Feeble regulatory minds, seeing risks in what’s perceived risky, doom our banks to die trapped in the last safe-haven

Sir, Robin Wigglesworth quotes Paul Singer of Elliott Management with: “Given groupthink and the determination of policymakers to do ‘whatever it takes’ to prevent the next market ‘crash’, the low-volatility levitation magic act of stocks and bonds will exist until it does not. And then all hell will break loose” “Calm waters raise fears of a leverage comeback” June 7.

Indeed, only an intellectual degenerating incestuous groupthink can explain current bank regulators fixation with what is perceived risky. Their risk weighted capital requirements are based on the perceptions of risk being correct, while as all logic screams for, these should be based on the possibilities of these perceptions being incorrect. The riskier something is perceived, the safer it is; and the safer something is perceived, the more dangerous it can become. “May God defend me from my friends, I can defend myself from my enemies”, Voltaire dixit.

Those regulations, by favoring so much what is perceived, (concocted) or decreed as safe, like assigning a 0% risk weight to sovereigns, cause sovereigns to be getting too much credit on too easy terms; and that banks could end up holding only sovereigns on their balance sheets. When that happens who is going to be able to kick the can forward to another safe-haven (gold?), sovereigns or their central bank agents?

Sir, our whole banking system is set on a path that with signs of “follow this safe route”, leads directly to a precipice.

You insist in keeping mum about that. There will come a day you, or at least your children, will deeply regret that.

When will regulators stop feeding us fake tranquilizers?

“Risk weighting” So we are to suppose risks have been duly considered?

“Living wills” So we are supposed to think that trustees are capable to enforce these?

“Stress tests” Tests that ignore the stress to the real economy because of what should be on bank’s balance sheets but is not, like “risky” loans to SMEs?

Dodd-Frank’s “Orderly Liquidation Authority” “Orderly”? No Sir, when the last safe haven runs out of oxygen, I assure you it is going to be anything but orderly… then all hell will really break loose.

Per Kurowski

@PerKurowski

Could not artificial intelligence, AI, sometimes prove more intelligent and socially concerned than humans?

Sir, John Thornhill writes: “Mireille Hildebrandt, professor of law and technology at the Free University of Brussels, says one of the dangers of AI is that we become overly reliant on “mindless minds” that we do not fully comprehend. She argues that the purpose and effect of these algorithms must therefore be testable and contestable in a courtroom. “If you cannot meaningfully explain your system’s decisions then you cannot make them,” she says.” “Only human intelligence can solve the AI challenge” April 18.

Indeed, but that should go for humans too! For instance bank regulators should be hauled in front of a courtroom, in order to answer some very basic questions about their risk weighted capital requirements for banks.

I ask this because I am absolutely sure that, if AI regulated our banks, then at least the following two questions would have been asked:

What is the purpose of banks? And something like John A Shedd’s “A ship in harbor is safe, but that is not what ships are for” would have been considered.

What causes big bank crises? And something like Voltaire’s “May God defend me from my friends, I can defend myself from my enemies” would have been considered.

As a consequence we would not be having our banks being regulated to avoid the risk taking the future of our grandchildren need, for no real bank stability purpose at all.

Here follows some of the questions that I would like to ask the current bank regulators in front of a court, since they do not even acknowledge hearing these.

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

@PerKurowski

Why would today’s journalist be more capable than others of teaching our children to spot and root out fake news?

Everyone who know something about banking, and bankers, would know that what is perceived as risky never poses the same dangers to the banking system as what is ex ante believed as very safe but the ex post turns out to be risky. Even 17th century’s Voltaire, with his “May God defend me from my friends, I can defend myself from my enemies”, would understand that.

But the pillar of something as important as bank regulation, the risk weighted capital requirements for banks, is currently based on some fake news, fake input, namely on the fake theory that what is perceived as safe is safe for the banks, while what is perceived as risky, and which is therefore in reality quite innocuous, is what poses the real dangers to the banking system.

Sir, on this monstrous regulatory mistake; one with disastrous implications for the so vital allocation of credit to the real economy, I have written you and your journalists about 2.5 k letters over the last decade… but you have decided to ignore these.

That is why I do not feel too optimistic about it all when Roula Khalaf reports that “journalists from Le Monde, the French daily that has developed a readers’ tool to weed out fake news [have] started volunteering at schools, teaching teenagers how to distinguish between responsible journalism and fabricated news” “Journalists enter the classroom to root out fake news in France” March 23.

Khalaf also writes that Tom Boll, an instructor at Syracuse University’s Newhouse school of journalism “argues that a literacy effort that warns against falling for fake news should become part of a civics course and every citizen should take it.”

Sir, FT’s lack of response could be a very valuable case study in those civic courses. That because failing to denounce fake news, is just as bad as propagating these.

@PerKurowski

How do you suggest a contrarian belief to a President without causing him great disconfirmatory feedback discomfort?

Sir, Tim Harford writes that when “I think I’m doing a good job, and then you tell me that I’m not… [research indicates] “that when this, which in the jargon is known as disconfirmatory feedback arrived, workers would then avoid contact with the people who had given them the unwelcome comments.” “If I’m cruising along in a complacent bubble, I badly need someone to explain what I’m doing wrong” January 11.

Bank regulators think they are doing great assigning a risk weight of 20% for what is AAA rated, and 150% for what is below BB-. I tell them they’re wrong, that what’s perceived as safe, contains much more danger than what is perceived as risky. I back it up with Voltaire’s “May God defend me from my friends, I can defend myself from my enemies” … and then the regulators avoid all contact with me. It sure looks like a case of reaction to a disconfirmatory feedback.

But, at a level of a Basel Committee for Banking Supervision should its members not have to be able to handle rationally any disconfirmatory feedback? And what about those even higher up?

For instance, I believe that in the race for jobs in the US, much more important than human competition from China and Mexico, is the fact that Americans have to compete with robots from everywhere that do not have to carry weights like payroll taxes.

Sir, I ask, how can I convey such a belief to a President without risking causing him great disconfirmatory feedback discomfort?

PS. Sir FT, since you have also mostly shut me up, could it be because I have gone over the level of disconfirmatory feedback you can handle? If so, how should we handle it? I ask because I have no wish to give up writing you my mind on so many things you might not agree with.

@PerKurowski

Dear Sir, using your extraordinary savoir-faire and FT’s immense influence, please educate our bank regulators

(I will try it the Lucy Kellaway way “How to ask for what you want — and get it every time” February 6.)

Sir, the world needs for you and your astonishing influential paper, as always without fear and without favour, to inform bank regulators about that their current regulations is based on a fundamental mistake, a sort of the mother of all “alternative facts”; namely that what is AAA to AA rated, is much safer for the banking system than what is rated below BB-.

That, in their standardized risk weights, has caused them to assign a meager 20% risk weight to the very dangerous AAA-risktocracy and 150% to those made so innocuous by being perceived ex ante as very risky.

Most probably because I am so unimportant, I have not found a way to transmit to the regulators the real truth, namely that excessive exposures to what was perceived as risky when placed on banks’ balance sheets have never caused a major bank crisis. That dishonor belongs to unforeseen events (like devaluations), criminal behavior, and to what was ex ante perceived as very safe but that ex post turned out to be very risky.

But Sir, with your importance and extraordinary savoir faire I am sure you would be able to reach out to them, discreetly if you so wish.

When you do, the world will owe you immense gratitude because, as is, this mistake has created such distortions in the allocation of bank credit to the real economy that our banks are no longer financing the riskier future our children needs to be financed, but only refinancing the safer past and present.

If they are too hardheaded and you need some backup argument, you could always quote Voltaire to them “May God defend me from my friends, I can defend myself from my enemies”

Yours always, admiringly and cordially

Per Kurowski

PS. Here some of my questions the regulators have refused to answer.

Help! Our so serious looking bank regulating technocrats are guided by childish romantic illusions. That’s dangerous.

Sir, Arthur Beesley and Alex Barker quotes Frans Timmermans, vice-president of the European Commission with: “Politics is always a balance between the head and the heart. In European politics we’ve sort of forgotten about the heart for too long, just thinking with the head. Then you end up in the underbelly, apparently, in some of our member states.” “Timmermans urges EU ‘not to punish Brits’”, February 3.

For EU politics that could be correct, though I really don’t know, and besides there are always more or less intelligent heads. But, in the case of regulations where only heads should be at work, there I am 100% sure, at least in the case of bank regulators, that only hearts reign.

That is because anyone who thinks that what is ex-ante perceived as risky, is ex post more dangerous than what is perceived as safe, is a naïve romantic full of illusions. The smart heads, like Voltaire did, would say “May God defend me from my friends, I can defend myself from my enemies”

Now for those who like EU have embraced the Basel Committee’s principles, this means for instance that a bank is allowed to hold less capital (equity) when financing the purchase of a house, than when lending to a SME or an entrepreneur.

That means a bank can leverage its equity more when financing the purchase of a house than when lending to a SME or an entrepreneur.

That de facto means a bank can earn a higher expected risk-adjusted return on equity when financing the purchase of a house, than when lending to a SME or an entrepreneur.

Consequentially that means banks will much prefer financing the “safe” basements in which kids without jobs can live with their parents, than the “risky” SMEs or entrepreneurs that could help the kids get the jobs they need to be able to afford buying a house and become parents too.

If that is not extraordinarily dangerous for the future of EU, what is? Sir why don’t you suggest Timmermans that if he has some 100% head-applying technocrats available, then he should urgently have them to take over current bank regulations. 

@PerKurowski

To get our banks back to where we need them to be, we need a complete brand new set of regulators

Sir, since Patrick Jenkins misses out on the very important question of how our banks got here, it is hard for him to understand where they should go. “FT Big Read: Banking: Too dull to fail?” September 9.

We got here because regulators, without doing any type of research, concocted the loony theorem that bank crises were the result of excessive exposures to what was perceived as risky; and therefore imposed risk weighted capital requirements for banks; more perceived risk, more capital – less risk, less capital.

That immediately resulted in that banks, instead of maximizing their returns on equity by means of banking with reasoned audacity, or as Deirdre N. McCloskey would probably phrase it, by banking with courage and prudence, maximized their ROEs by minimizing equity.

And so the real problem is that banks can’t find the way out of their predicaments, unless we get ourselves a brand new set of regulators. Some who know about Voltaire’s “May God defend me from my friends [the AAA rated], I can defend myself from my enemies [the below BB- rated]”; and who know about John A Shedd’s “A ship in harbor is safe, but that is not what ships are for.”

And we need that to happen fast! If we want our kids and grandchildren to have jobs in the future; and if we want to have a real economy sufficiently healthy to help pay for our retirements, dumb regulatory risk aversion imposed on banks is about what we least can afford

Would the UK, and the Western World have become what it is with utilities like banks? Of course not!

PS. Jamie Dimon has still not yet convinced me he is a real banker and not just one of those bank equity minimizing bankers.

@PerKurowski ©

When will the Basel Committee define the purpose of our banks, and regulate accordingly?

Sir, Jim Brunsden writes of a “letter from the banking associations [that] calls on the Basel Committee on Banking Supervision to scrap plans for a floor limiting how far a bank can decrease its capital requirements by using internal risk models. “Lenders step up their fight against global capital reform.” September 2.

My immediate reaction could be to ask the bankers: When will you return to earning your returns on equity by doing banking and not by minimizing equity?

The current confusions about bank regulations all begin with that mindboggling fact that the regulator has not defined the purpose of banks. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

When will the regulator understand that banks must finance the “riskier” future and not just refinance the “safer” past?

When will the regulator understand that what’s rated AAA is more dangerous to banks than what’s rated below BB-?

When will the regulator understand Voltaire’s “May God defend me from my friends. I can defend myself from my enemies”

When will the regulator understand that risk weighted capital requirements distorts the allocation of credit?

When will the regulator understand the full monstrosity of its risk weighted capital requirements for banks?

PS. Sir, from your steadfast silence on these issues I can only deduct your “Without fear and without favour” is pure BS. You are clearly beholden to banks and their regulators, caring very little for the real economy 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 ©

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 ©