If only the Basel Committee of Banking Supervision ‘Swallowed the brave pill’

Sir, I refer to Emma Jacobs "‘Swallow the brave pill,’ advises the tech executive turned entrepreneur" July 23

Currently regulators, by means of lower capital requirements, give banks incentives to build up large exposures on what is perceived, decreed or concocted as safe, like house financing, sovereigns like Greece and AAA rated securities. That is like feeding our banks carbs only, something which makes our bank system obese.

As a result those perceived as risky, like SMEs and entrepreneurs, and who are so important for the future of the economy, are also kept on an anorexic credit diet. 

That is all because regulators, even if banks with size of exposure and risk premiums already clear credit risk, are, quite infantile I would say, more concerned with the risks perceived ex ante than with what could happen ex post. Had they not been so, they would have long time ago realized that what puts our bank system in danger of major crisis, is never what is perceived ex ante as risky, but always what has been wrongly perceived as safe.

Wouldn’t it be nice Thomas Davies helped those regulators to “swallow a brave pill” in order to get over their affliction that so much hurts us? Then our bank system would be safer and our economies stronger.

@PerKurowski

The risk weighted capital requirements doomed our banks to impotence, and our economies to obesity.

Sir, I would like to make some of my own observations on two terms of those exposed by Robert Shrimsley in “Menopause, impotence and other useful economic terms” May 18.

Shrimsley writes: “Impotence: An underperforming economy is distressing for all parties. This kind of dysfunction can be either structural or cyclical or psychological”. 

Indeed but it can also be physiological. When the Basel Committee introduced risk weighted capital requirements for banks they impeded banks from feeling any attraction to what’s perceived as risky, like the entrepreneurs. That has our banks only masturbating by lending to what’s “safe”, like houses and sovereigns… and all the Viagra in the world won’t help. Our only salvation lies in a delicate intervention that removes this regulatory object that causes this ED; so that banks can, little by little, throwing out the equity minimizers and reincorporating some savvy loan officers, learn again to perform their societal duties.

Shrimsley writes: “Obesity: This is an economy…which has given up going to the gym and is too heavily dependent on house price inflation and junk commodities like lightly regulated financial products” 

When regulators told banks that if they only stayed away from what is perceived as risky, what bankers don’t like, like risky entrepreneurs and broccoli; and went for what’s safe, what bankers love, like residential mortgages and ice cream, then they would be rewarded with the chocolate cake of higher expected risk adjusted returns on equity…they guaranteed the economy to become obese.

@PerKurowski

On Main Street what’s perceived ultra risky, is de facto much less dangerous than what’s perceived ultra safe.

Sir, Simon Kuper writes: “The Republican plan to strip health insurance from 22m Americans (including 18m adults), it would kill about 32,700 adults annually (using the mid-range estimate). That’s gruesome. But boring old obesity kills far more.”, “How to solve the obesity epidemic” July 29.

That presents a perfect opportunity to explain again, for the umpteenth time, what regulators did wrong with their risk weighted capital requirements for banks.

They would have assigned a higher risk weight to the Republican plan, because even though it might kill less it is perceived (or decreed) as riskier, than what they would assign to what though more dangerous for society, obesity, is perceived as safer.

In Basel II, the ultra dangerous ultra safe AAA rated got a 20% risk weight, while the totally innocuous ultra risky below BB- rated got a 150% risk weight. 

PS. Cars and motorcycles.

@PerKurowski

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 ©

Tim Harford. Avoiding the risky and embracing the safe, is that a good New Year resolution for banks at the Basel gym?

Sir, Tim Harford, a self-declared undercover economist, writes about incentives in “How to keep your gym habit” February 6. It is very interesting but, as an economist writing for FT, he should perhaps be more interested in the incentives that guide the actions of our banks.

The regulators, by means of risk weighted capital requirements; which allow banks to leverage more with assets perceived or deemed safe than with assets perceived risky; which allow banks to earn higher expected risk adjusted returns on equity with assets perceived or deemed as safe than with assets perceived as risky; have created great incentives for banks to stay away from what’s “risky”, like the SMEs and entrepreneurs, and to embrace what’s “safe” like sovereigns, the AAArisktocracy and housing.

To me, also an economist, that would, in terms of a gym, indicate incentives for banks to stay away from anything that could break out a sweat; and in terms of a diet, to stick with chocolate cake and forget the spinach.

Short term everyone but “the risky” can love it; higher expected risk adjusted profits on what’s safe than on what’s risky sounds like a banker's wet dream. But, in the not so long run, that is clearly unsustainable and will cause a dangerous increase of obesity among banks and in the real economy. 

And so, in the particular case of banks, it is not that the incentives don’t work, it is the New Year resolution imposed on banks by the Basel Committee that is plain wrong.

@PerKurowski ©

With their credit risk weighted capital requirements for banks, regulators doomed our economies to obese growth.

Sir, you refer to growth in the US and hold that the “bearish case for the US rests on the travails in China, and events in the oil market, conspiring to expose “The small but serious threat of a US recession” February 6.

You, as you have done the last decades, simplistically suppose all economic growth is equal. But, the truth is we can have obese economic growth, based on carbohydrates, such a financing consumption, housing and refinancing the safer past; or we can have muscular economic growth, based on proteins, such as taking risks on SMEs and entrepreneurs. And guess which one of these is the sustainable growth?

Ever since regulators, with their credit risk weighted capital requirements, set the banks on a credit risk aversion path, all growth we have perceived has been of the not sustainable obese type.

So no! Whatever happens in China, or with the oil price, if the US, and Europe, insist on having the same failed bank regulators regulating their banks, their economies will go downhill more sooner than later.

You quote Bill Dudley, president of the New York Federal, as noting, in your face, “credit conditions have already tightened as risk aversion has caused a selloff of risky assets.

Dudley should be ashamed. As one of the regulatory community he must know that regulators, long time ago, de facto gave banks the incentives they needed to avoid creating “risky” assets. They made bankers’ wet dreams, that of making the highest expected risk adjusted profits when financing what was perceived as the safest, come true.

@PerKurowski ©

We need a free finance sector able to feed proteins to the real economy, not one regulated to only feed it carbs.

Sir, I refer to Tim Harford’s “What’s the diet for growth?” August 22.

Harford states: “research reminds us that we shouldn’t simply bash ‘banking or ‘finance in some generic way, blaming the banks for anything from the weather to the struggles of bees. We need to look at the details of what the financial services industry is doing, and whether financial regulations are protecting society or making things worse… The truth is that we desperately need a strong banking sector.”

Absolutely, but foremost we need a free banking sector able to deliver a balanced diet of credit to the real economy, one that includes proteins.

In an Op-Ed in 1997 I wrote: “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, but presiding over the funeral of the economy. I would much prefer the regulators to put some blue jeans on and try to help to get the economy moving.”

And in April 2003, as an Executive Director of the World Bank, in a written statement presented to the Board I pleaded: "Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. 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. Once again, the World Bank seems to be the only suitable existing organization to assume such a role." 

I said so because I thought that as the world’s premier development, bank the World Bank would know risk-taking is the oxygen of any development. 

Sadly, neither World Bank, nor anyone else, wanted to assume such responsibility and so the world got stuck with portfolio invariant credit-risk weighted capital requirements for banks. That guaranteed the economy is fed a diet of bank credit based almost exclusively on carbs, unable to provide it the nourishment needed for sustainable economic growth. 

And, to top it up, those capital requirements, which are extremely small for what is perceived as safe, also guaranteed too many banks to become too obese to fail.

@PerKurowski

France, risk weighted capital requirements for banks, guarantees you a weak and obese economy. Any growth... just froth

Sir, Lindsay Whipp and Claire Jones report “France business activity weakens” December 17.

This is to be expected. Risk weighted capital requirements for banks which allow these to earn much higher risk-adjusted returns on equity when lending to “infallible sovereigns” and the AAAristocracy, than when lending to the “risky” medium and small businesses, entrepreneurs and start-ups can only guarantee turning our western economies into weaklings.

Distorting the banks into refinancing the safe past and not financing the more risky future is no way to create a strong and healthy economy. Any sigh of growth you might see in the interim, is pure froth… or let´s say pure fat no muscles… in other words the economy turning dangerously obese.

Even though I am aware that FT does not want to report on this, for reasons of its own, I will be remembering you about it every time I see the need for it.

Current bank regulations can only produce old weak jobs, not new sturdy and strong jobs. That takes risk-taking.

Sir, Chris Bryant, in “Germany’s ‘jobwunder’ obscures full picture” September 3 reports that most job growth in Germany is made by “low paid, precarious types of employment Such as part-time work, temporary contracts, so called ‘minijobs’ and outsourcing”.

We should not be surprised. Bank regulations which allow banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible”, than when lending to “The Risky”, can only produce fatty tissue, and not the muscles required to engineer a new generation of sturdy jobs… that requires risk-taking and does not allow for excessive risk-aversion.

Europe is doomed to a wrong recovery with dangerous obesity

Sir, you write that “Europe risks a ‘wrong’ recovery” July 27. Wrong! Europe is doomed to a ‘wrong’ recovery. Any economy in which its banks are made to keep away from lending to small and medium businesses and in which only because these are perceived as “risky” stands no chance of getting on the track of a right and sturdy recovery.

You admonish Europe to “remember that how an economy expands is just as important as whether or not it grows.” And you are absolutely correct. An economy in which banks lend primarily to the “safe” only because regulators then require the banks to hold less capital and therefore then allow banks to earn higher expected risk-adjusted returns on equity, will only grow obese and fluffy, prone to a final and fatal heart attack 

Europe, pray: “God make us daring”

Must Michele Obama explain the causes and dangers of obesity to Ben Bernanke and bank regulators ? And to FT?

Sir, in your “Bernanke’s gamble is no free lunch”, September 22, you mention the possibility of QE’s diminishing returns, which would lead us into uncharted waters. Of course, QEs, and other stimulus, are dangerous, if not productive and self-sustainable. It is as easy as that. 

Sadly though, the QEs and other more traditional stimulus are now all bound to be unproductive, since banks, because of the way they are regulated, will mostly re-channel any new funds into holding assets perceived as “not-risky”, as these do not require from the banks much of that now so very scarce bank equity. 

What is missing in the debate, and FT's silence on that is almost embarrassing, is the fact that an economy needs “risky” loans to generate both its vitality and its flexibility. Inducing our banks to take cover in what is ex ante deemed as “not-risky”, only guarantees a type of economic flabbiness as well as a structural fragility. 

It is all like sending the kids out to play telling them “You can only eat the pastries ("infallible" sovereigns) and the well certified by your Aunt Moody hot dogs (AAA-rated), because I do not really know who cooked the vegetables (small businesses and entrepreneurs)”. 

Sir, must we call on Michele Obama to explain to Ben Bernanke and bank regulators (and FT) the causes and the dangers of obesity? 

For the umpteenth time, please understand that we need those perceived as “risky” to have access to bank credit, on terms free of regulatory discrimination.

Witless risk-adverse bank regulators are unwittingly destroying our economies. We urgently need regulators and bankers capable of "reasoned audacity"!

FT, you do not support intelligent bank regulations by silencing its stupidities

Banks consider the perceived risks of default of borrowers when setting the interest rates, the amounts of the loans and all other terms. Therefore, to also favor with bank regulations bank exposure to what is officially perceived as absolutely not risky, like triple-A rated and infallible sovereigns, and thereby castigating their exposure to what is officially deemed as risky, like small business and entrepreneurs, dooms the banks to dangerously obese exposures to the “not-risky”, and to the for the economy equally dangerous anorexic exposures to the “risky”. And that, no matter how you look at it, is plain stupid bank regulations.

Since FT has clearly, and I would say deliberately ignored the previous argument, about which I have sent FT over 600 letters the last 7 years, I find it absurd when in “Lost in translation”, April 14, FT expresses that it has “always favored intelligent banking regulations”

For example just earlier this week Martin Wolf wrote, for the umpteenth time, about balance of payment problems in Europe stating “In the years of euphoria before the financial crisis private capital flowed freely [to] Greece, Portugal and Spain”, and again completely ignoring the fact that these capital flows were actually much pushed by the dumb capital requirements for banks, “Why the Bundesbank is wrong”, April 11. 

No wonder Margaret Atwood can express so much bile against powerful uncontrollable and unaccountable private sector Gods of high finance, “Our faith is fraying in the faceless god of money” April 14. No one has cared to inform her that without the stupid bank regulations there would have been no market for those bad mortgages she rightly abhors. No one has cared to inform her that those who really played Gods, and with immense hubris thought themselves risk managers of the world, were the bank regulators, and who now, instead of being held accountable, for instance for Basel II, are in charge of producing its sequel Basel III, which, by the looks of it, will just dig us all deeper in the hole.

What we need to check is the bank regulators testosterone levels to see if it is sufficient.

Sir, I am not sure about the applicability to banks of Gillian Tett´s “Regulators should get a grip on traders´ hormones” March 16, since Mark Twain´s “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” would indicate that the testosterone level of bankers is far from being abnormally high. 

But what might behoove us is to test the regulators hormones. When these decided that even though banks were already clearing for perceived risks of default of borrowers by means of interest rates, amounts exposed and other terms, they should also consider those same perceptions for their capital requirements, they most definitely evidenced what would seem to be a severe case of lack of testosterone. 

As a direct consequence of the risk-adverseness of the regulatory nannies, we are now suffering from obese bank exposures to what was officially perceived as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what was officially perceived as risky, like the small businesses and entrepreneurs.