory distortion of bank credit must be eliminated.

Sir, Mohamed El-Erian holds that: “the move up in US interest rates has attracted lots of attention. It’s been blamed for a violent sell-off in stocks, and fuelled warnings not just of an end to the bull market in bonds but, perhaps, also equities. That, in turn, can engender concerns about the housing market, corporate funding, financial stability and economic growth. Yet the causes behind the rise in bond yields suggest that this is more likely to be part of a larger — and healthier — economic and financial normalisation.” “Don’t forget the good news behind higher bond yields” February 6

Let me be absolutely clear, before the credit distorting and danger enhancing risk weighted capital requirements for banks are eliminated, and the difficult and very delicate task of recapitalizing these completed, there will be no real economic and financial normalization.


@PerKurowski

February 05, 2018

Banks now invest based on the risk-adjusted yields of assets adjusted for allowed leverages; that distorts the allocation of credit to the real economy.

Sir, Lawrence Summers, when writing about the challenges Jay Powell will face as Fed chairman mentions “Even with very low interest rates, the normal level of private saving consistently and substantially exceeds the normal level of private investment in the US” “Powell’s challenge at the Fed” February 5.

Not too long ago, markets, banks included, invested based on the risk adjusted yields they perceived the assets were offering. Some more sophisticated investors also looked to maximize the risk adjusted yield of their whole portfolio.

But, then in 1988 with Basel I, and especially in 2004 with Basel II, the regulators introduced risk based capital requirements for banks. As a consequence, banks now invest based on the risk-adjusted yields adjusted for the leverage allowed that they perceive the assets offer. As banks are allowed to leverage more with safe assets, which helps to increase their expected return on equity, they now invest more than usual, and at lower rates than usual, in “safe” assets like loans to sovereigns, AAA rated and mortgages. And of course, banks also invest less than usual, and at even higher rates than usual, in loans to the “risky” like entrepreneurs and SMEs.

That has helped to push the “risk free” down, and also explains much of the lowering of the neutral rate. Since the regulators now de facto block the channel of banks to the “risky” part of the economy, there is a lot of private investment that simply is not taking place any longer.

It is sad and worrisome that neither the leaving Fed chairman, Janet Yellen, nor the arriving one, Jay Powell (nor Professor Summers for that matter) can apparently give a clear direct and coherent answer to the very straight forward questions of: “Why do regulators want banks to hold more capital against what’s been made innocous by being perceived as risky, than against what’s dangerous because it’s perceived as safe? Does that not set us up for slow growth and too-big-to-manage crises?


@PerKurowski

February 04, 2018

Jan Zielonka, yes, the ‘enlightened’ and not accountable to anyone besserwisser ‘experts’, are taking our world order down.

Martin Wolf writes that Jan Zielonka, in “Counter-Revolution”, holds that “liberal democracy and neo-liberal economics, migration and a multicultural society, historical ‘truths’ and political correctness, moderate political parties and mainstream media, cultural tolerance and religious neutrality…is under attack” and that he “is particularly critical of the EU, a “prototype of a non-majoritarian institution led by ‘enlightened’ experts”. “Project backlash”, February 3.

“Enlightened experts”? Absolutely! In 1988, without any real meaningful consultations, without thinking about the purpose of the banks, and without thinking thru its possible consequences, G10’s central bankers and regulators introduced risk weighted capital requirements for banks.

The Basel Committee then favored the sovereign with the outrageously statist risk weight of 0%; and, in 2004, the AAArisktocracy with 20% and the financing of residential houses with 35%; while disfavoring loans to unrated citizens, SMEs and entrepreneurs with a 100% risk weight.

Did those regulators ever explain why they should want to favor with lower capital requirements for banks that which is already favored by being perceived as safe, and thereby discriminate against that which is already disfavored by being perceived as risky? No. They are such besserwissers they don’t even hear the question.

These regulations seriously distorted the allocation of bank credit to the real economy by stimulating the banks to finance much more the “safer” present consumption than the future “riskier” production… something that truly constitutes a shameful intergenerational treason.

Besides a slowing economy, the only thing the risk weighting guarantees is that when banks systems really find themselves in trouble, which is when something perceived as very safe turns out to be very risky, banks will stand there with especially little capital. Brilliant eh?

Martin Wolf ends with “We can see the crisis of liberal democracy most clearly in the fact that so ardent, yet disappointed, a proponent offers not much more.”

Mr. Wolf what about your duty of “without fear and without favor” using your throne of influence to force the Basel Committee regulators to answer the questions that I have posed in thousand of letter to FT, and mostly to you?


Per Kurowski