QE-forever cycle of fiscal stimulus, with current bank regulations, can only generate a dangerously obese economy.

Sir, Satyajit Das opines that “QE-forever cycle of fiscal stimulus won’t generate a recovery” August 2.

He is absolutely right! A recovery, to be for real, to be sustainable, requires a dose of risk-taking, which is currently being negated as a result of the risk-weighted capital requirements for banks. Allowing banks to leverage more with what is perceived as safe, than with what is perceived as risky, allows banks to earn higher risk-adjusted returns on equity with what is perceived as safe than with what is perceived as risky… with expected consequences.

And credit to what is safe, mostly refinancing the safer past, provides mostly carbs to the economy, which results in flabby obesity. It is credit to the riskier future that can provide the best proteins an economy needs to grow muscular and sustainable.

And for sure, the negative rates, a subsidy for "the safe" doing something with money, is a clear expression of how obese our economies have already become.

PS. A brief memo on some monstrous mistakes of current bank capital requirements.

@PerKurowski ©

Basing equity requirements for banks based on cuckoo-calls, could be better than using current risk weights

Sir, Satyajit Das writes “Where assets are not adjusted for relative risk, banks are encouraged to increase risk without having to hold additional capital”, “Rules to cut bank risk work in theory but not necessarily in practice”, April 28.

Wrong! Adjusted to relative risk has all to do with expected risks, with unexpected losses, those that bankers should be able to manage or have to fail, fast. Capital requirements should create a shield against the unexpected, something which definitely does not include the expected risks that banks are already clearing for.

For instance, if the probability of a cuckoo calling out more than x times during x month was 8 percent, then that percentage or required equity applied to all bank assets would make more sense that current risk-weights.

As is banks are not taking sufficient risk on what is perceived as risky, like lending to SMEs, but taking excessive risks on what is perceived as “safe”, like lending to the sovereigns or to the AAArisktocracy

The cuckoos in the forest would serve us better than the cuckoos in the Basel Committee.

Damn you, you so risk adverse, baby boomer bank regulators

Sir, Satyajit Das, states clearly the fact that, if things go on the same, “Over time, financing will become concentrated in official agencies, the ECB and national governments or central banks. Risks will shift from the peripheral countries to the core of the eurozone, especially Germany and France”, “Debt crisis has left German economy vulnerable” November 5.

Of course, how could it be otherwise, with bank capital requirements that so much favor banks going to the “safe harbors”?

Unfortunately, what Satyajit Das, and the Financial Times, do not get is that the greatest cost of it all, for the eurozone and for the whole Western world, is all that adventurous, quite risky, but potentially extremely productive bays that were not explored, only because of such regulations, produced by such risk adverse bank regulators... and who only concern themselves with banks and not one iota with the real economy.

Sir Bank Regulator, excuse my bluntness, is that not really fucking dumb?

Sir, there is a question bank regulators really hate being asked, and it goes like this:

Sir Bank Regulator, you must know that when banks are allowed by you to hold “ultra-safe” assets against much less capital than what is required of them when holding “risky” assets, they do earn much higher risk-adjusted return on equity on the safe assets than what they earn on the risky.

And that of course means that banks will lend too much at too low interests to “The Infallible”, like sovereigns, housing and the AAAristocracy, something which in itself is risky for the banks; and too little, or nothing, at too high interests to “The Risky”, like the medium and small businesses, the entrepreneurs and start-ups, something which is equally risky for the real economy, and for the banks.

And so, Sir Bank Regulator, excuse my bluntness, but is that not really fucking dumb?

And when I have asked regulators what’s above (with only two exceptions and who I do not want to name, because that could make life difficult for them with their colleagues) they all go away, as if I have insulted their intelligence… something which I really don’t have to do, since, as I see it, they are with gusto doing it to themselves.

Sir, and now again it is you Sir of FT. My question on capital requirements for banks based on ex ante perceived risk, only reinforces what Satyajit Das so well concludes in his “Post-crisis policies offer only chronic stagnation” September 12, namely that current “policies will engineer a chronic stagnation, requiring continuous interventions to prevent rapid deterioration”, and this as I would explain, when more safe-havens get to be dangerously populated and more of the risky but potentially valuable bays are left unexplored.

Am I supposed to use this f... language in this context? Perhaps not! Especially so when being a respectable grandfather, but, much more vulgar and harmful to our society, primarily to the possibilities of our young ones of finding sturdy employments in their lifetime, are these regulators.

God make us daring!