Central bankers have surely favored government borrowings… and the costs will be horrendous.

Sir, Desmond King reviews and discusses Paul Tucker’s “Unelected Power”, which asks:“To whom are central bankers responsible? How is oversight of their discretionary authority monitored in a democracy? Can central banks remain legitimate as they choose financial winners and losers?”

The starting point for Tucker’s questions seems to be when, in September 2008, “Citizens and bankers sat transfixed as Lehman Brothers collapsed, rattling equity and credit markets”.

Wrong! Not that I had any idea of it back then but the genesis of the problems herein referred to seem to me be in 1988 when bank regulators came up with the incredibly hubristic concept of risk weighted capital requirements for banks, as if anyone could measure ex ante the risks that would explode ex post.

From a cv. on the web I see that Paul Tucker worked in 1987 in “the Banking Supervision Division; as part of the 4 person team negotiating the Basle International Capital Convergence Agreement; and assistant to chair of Basle Supervisors Committee”

So when King writes that “Tucker argues that the “most compelling reason” for [central bank independence] is to “enable governments to save paying an inflation risk premium on their debt”, I must ask: “Really Mr. Tucker, does that require risk weighing the sovereigns with 0% while assigning the citizens 100%?” 

That regulatory subsidy causes, sooner or later, governments to take will be getting up too much debt, that which can only be repaid by the printing machine… meaning inflation… meaning tragedies. 

I have not seen anyone holding Sir Paul Tucker accountable.

PS. I dare Paul Tucker, the current chair of the Systemic Risk Council, to give a coherent explanation for why banks should hold more capital against what’s made innocous by being perceived risky, than against what’s perceived safe and therefore carries more dangerous tail risks? The distortion that produces in the allocation of bank credit constitutes, as I see it, a huge systemic risk.

@PerKurowski

Nonsense! Why should ECB worry about banks' risk models being right, when its problem is when these are wrong?

Sir, I refer to Laura Noonan’s “ECB doubles the time needed for ‘intrusive’ review into banks’ complicated risk models”, August 18.

All those studies are utter nonsense. Let us suppose banks’ risk models work well. Would ECB have any problem with that? No! Its only problem is when those risk models do not function. And, so if you are going to ask banks to hold capital, it is precisely against that or any other unexpected risk… and frankly, who can evaluate those risks?

Noonan writes: “various studies have found widespread differences in banks’ Risk Weighted Assets models… The 123 banks together have more than 7,000 internal models”. Though all those models are most certainly used to justify lower capital needs of banks, I still find that slightly comforting… since, this way, there are less risk these could all be wrong in the same way.

Because when I read: “Harmonising supervisor’s approaches — including to risk models — was a priority, said the ECB.”, that scares me even more, because the possibility of introducing a fatal not diversifiable systemic risk is much increased. 

In 2003, as an Executive Director of the World Bank, with respect to Basel Committee regulations I warned: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

The absolute least we must require of ECB is that all the consultants who would be working at this, and who at the end of the day are paid by taxpayers, put up their conclusions on the web, so that we can really shame them if they get it wrong. (Or shoot them if they get it wrong… since as a consequence much people will most likely suffer… and even die).

In my mind, and pardon the vulgarity, with these studies ECB is just trying to cover its behind… at taxpayers’ expense.

I dare ECB to allow me, on a pro-bono basis, to formally record my complete criticism of the pillar of current bank regulations, namely the risk-weighted capital requirements for banks.

ECB, IMF, Basel Committee, FSB, Fed, FDIC, Systemic Risk Council, anyone involved, for the umpteenth time I warn you: One thing is a simple fixed capital requirement on all bank assets, which allows the markets to figure out and manage the risks as best as it can. Something entirely different is many, few, or even one single model that sets the risk-weights that determine the capital requirements of banks. That can only confound the markets making it impossible for anyone to better estimate the real risks… making it more possible for the last safe haven to become overpopulated, and us dying suffocated there for lack of oxygen.

Please regulators… you are playing around with extremely dangerous explosive material.

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

In 2008 we already saw one AAA-rated bomb explode… and we sure do not need more of those. 

PS. Come to think about it. This ECB research project sound about the most useless navel gazing project I have ever heard of. A risk model, if it is worth anything, must be very dynamic, meaning the one you researched like an hour ago, could perhaps have very little to do with the one being used in this minute. Or, will the banks now require ECB’s or Basel Committee's permission to change the model they use?

PS. On the other hand ECB’s research project formally indicts the Basel Committee and FSB as being clueless about what they are doing.

Just one more thing!

So ECB, during 4 years you intend to contract many expensive consultants to check 7,000 different models that determine the risks weighted assets of banks, in order to determine the risk for banks.

So ECB: How many consultants will be checking the risks all these risk-weighted asset models imply in terms of possible bad allocation of bank credit to the economy? 

@PerKurowski

Some are waking up to the colossal failings of Basel bank regulations... when will FT?

Sir, Shahien Nasiripour and Tom Braithwaite report “US regulators urged to outdo Basel III rules” October 5. In it they mention that “some like Jeremiah Norton, a director on the FDIC´s five man board, have voiced doubts about the proposed risk-weighting scheme, which links capital levels to assets risk”. Might he have tried to answer some of my wicked questions on bank regulations? Like: 

1st: When do banks most need capital, when the risky turn out risky, or when the “not-risky” turn out risky? 

2nd: If bankers do as Mark Twain says, namely “lend you the umbrella when the sun shines and wanting it back when it rains”; and all bank crisis ever have result from excessive lending to what was perceived as “not risky”; and the perceptions of risk have already been cleared for in the interest rates and the amounts of the loans, then what is the logic behind allowing banks to hold less capital requirements when they engage in what is perceived as “not risky”, as current bank regulations do? 

3rd: What economists can be so dumb not understanding that if you allow banks to leverage 60 times or more their bank equity for some assets and only 12 times for other, producing thereby vastly different returns on equity, you will drastically distort the economic efficient resource allocation that banks are supposed to perform? 

More sooner than later, everyone is going to wake up to the fact that our current bank regulations are built upon absolutely insane foundations. And then of course, the silence of the Financial Times on this issue is going to be a source of immense embarrassment for the paper and especially for those responsible of, notwithstanding its motto, ordering its silence on it, during so many years.